[This article was posted on August 6, 2009, on the website of ABA Banking Journal, www.ababj.com, and is copyright 2009 by the American Bankers Association.]

At one time or another we have all experienced frustration when our computer has frozen or crashed or simply when our email is down for a short period of time. We feel helpless and encumbered. Now just translate that dependency to your bank’s core banking system.

Every one of your products and services are dependent upon your core system.  It’s where each product is set up. It’s where the fee structure is established. It triggers customers to be charged fees. It reports your income and expenses. And, finally, you depend on it to track the bank’s performance and to provide you with information to make daily management decisions. So now ask yourself: “Is my core system holding my bank hostage?”

A review of all the income opportunities that we have identified for clients over the past 15 years indicates that more than 50% are directly a result of the core banking system’s unprofitable settings. Also known as parameters or system specifications, these settings vary by system but govern all manner of bank functions, implement pricing policies, etc. For example, the bank may price its money market accounts to assess a $5 monthly service charge if the account balance falls below $1,000. That balance could be a monthly average, or a minimum daily balance, and could be based on the ledger, collected, or available balance, and each has different income implications. The settings would reflect the specific choice. Usually the system vendor would help set up the settings during the system conversion process, but there are typically so many settings, that it’s rare when a bank doesn’t have many errors in place, as, for example, when a setting does not reflect the bank’s policy or is not the most profitable choice. In one case, following a merger, a bank was supposed to be charging a $2 foreign ATM fee. The setting reflected this policy, but the fee amount had not been filled in. So the activity counters were being updated, however, no fee was charged. This had gone on for four years undetected.

These system parameter opportunities are not specific to one vendor. We’ve found income improvement opportunities in Jack Henry, Fidelity, Fiserv, OSI, and Metavante systems, among others.

Why do core systems so often have unprofitable settings? Changing over to a new system and merging institutions are the two primary reasons for lost income due to incorrect/unintentional system settings. System vendors naturally are more concerned about selling their system and achieving a punctual conversion than they are with their client’s ROA. This is not meant to speak poorly of system providers, only to emphasize the fact that they are not in the business of maximizing their client’s income potential. Further, not understanding how to get more out of their investment, bankers are often open to the idea of purchasing an ancillary system that the vendor promises will improve operations and enhance cross-selling opportunities all with the hope for increased earnings. Those results are always far easier said than done.

Decisions/errors that were made at the time of installation are typically not questioned or revisited for many years, as in the ATM fee example mentioned above. Day after day these errors continue costing the bank income. One bank CEO described to us how income can be lost in a core banking system:
“After we had a system conversion, we found out several months later that one of our fees was not producing income. We came to find out that this fee was not on the system at all and had cost our bank hundreds of thousands in a short time.”

Errors occur because conversion to a new core system is an extremely stressful time where the primary concern is to get the system operating. The objective is to have the new system match the old one, and the last thing on anyone’s mind is whether the old one was set up with the most profitable settings to start with.

With system providers needing to appeal to a wide array of financial institutions, their “vanilla” system packages have a tremendous amount of flexibility. That allows them to customize the system to fit the precise needs of the bank. With this flexibility comes risk, however. If all system settings are not completely understood and the right settings are not chosen, significantly less profitable options can easily be installed. The fact is there are many options within the system settings for each product, all of which are compliant with federal and state regulations. So, in most cases, it is not that your core banking system is set up wrong, it is just not set to the most profitable settings for your institution.

This is all well and good but what should a bank do about it? Here are four steps to consider:

1. Assess the usage, functionality and adequacy of the core system
Survey your users and determine the issues they are facing on a daily basis. Upward communication tends to be poor in most organizations and a mechanism needs to be put in place to communicate problems that end users are having. This will point out areas that need addressing either through clarification from the system provider, additional staff training, or customization.

2. Review the system settings and re-evaluate your policies
Compare your system settings (or parameters) both at the global level and the account-type level to ensure the settings match your policies. At the same time, re-evaluate your policies to see if there is a more profitable option. Sometimes this will require a disclosure notification, so we recommend a full review be completed annually.

3. Validate any customization
Most system providers will allow customized programming to their “vanilla” package in order to accommodate a bank’s particular needs (for a fee). When a new version is released, most core system vendors charge an additional fee to convert this customization to the new release. You should have your IT department work with Operations to validate that the need for the customization still exists. This should also be reviewed on an annual basis.

4. Question everything
Always ask yourself and your staff, “Is there a better, more profitable way?” And more importantly, “Is our system doing what we think it is?”

By Scott Bass, senior consultant with Lodestone Banking Consultancy, Inc.  Lodestone works with CEOs and senior managers primarily at mid-tier banks to increase interest and noninterest income without raising fees and without reducing staff. They use an integrated analysis that penetrates deep into systems and operations to uncover hidden income opportunities. Contact: Mark Clark, EVP This e-mail address is being protected from spam bots, you need JavaScript enabled to view it or visit them at www.LodestoneBanking.com

[This article was posted on August 6, 2009, on the website of ABA Banking Journal, www.ababj.com, and is copyright 2009 by the American Bankers Association.]