As customer and market demands push against economic forces and the functional limits of legacy bank technologies, many banks face a tough choice. Should they retrofit or hold on to older existing technology in an effort toward short-term cost control? Or invest in newer technology as a strategic move toward competitive growth?

Keeping old technology limits your growth and service abilities. New technologies require a conversion process. A strategic move to a new system, however, will yield the best overall results and return on investment (ROI), getting you where you want to be years from now, competitively and operationally.

A strategic view of bank technology is critical to building bank value and success. Today’s replacement systems provide an architecture that can more easily and fully utilize and adapt with the bank and other new technology than a complex and expensive retrofitting of legacy systems. When evaluating ROI for a core system, it can be helpful to broaden the scope of things to consider, while developing a specific process and questions to identify the right course of action.

 

Begin with the End in Mind
In 1989, Stephen Covey published his best-selling business productivity book, The Seven Habits of Highly Effective People, which outlines seven “habits” to maximize personal and professional success. In the book, he describes how people – and businesses – must begin with the end in mind. Only by knowing where you are headed can you take the appropriate steps today to get there.

Every bank is different, and every bank has different demands for its core system. The first thing any bank should do is evaluate long-term competitive needs and growth projections. Today’s better core systems can perform nearly any automated task, so it is crucial that banks decide what they really need from a core system.

Ron Santarosa, chief financial officer for Westlake Village, Calif.-based First California Bank ($1.2 billion in assets), reinforces this approach. “The beauty of today’s core systems is it can do anything you want,” he said. “The problem with today’s core systems is it can do anything you want. If you don’t know what you want or never thought through what you need, selecting a core system can become a daunting task.”

Technology Should Make Life Easier
Technology, at its most fundamental, should be more than economical or flashy. It must tangibly support strategic objectives that help the bank grow and prosper. It must create efficiencies and improved services, integrate the entire bank and put the bank in control of its data.

James Ziegler, president of Coatesville, Pa.-based Savings Bank ($240 million in assets), underwent a core conversion in 2007 to eliminate repetitive tasks and increase the productivity of bank staff.

“We chose our system because of its flexibility in design and operation,” said Ziegler. “The system could grow with our bank, and the ability to expand our technological capabilities means our employees will benefit from an efficient system with which they feel comfortable.”

Banks should also be able to independently control the technology and make it adaptive, according to their immediate needs. This impacts ROI by enhancing staff efficiency, service capability, and strategic responsiveness.

CG Kum, president of First California Bank, also cited the improved task-efficiencies in his bank’s selection of a core processor. “Our core system is very user-friendly with what I call plug-and-play capability,” Kum said. “As we grew and as we needed to overlay more capabilities into our core processing system, we were able to do that.”

Banks should consider how add-on products impact the total cost. Does the system integrate with a variety of existing technologies with minimum costs and integration issues? Does the vendor require certain companies or partner products, or make it difficult to use others? Will they work with existing services?

Improve Customer Service with the Right Tools
A core processor, while primarily used by bank staff, directly affects how a bank can serve its customers. Happy employees deliver better service. Customers today also expect more. They want easy access to information, and a wider, yet more individualized variety of services, service channels, conveniences, accuracies and options.

Thomas Ellison, chief executive officer of Nacogdoches, Texas-based Commercial Bank of Texas ($318 million in assets), said, “The real customer of core systems is not a bank. The real customer is the bank’s customer, because in the long run, the ability to meet the needs and expectations of customers will determine the true success of the bank.”

A core system should also assist the bank in maximizing its customer relationships. At minimum, it should:
•    Reduce expenses, increase efficiencies, and integrate seamlessly with other software the bank chooses to use,
•    Improve customer service that will help retain customers and increase satisfaction,
•    Provide unique, profitable products that attract new customers and improve competitiveness,
•    Keep up with rapid industry and technology changes with regular updates that keep the bank up-to-date on the best tools for growth and
•    Provide favorable ROI over the long-term, with no hidden or surprise costs.

Banks need to leverage their core systems to create value for the customer. Reporting tools can provide the information needed to offer a competitive interest rate or flexible terms. Banks can analyze their current customer base to determine where the most profit is located or where there is opportunity to cross-sell additional services.

When selecting core systems, then, banks should look at the reporting options available and the level of data they have access to. Comprehensive reporting and access gives bank executives the information needed to maintain service and profitability.

Provide New Products While They are New
Banks face a customer base that is increasingly comfortable with new technologies and expects cutting-edge services no matter how large or small a bank is. Mobile banking, ATM services and remote capture are just a few of the new products vying for market share. In addition, long-held products, such as lending, benefit from new tools that can analyze guideline, guide decision-making and create profitability reports.

Bankers can use core technologies to target customer opportunities by expanding their product offerings, automation, analysis and better customer service. Selecting useful technology is a matter of finding systems that can provide flexibility, already have the integrated tools, can easily integrate other tools according to the bank’s preferences, or can allow the bank to create the tools they need themselves.

Ellison says Commercial Bank of Texas chose their core system because it helps them focus on a customer’s entire relationship with the bank and the bank’s most profitable market sectors. They are also able to quickly customize products or even help create new system capabilities in response to operational, strategic, or market needs. 

Kim Capeloto, President of Vancouver, Wash.-based Bank of Clark County ($430 million in assets), worked with his core processor to develop an automated guidance line tool that, among other things, helps him instantly determine a customer’s capital commitment on a loan, how much of the loan line has been used and how much is still available based on each budgeted amount per project.

Keep Up with Changes
A bank’s core vendor should be committed to a collaborative, personal relationship with the bank. As customers, products and technology needs change, a core system will need to be updated or customized. Banks should evaluate the vendor relationship dynamics to ensure the bank’s best interests are at the heart of the system’s development to keep it, and the bank, viable for many years.

A successful relationship should be one of mutual understanding, collaboration and interest in the bank’s perspective. It should include involve the bank in product development, and it should provide support beyond implementation.

Basil Blume, executive vice president and chief information officer of Castle Rock, Colo.-based Colorado Capital Bank ($525 million in assets), said he considers his core provider an extension of the bank’s management team.

“We look to our core vendor like a department head,” Blume said. “In our case, they serve as the department head of core processing. Their integration into our strategic planning gives the bank a competitive advantage by enabling us to provide our customers with products and services other institutions cannot or are unwilling to provide.”

Being an extension of the bank staff involves extended training, regular updates and a partnership where the bank can offer feedback on services. Training impacts budgeting, efficiency and service. Consider how much training is included and what the process is for post-implementation training.

Banks should also expect a voice at the development table for future enhancements to the core system. Examine the ways in which vendors enable regular input and involvement from customers. Do they offer user groups, surveys, site visits, or Beta testing? This can impact how well the technology suits a bank’s ongoing competitive needs.  Open dialogue also addresses emerging technologies and makes bank IT staff a part of strategic planning, rather than just a resource or engine by which planning is carried out.

Santarosa also knows the value of a strong partnership. “We recognize that technology changes quickly, and today’s cutting edge can be obsolete very quickly,” he said. “With our core provider we know we have a voice and are involved in shaping what’s occurring in the business.”

Know the Total Cost of Ownership
Banks must insist on evaluating the total cost – short- and long-term – in order to truly evaluate ROI. Evaluating the total cost of ownership includes both “hard” and “soft” attributes. “Hard” costs include known hardware and software investments and upgrades. “Soft” costs include increased support center calls due to errors or restricted access, inability to support new services, costs for upgrades, or new branches. Those costs then need to be measured against “hard”

savings, such as fewer staff, equipment or programming costs.  “Soft” benefits – scalability to support growth, full access to data, enhanced efficiencies across channels, and more competitive capabilities – can permanently accrue as a savings to the bank.

Sometimes banks fail to consider the hidden costs, and core vendors do not openly address them. Bank may need to upgrade hardware or software in other areas of the bank, like the back office or the teller line, to support the new core system. Vendors should provide a baseline minimum for its software up front and to be clear about upgrade requirements.

Banks should also be clear about any costs that may not be in their proposal and contracts. For example, charges for the right of entry to certain data or for system inquiries can lead to unexpected per-use fees or custom programming. Its best if every field of data is freely available. Ask for clear itemizations of all costs (including one-time, monthly, and per-use fees) and quotes for custom services. If the vendor has provided everything up front, initial billings should closely match their proposal.

In the end, today’s banks need core technologies – and partners – that will ensure their core selection addresses all that is at stake and meets their strategic initiatives. Bankers that take time to truly evaluate what they need from a core, determine the true ROI and have a close working relationship with their vendor will be better positioned for growth over many years.

About the author

John H. Jones, a 29-year veteran of the banking industry, is president and chief executive officer

of Hutchinson, Kan.-based DCI, a bank-owned provider of core processing and technology products and services. 

About DCI
Founded by bankers in 1963, Hutchison, Kan.-based DCI is a privately held provider of full-service bank technology and processing solutions to the financial industry nationwide. DCI’s flagship product, iCore, is a scalable, Windows®-based core processing system for complete bank management, built around a single relational source of account information, transaction integration and automation. Key features include integrated document imaging and reporting systems, Internet banking, Check 21 imaging, ATM/card processing and balancing, teller automation, BSA compliance, ID verification, Web-based statements and fraud prevention, IT management, networking and data security.

For more information about DCI and its products, visit www.datacenterinc.com.

View July 08 digital edition
Data Center Inc—Executive Summary on page 53 

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