Small regional firms that deliver technology outsourcing services are the latest victims of the continuing consolidation of the banking industry.
These companies - which have always struggled to stay competitive with large national providers like Electronic Data Systems Corp. and Fiserv Inc. -now face the loss of customers as a result of mergers and acquisitions in the financial services industry.
What's more, the rapid evolution of networks of cheap personal computers - so-called client-server systems - is making it hard for smaller firms to keep up.
Personal Services
Nevertheless, small vendors have managed to etch out good livings for themselves by honing their business strategy. Many are attempting to counteract the effects of consolidation by expanding into new markets and providing additional services.
While some regional data service vendors claim to offer lower costs than their big-name competitors, they also tout their personalized service and ability to segment the market as their biggest selling points. These claims mirror those many community bankers give when asked how they will survive the competitive onslaught of superregional institutions.
Small data processors offer the convenience and service of neighborhood store versus the mall-approach of larger companies, said M. Arthur Gillis, president of Computer Based Solutions Inc., a banking industry technology consulting firm based in New Orleans.
One company that attempts to prove to customers that bigger isn't always better is Connecticut On-Line Computer Center Trust, in Avon, Conn. By staying abreast of technology, and staffing knowledgeable customer service representatives, the company is able to respond quickly to customer needs, said Arthur S. Doll, executive vice president.
"Bankers like to work with someone they can sit down and talk to," he said. "They want a company that knows them, knows their bank, and understands their problems. Most users consider us their back office."
Representatives from the company call on banks twice a year to offer free training and to ensure that systems are being used correctly, said Mr. Doll.
The company also runs focus groups so that customers can participate in the development of new products and services, he said.
Narrow Markets
Other vendors such as Computer Services Inc., build close relationships with clients by concentrating people in the marketplace they serve.
"We focus our resources in a tight geographic area instead of spreading them throughout the country" said Steven A. Powless, president and chief operating officer of the Paducah, Ky.-based regional provider.
Computer Services serves 285 banks in 10 states, with the majority of its customers in Kentucky, Illinois, and Indiana.
"There's an office within 100 miles of any bank we serve so our people are more accessible," said Mr. Powless. adding that there's one customer service representative for every customer, which he describes as "extremely unusual" in the industry.
For small data processors, staying competitive also means focusing on new segments of the market to make up for customers lost by bank consolidations.
Connecticut On-Line - which provides services for thrifts with assets between $50 million and $1 billion - has seen its potential customer base shrink by almost half in the last 10 years.
"In 1984 there were over 750 institutions that met this criteria in New England and New York state," said Mr. Doll, executive vice president. "Today, there are 404."
Adding Credit Unions
To make up for the customers they've lost, Connecticut On-Line and other vendors have attempted to service additional markets, such as credit unions.
Data Center Inc. based in Hutchinson, Kan. for example, purchased a small credit union processing company and acquired its 30 customers. The credit union business has allowed Data Center to diversify, since credit unions normally don't process their own debit card transactions. So Data Center now processes debit card transactions, said Grady Hopper, the company's president.
"It turned out to be a service we could integrate without much additional cost," he said. adding that the company may move into credit card processing in the future.
Client-Server Needed
Despite these efforts, small vendors will continue to fall primarily because they have not invested in new technology, said Richard K. Crone, senior manager, financial institutions consuiting group, KPMG Peat Marwick.
Most regional service bureaus remain married to old, inflexible mainframe-based systems, he said, while many community banks and credit unions are adopting PC-based, client-server platforms.
"The PC has become a viable platform for large-scale computing," said Mr. Crone. Intel's Pentium chip has processing power equal to a mid-sized IBM mainframe, he notes.
Banking of the Future
This mainframe-class computing will "push processing down to the point of service," where PC network users will have access to customized computing solutions, said Mr. Crone.
"This is the future of bank processing," he said.
While the number of banks outsourcing compared with those doing in-house processing stands about evenly mixed, Mr. Crone maintains that in-house systems at the client-server level are gaining sales momentum.
Of particular note, he said, is an announcement by Microsoft-Corp. expected in June at the American Bankers Association's National Operations & Automation Conference, regarding a Windows NT-based bank system that will handle financial institutions of up to $5 billion in assets.
Beyond Data Processing
"The Microsoft product will bring processing far closer to the end user than the way it is now with regional processors," said Mr. Crone.
The emergence of this "computing democracy" will challenge the centralized processing of today's "outsourcing empires" said Mr. Crone. Those vendors that remain mainframe-centric will find it harder to muster the resources to serve the market, he said.
CSI's Mr. Powless does not deny that PCs are growing more powerful, but he asserts that there's a lot more to outsourcing than just data processing.
"Moving the data from one location to another is not enough," he said. "Someone still has to manage the environment, which is why outsourcing is being done."
To Mr. Powless, managing the environment means applying expertise the outsourcers have in such areas as data communications, regulatory compliance, and network management. Rather than seeing client-server as a threat to his business, Mr. Powless contends that PCs used in conjunction with a large host system can complement each other.
Recognizing this trend, OnLine Financial Services Inc. offers customers PC-based teller and platform automation systems that draw information from the company's mainframe, said Robert T. Stokes, president of the Oak Brook, Ill.-based company.
Offering Total Management
The removal of the access barrier between mainframes and workstations, along with efforts by small data processors to reposition themselves as total network managers, will help them carve a place for themselves in the new processing world, said Mr. Crone.
Outsourcers have an opportunity to expand their services, he said, by offering total management of the client-server network, including software updates, maintenance, and backup.
Some companies are attempting this already. Computer Services provides consulting in operations and efficient workflow setups, and it evaluates customer technology plans, said Mr. Powless. The company lends banks the expertise of its voice/ data communications and local-area network installation specialists.
System Survival
Similarly, Mutual Services, Inc., which services approximately 50 savings banks in Massachusetts, has added halfa dozen ancillary services in the last two years, said Charlie Wyman, vice president of sales and marketing.
The company offers local and wide area network design and management, and PC-based programs that interface with the core system, he said.
Mr. Crone of Peat Marwick believes that, ultimately, the outsourcing vendors that survive will be those that incorporate client-server technology, and offer customers "shrink-wrapped software modules that run standardized, commoditized, and regulated financial service applications in an open systems environment."
Keeping Pace
Mr. Powless agrees that small outsourcers must invest prudently in new technology to help their customers survive.
"There will always be a place for small outsourcing vendors if community banks survive," he said. But vendors will not be able to "wait out" trends in the industry that may force them to modify the way they do business, or to wait until things get back to "normal," he said.
"One of the biggest challenges our industry is facing is the realization that the current pace of change is the norm, not the exception."
