Barnett Cost-Cutter Focuses on Revenue, Too

Having at least a single account relationship with more than 40% of households in its home state of Florida, Barnett Banks Inc. holds a market position that any institution would envy.

But until recently, few executives would have wanted to change places with Barnett's top technologist, Jonathan J. Palmer.

When Mr. Palmer, 51, arrived at Jacksonville-based Barnett in 1990, the company's efficiency ratio - expenses as a percentage of revenue - was one of the industry's worst. Returns on assets and equity were similarly dismal.

Analysts at the time thought Barnett would have to pare its extensive branch network to achieve any real efficiency improvement. But the bank was reluctant to do so because about two-thirds of its revenue comes from retail customers who are above-average consumers of branch services.

Thus, Mr. Palmer's charge seemed almost unreasonable: Improve operational efficiency without hurting customer satisfaction with the branch system.

Five years later, the bank's efficiency numbers are in line with industry averages, and they got there without the precious network of 628 retail branches having been gutted.

Observers said Barnett's experience demonstrates that institutions looking to cut costs do not always need to close branches as a first resort.

The push to improve efficiency continues, but analysts said Barnett must now focus more keenly on improving revenues, which have been mediocre given the bank's domination of its market.

"They've got to start improving revenue," said Deborah Beylus, a research analyst at J.W. Charles Securities in Boca Raton, Fla. "They've been very successful at improving efficiencies. Now they have to go to the next level."

Mr. Palmer - who recently added responsibility for retail banking - said the company intends to do exactly that.

"We're pleased with the focus on expense management, we're pleased with our results to date, but we're not happy with leaving it where it is," he said.

Though Barnett's branches will be the foundation of its business for some time to come - they handle 70% of retail transactions, whereas other big retail banks are below 50% - Mr. Palmer acknowledged the importance of alternative delivery channels such as home banking and automated teller machines.

And he pays them more than lip service.

The most visible of Barnett's alternative banking initiatives is a partnership with Time Warner Inc. to deliver banking services through cable television. The media giant is testing an interactive TV system in Florida that aims to offer viewers a dazzling array of services, including movies on demand and on-line shopping.

Though the Time Warner project has met with some delays, Mr. Palmer expects that banking services will be available to several thousand Florida residents by midyear.

Interactive TV users will be able to get information about their Barnett accounts, transfer balances from one account to another, and "eventually do anything but get cash," said Mr. Palmer.

Also in the remote-service realm, Barnett is experimenting with screen- based telephones. Smart cards - transaction cards featuring a computer chip that can store a wealth of information or electronic cash - are also likely to play a role in Barnett's near future, Mr. Palmer said.

"Our view is that, as our customers' preference for delivery changes, whether to ATMs or home delivery of financial services, we're going to be there," he said, echoing a mantra voiced by many but honored by few.

Mr. Palmer acknowledged that offering a wide range of customer choices would not come without a cost. The bank's information technology budget, including telecommunications outlays, is at about $150 million for 1995 and is expected to grow by about 5% per year.

But he said he thinks development costs can be kept to a minimum because "many of the (new) delivery channels we will not own."

By keeping costs low and the range of delivery options high, Mr. Palmer said, he believes Barnett will be able to garner more revenue from nonbranch transactions.

The numbers so far support his contention. Transaction volume from alternative delivery channels is growing at about 35% per year, while branch-based transactions expand at only a 5% rate.

He also sees the bank's investment in check-image processing as a possible source of revenue.

The bank was one of four pioneering institutions that bought Unisys Corp.'s system, which improves check-processing efficiency by turning paper items into computerized images.

Barnett is only weeks away from completing its conversion to the system, and Mr. Palmer said the Jacksonville processing center may eventually sell check-image processing services to other institutions.

As the bank invests in technologies that can bring in revenue, Mr. Palmer plans to continue the back-office consolidation that has allowed the bank to improve efficiency during the last few years.

The check-image system, which handles about eight million items on peak days and is "about breaking even right now," will start to pay off in terms of cost savings soon, Mr. Palmer predicted.

And the cost-efficiency moves of the past few years will continue to pay dividends, analysts said.

Barnett has consolidated consumer and commercial loan operations into a single center. In addition, the bank's units run on a common system run from a single data center.

In auto finance, Barnett employs a credit scoring and risk-based pricing system that lets the bank "buy a few more marginal credits from dealers because we're pricing more accordingly," said Mr. Palmer.

An earnings analysis system that lets the bank examine the profitability of individual lines of business will point out areas that Barnett needs to improve.

"My view of this is that we need to be competitive on costs so we can be competitive on price," said Mr. Palmer.

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