Through all the changes in the outsourcing business in the last several years, one thing has remained constant: Community banks have been among the most avid users of third-party services.
Because smaller banks tend not to have the money or expertise to run and maintain their systems, they typically farm out some or all of their computer functions.
Typically, this has proven a boon for the banks. Outsourcing gives them access to products and services they otherwise could not afford. It also makes their expenses predictable.
But all is not perfect. Two forces - the consolidation of outsourcing providers and a renewed openness of large banks to outsourcing - have some community banks worried that they will have an increasingly tough time getting good service at a fair price.
Their fears are based on the belief that with larger outsourcing companies, smaller banks may get lost in the shuffle: since the largest customers generate the most revenue, they would be expected to get the most attention.
Joseph Williams, president and chief executive officer of $46 million- asset Marine National Bank, Jacksonville, Fla., said pricing, system upgrades, and the availability of new products and services are all affected by the trend toward bigger outsourcing providers. "You simply don't have any voice," he said.
Community banks rely heavily on outsourcing services. According to the most recent data from Mentis Corp., Durham, N.C., close to 85% of financial institutions with under $1 billion in deposits engage in some type of outsourcing.
Mr. Williams, former president of Community Bankers of Florida, said he saw no reason for smaller banks to run certain back-office operations, such as check processing, which involves some of the most expensive technology in a bank.
A bank the size of Marine National would only run a reader/sorter for two hours a day, which Mr. Williams described as the "silliest thing you can do. ... What sense does that make?"
But he said he nonetheless fears that outsourcing will become a less attractive option as the players get bigger and bigger.
As a way to improve their leverage with outsourcing providers, many community banks are striking deals in groups.
For example, the Independent Bankers Association of America - a trade group for community banks - recently cut a deal with Fiserv Inc. for automated teller machine transaction processing. Mr. Williams said his bank's participation in the arrangement will cut his ATM processing costs in half.
"These are the things we'll have to do to survive," he said.
Others agree that community banks may have to become more creative in their use of outsourcing. However, not everyone says community banks are losing control.
M. Arthur Gillis, a New Orleans-based consultant who tracks community bank technology, said outsourcers generally do not discriminate against smaller banks. "The first question they ask is not what is your asset size," he said.
Despite the consolidation, competition among outsourcing vendors still is fierce enough that even the smallest banks can get a fair deal if they are willing to shop around, he said.
Major bank outsourcers - such as Alltel Information Services Inc., Bisys Group, Electronic Data Systems Corp., Fiserv, and M&I Data Services Inc. - generally recognize and cater to customers' needs, regardless of their size, Mr. Gillis said. Most of the providers that operate any other way have "gone belly up," he said.
John Stone, a partner with KPMG Peat Marwick, Boston, agreed with Mr. Gillis' assessment.
"Community banks are squeezing their servicers for better prices," said Mr. Stone, adding that he felt they are actually in "the driver's seat" as technology evolves.
The power community banks wield also stems from the fact that there are an increasing number of in-house technology options.
Though, as noted by Mr. Williams, it is true that outsourcers can almost always provide a lower price on certain functions, the emergence of banking systems that run on personal computers has empowered many community banks.
"With the power of PCs today, technology may be more of a friend to little banks than the big ones," Mr. Williams said.
The outsourcers are not ignoring the fact that many community banks are looking for PC-based solutions. They're "not walking way from that market at all," Mr. Stone said. "They want to keep the customers they already have, as well as sell it to new ones."
Given the trends in the outsourcing industry, midsize banks may be the most at risk. Fearing that outsourcing can give them only generic solutions to their processing needs, many choose to handle their own technology.
As a result, they shoulder the burden and cost of new product development, regulatory compliance, and product customization.
They are "reinventing the wheel every time," said James J. Giancola, president and chief executive of CNB Bancshares, Evansville, Ind.
He questioned strategies that do not take advantage of shared development costs and bulk purchases of equipment.
"Here we are, a $4 billion bank competing with superregionals, with the advantage of the same software capabilities they have," Mr. Giancola said. "We would have no ability to develop that on our own."
Mr. Giancola noted that outsourcing gives his bank access to state-of- the-art technology developed by some of the sharpest minds in the business.
"The best technology people ... want to be with firms that can offer them career paths that we in the banking industry simply can't provide." As a result, most of the best technology people wind up with outsourcers, he said.
The fact that the outsourcers hold many of the technology cards makes it hard for community banks not to turn to them.
"The way the market is going, people will have to come up with reasons why not to outsource," said Jerry Mirelli, an executive vice president at Technology and Business Integrators Inc., Woodcliff Lake, N.J.
