Small Banks: Alternative Delivery A Minority Stance

W. Page Ogden, president and chief executive of Britton & Koontz Capital Corp., Natchez, Miss., is not afraid to gamble on new technologies.

In the last year, he has overseen his $500 million-asset national bank's construction of a transactional World Wide Web site and its launching of the only locally run Internet access service for his town of 20,000 in southwestern Mississippi.

The services put Britton & Koontz squarely in the minority among community banks.

According to a study by Mentis Corp., 71% of small banks - defined as those with fewer than 100 branches or less than $4 billion of assets - neither offer alternative delivery services nor plan to in the coming year.

By contrast, banks with more than 100 branches almost universally use alternative delivery of some kind. More than 86% said they offer services such as PC banking, call centers, and automated debit. (Automated teller machines were excluded as a form of alternative delivery in the Mentis survey.)

The reasons are varied for community banks' slow adoption of new delivery mechanisms.

Some said alternative delivery mechanisms are difficult for smaller banks to operate and maintain. Others, noting that community bank customers typically value personal service more than speed and convenience, said significant demand is lacking for electronic services.

However, a growing group is coming around to Mr. Ogden's point of view: Alternative delivery is a must for community banks that wish to compete with larger institutions.

By Mr. Ogden's reckoning, going full force into electronic banking was the only way for Britton & Koontz to preserve a niche for itself in a future when bankers will have to rely less on branches and more on alternative means of reaching remote customers.

Alternative delivery "makes us different from our competitors," he added. "We've created a whole new communications channel with the customers."

Surprisingly, the cost of alternative delivery technology - building Web sites, installing new processing systems, building communications transmission links - is not a major hurdle for community banks. Consultants agree that advances in processing power and client-server computing have made low-cost systems available to even the smallest banks.

Some went so far as to say the availability of affordable alternative delivery systems gives community banks a leg up on larger institutions.

"Large banks lose a certain amount of nimbleness when it comes to switching technologies," said Joseph L. Boutin, president and chief executive of $600 million-asset Merchants Bancshares in Burlington, Vt.

"That puts us at a competitive advantage," he said. "We can offer the best of both worlds - personal service and convenience. And our nerves are right in our fingertips."

Experts attributed small banks' reluctance to offer alternative delivery services to their relative success in their traditional business.

"Small banks are biding their time," said James Moore, president of Mentis, which is based in Raleigh, N.C. "The majority of their relationships are still managed effectively through the branches."

Community bankers said they are emphasizing branch networks in an effort to satisfy the demand they see for personal, "hometown" services to account holders.

But an increasing number also say they are being forced to invest in new technologies. And sometimes, one new technology spawns the use of another.

Britton & Koontz, for example, made its way onto the Web by looking into imaging systems for its check processing operations.

The search for ways to leverage the investment in check processing led the bank to examine how a Web site might be used to ship check images more efficiently to customers. The Web project eventually expanded into much more than that.

In ways such as these, Mr. Ogden said, the bank's technical staff is helping it find better ways of doing business.

"It has to do with knowledge, not cost," he said. "You really have to have someone in the organization that has the interest and the knowledge to spread around."

Consultants said banks that are not moving as fast as Britton & Koontz may be confused or daunted by the myriad options available.

"It's hard for a smaller bank to know what to focus their bets on," said Harold Brewer, president of Brintech Inc., a New Smyrna Beach, Fla., company that consults with small banks on their technology strategies.

"Even larger banks are unwilling to put all their eggs in one basket," he said. "The worst nightmare to a small bank is to spend the money on offering alternative delivery services only to have 1% of your customers sign up for it."

Lacking the resources to attract technical talent, community banks frequently stick with the status quo. "There is a mentality that says, 'This is the way we've always done it'," said John M. Floyd, president of John Floyd & Associates in Houston.

But at least a handful of small banks are experimenting by picking their spots with technologies that best fit their customer demographics.

Of the small banks responding to the Mentis survey, 16% currently offer alternative delivery services. Another 13% say they plan to launch new channels within a year.

Denali Bancorp., Fairbanks, Alaska, for example, opened call center operations last July and plans to launch its PC banking product in January.

But the $106 million-asset bank, which opened in 1986, offers no ATM services and does not plan to do so, said Gary Roth, president.

Denali executives have discovered they can meet consumer needs by offering extended branch hours - including a drive-up window Sundays - in lieu of ATM services. But the changing demographics of Fairbanks forced executives there to consider alternative delivery as well.

The new PC Banking program was designed as a "defensive move," said Mr. Roth. He added that he believes small banks that think their customers don't want computer home banking services are misguided.

"The computer craze has really hit on here," said Mr. Roth. "If Fairbanks, Alaska, is ready, those small banks elsewhere are missing the boat."

Mr. Boutin of Vermont's Merchants Bank agreed. Despite a 34-branch network spread across rural Vermont, alternative delivery channels like PC Banking are often the only means of contact with customers.

"If you don't have multiple distribution channels," he said, "the customer is going to look elsewhere."

Merchants Bank offers telephone banking, PC Banking, debit cards, and remote check writing. The institution is exploring a highly experimental technology that would allow Internet access through television for bank transactions.

"We are pushing the envelope," said Mr. Boutin, who estimated that the bank would spend about $5 million on technology during the next two years.

In addition to attracting a younger customer base, these alternative delivery strategies help create loyalty, say consultants and bankers. "The big opportunity is to firmly attach customers to your bank going forward," said Mr. Brewer of Brintech. "That's the most compelling reason for doing it."

Mr. Ogden said he has already seen the benefits. "We may not have everyone using e-banking," he said, referring to the bank's transactional Web site. "But people know that the B&K bank offers it and is the leader in this area. We are sending a lot of messages out."

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