Bankers caught up in the recession are accepting the irreducible logic of "smaller is beautiful" for their back offices, and 1992 should reveal whether they are able to stay on those fat-reducing diets.

The past 12 months proved a turning point for banks' operations and technology units. Some of the largest banks announced mergers that were driven largely by anticipated savings from combining operations.

Other institutions turned their back offices over to technology-services companies that promised to help slash back-office costs. The trend, which came to be known as "outsourcing," encompasses all types of such spinoff deals.

Wheels in Motion

Some of the largest outsourcing contracts in the industry's history were inked in 1991, and consultants say the trend will continue.

But while the wheels for cost-cutting have been set in motion, it remains to be seen if bankers will realize their goals. Much depends on how quickly banks - especially those involved in mergers - move to reduce staffs, merge facilities, and develop common systems.

"The conventional wisdom is: If you don't try to capture the savings early on, you won't get them at all," said George Rusznak, vice president and head of the banking practice at CSC Index Inc., Cambridge, Mass.

Selective Pink Slips

As a result of the changes, thousands of bank operations and technology employees will face layoffs in 1992, but consultants say that most technically skilled staffers will be spared.

At the same time, automation will allow banks to deliver more pink slips in 1992 - 100,000, according to one of the more extreme prediction, by the New York-based consulting firm Cresap.

The brunt of layoffs will be borne by tellers, clerical staff, and platform personnel, according to Cresap, a unit of Towers Perrin.

On a more positive note, banks' moves to streamline should give new life to languishing self-service technolgies such as home banking via PC or telephone, enhanced automated teller machine services, and debit card point-of-sale systems, observers predict.

MERGER GOALS DIFFICULT

Despite bankers' grim resolve, there is already some evidence that they have underestimated the complexities of managing large-scale system consolidations and outsourcing projects, causing delays in cost-cutting.

"The most meaningful savings are the ones they will realize in the first 12 to 18 months after the merger," Mr. Rusznak said.

Emerging megabanks such as Chemical Banking Corp., Bank-America Corp., and the NCNB Corp. successor, NationsBank, have projected large cost savings through systems consolidation.

Chemical, slated to merge with Manufacturers Hanover Corp., hopes to save $100 million in the first year and another $100 million over the next three years.

The bank originally planned to merge its lead institutions by Jan. 1, but had to push the date to mid-1992 because executives realized they needed more time to combine systems. The new Chemical must now move quickly to meet its cost savings goals.

Of $1 billion in total expense reductions that BankAmerica estimates it will save in its merger with Security Pacific Corp., about $400 million will come from computer systems consolidation, branch closing, and other operational redundancies.

NCNB, which will combine with C&S/Sovran Corp., hopes to eliminate $350 million in systems expenditures over three years.

Bankers and consultants say that the first order of business is to remove duplicate systems in business units - such as funds-transfer, consumer-banking, and trust departments - reduce staff, and close operations centers.

This is easier said than done, because systems-consolidation decisions are often political and technical hornet nests. Technicians are reluctant to give up systems they have nurtured over the years - partly out of loyalty but also because eliminating them might mean the end of their jobs.

For example, 25 of 32 major computer systems for the new Chemical have been chosen. But the system that will support consumer banking, a key area, has not been chosen, say technology executives at Hanover. A decision is expected after the first of the year - several weeks behind schedule.

OUTSOURCING ON THE RISE

Cost-cutting imperatives are also largely responsible for the upsurge in the number of large banks outsourcing their data processing.

The need to raise capital and get out from under marginally profitable transaction-processing businesses has also pushed some large institutions to farm out systems to nonbank specialists.

The largest bank outsourcing deal occurred in September when Continental Bank said it would turn its data center and technology operations over to International Business Machines Corp. Industry sources estimated the contract at more than $500 million over 10 years.

Barely a week later, NCNB said it would outsource to Perot Systems Corp. The agreement is expected to encompass the merger of NCNB and C&S/Sovran, which will rank among the top four holding companies.

Hopeful Year for Outsiders

Bankers and consultants expect more institutions to turn to outsiders for technology management.

"I suspect that several banks bigger than us will outsource over the next three years," said Donald C. Parcells, executive vice president at First Fidelity Bancorp., Lawrenceville, N.J. The $30 billion institution signed a $450 million outsourcing agreement in 1990 with EDS Corp. of Dallas, a General Motors Corp. subsidiary.

The outsourcing trend will continue because banks - contending with a myriad of regulatory and business condition changes - cannot afford the investments they need to make in technology to stay ahead, experts say.

"The banking industry needs to make major structural changes to compete with other financial services companies," says Mr. Rusznak. "They will lack the capital and the competence to implement those changes."

Outsourcing will not be confined to data center operations. Experts predict an increase in outsourcing agreements for specific business systems, such as mortgage servicing, trust, and credit card processing.

EMPLOYMENT

However, the move to farm out data-processing tasks will affect only 8,500 to 12,000 employees out of the 100,000 jobs to leave banking next year, according to Cresap. About 50,000 will be tellers and other retail support staff, the firm estimates.

"I suspect that on a case-by-case basis, the technologists are being let go a bit more slowly than employees in other parts of the organization," said Chick Bisberg, president of technology search firm Two-Party Systems, based in Livingston, N.J. "I don't see them as being quite as vulnerable as other departments."

Technologists are still perceived as necessary to maintain the underpinnings that enable banks to maintain their competitiveness.

"Technology is a relatively small part of the layoffs," according to David M. Partridge, director of Cresap's financial institutions practice. "Data processing is the future: We have to lift the house up and slip a new foundation in."

Mr. Partridge estimates that another 20,000 and 25,000 support staff will be laid off as the result of mergers that have already been announced.

Streamlining for Speed

Many of these will be back-office staff; a smaller number will be technologists. Streamlining, and rengineering of work flows, will affect another 15,000 to 18,000 employees, according to Cresap. These numbers will include big staff reductions in labor-intensive areas such as check processing.

Those systems managers who have maintained strong hands-on skills and can communicate well with business managers and understand how technology affects business will have the best shot at finding and keeping their jobs. Programmers and business systems analysts will still be in demand, consultants say.

And while the skills required by banks are changing somewhat, banks will still need to hire programmers proficient in Cobol, a computer language popular in the 1970s and 1980s for writing business software. "Cobol programmers are not yet a dying breed," Mr. Bisberg said. "So many systems are built in Cobol that banks cannot afford to change them."

But the hottest demand is for programmers proficient in "C"-a newer language used in local-area network and data communications, in client/server computing, and on trading floors.

Banks are also interested in technologists with skills in areas such as Case tools, which can help reduce backlogs of applications quickly; and artificial intelligence/expert systems, which can help fight fraud and are becoming less expensive to develop.

According to Cresap's Mr. Partridge, banks will begin to push customers aggressively in 1992 to use automated teller machines rather than to wait in line to talk to a human. Transactions involving teller personnel cost about 2.5 times more than ATM transactions. "1992 is going to be the year when banks push hard on this," Mr. Partridge said.

Over the past 10 years, the ATM has grown from a banking curiosity to a durable workhorse that handles nearly 50% of banks' basic consumer transactions. Despite that number, the machines have yet to fulfill their promise of reducing branch overhead costs by displacing teller-line transactions.

In 1991, a number of financial institutions, including Seattle First National Bank and Maryland National Bank, attempted with some success to turn their ATMs into revenue-generators by rigging them to sell stamps and other products. To reach the same end, other banks, such as First Interstate of Nevada, simply jacked up transaction fees to new heights - $1.50.

Yet, just as it seemed the banks would start making some large steps toward ATM profitability this year, trouble struck in the form of new legislation. Regulations for the Americans with Disabilities Act, written in July, required financial institutions to make substantial portions of their ATM sites accessible to people with disabilities by Jan. 26.

Accommodating the Disabled

Renovations to ATM sites will typically cost about $500 to $4,000 per site, according to the American Bankers Association. And the act could affect as many as 50% of the ATMs in the United States, or about 40,000 machines.

Whether from altruistic motives or fear of lawsuits, most financial institutions are beginning to make the necessary moves to accommodate the disabled. However, the unexpected costs of the renovations will put a squeeze on the ATM profits of many institutions for some time to come.

Perhaps as a reaction to these difficulties, a number of institutions are expressing renewed interest in alternative ways to deliver retail products.

Home banking -- which some observers thought died mercifully when a number of major projects flopped in the '80s -- experienced a modest rebirth in 1991.

This past year, several institutions, including Huntington Bancshares and Manufacturers Hanover Trust Co., initiated new bank-at-home programs. And many experts expect that other institutions will follow in the coming year.

'Irresistible Last Frontier'

At the Bank Administration Institute's retail delivery systems conference in early December, Fred White, a principal at First Annapolis Consulting, remarked: "Clearly there have been a number of false starts," in home banking, "But in many ways it represents the irresistible last frontier for retail banking -- I don't think [bankers] will be able to stay away for long."

Home banking solutions range from full-blown programs that require consumers to have personal computers in their homes to the so-called "smart phone" applications being tested by Citicorp and Huntington Bancshares. Smart phones are telephones equipped with display screens on which consumers can perform transactions.

While the jury is still out on whether consumers want to bank from their homes, bankers are aggressively pushing technology so shoppers can use debit cards at retail merchant locations.

Some Success Stories

Nearly 75% of credit card payments at retailers and merchants are now processed electronically, and that success is encouraging to bankers who would install similar programs for debit card use.

The initial successes for debit cards have come in supermarkets and similar retail sites. These programs, in which consumers use their ATM cards instead of cash to pay for groceries, have been spearheaded by regional ATM networks.

As anticipated, debit cards are now going national, with MasterCard International and Visa U.S.A. rolling out Maestro and Interlink, their respective online debit programs.

Matt Barthel, Karen Gullo, and Jeanne Iida contributed to this report.

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