Banks are ignoring fundamental technology issues while chasing after fancy solutions to noncore problems, a consultant warns in his annual report on the industry.

They can move ahead of the pack by focusing their resources on three areas: improving their core applications, implementing full-scale platform systems, and developing enterprisewide imaging systems, Art Gillis writes in "Automation in Banking."

Mr. Gillis, the founder and owner of Computer Based Solutions Inc., of Dallas, does not mince words in his criticism of banks' yearning for the Next Big Thing. They "are looking for the sizzle," he said in an interview.

"In the real world, 80% to 85% of what any bank does is based on core applications," he added.

In the report, published this month, he defines core applications as internal financial management systems, deposit systems, loan systems, and other customer-related applications. "You'll spend a lot of money doing those things, but you'll have excellent strengths and capabilities, and they are all designed to serve the bank's customers," he writes. In 2000, a record 8.12% of banks converted to a new core processing system. That is partly explained by the fact that some held off until after their Y2K concerns were allayed.

Mr. Gillis recommends that bankers talk with their back-office personnel to find out where improvements are needed. "Employees suffer the degradation of doing things themselves that the system has left undone, things that should be automated," he said.

Ultimately, core system tune-ups help customers, and that, Mr. Gillis said, is the point. "The best thing a phone center can say is, 'We're not getting any calls.' It's the weaknesses in the core applications that produce those calls."

In his view, 2000 was a predictable and unexciting year for bank technology, especially after Y2K turned out to be a "nonevent." Overall, he remains skeptical of the potential for banks to benefit from the Internet. "Too many people thought too many things were going to happen that didn't."

Though the dot-com shakeout began in 2000, "Automation in Banking" notes that all of the technology companies that reported revenue increases of 30% or more were directly Internet-related.

Bank consolidation presents a big challenge, especially for smaller technology companies. According to the report, the number of banks, thrifts, and credit unions shrank by 3% in 2000, meaning that 639 financial institutions may have been folded into their new parent's technology system. That was a boon for the parent companies' providers, but not for the providers that served the digested banks, he said.

The review says Fiserv, the Brookfield, Wis., data processing giant, "holds the strongest position in the industry," and notes that eight companies won 66% of the contracts made in 2000 for core applications and outsourcing.

That leaves little new business for the remaining players, and perhaps that is why there are fewer core applications providers today. In a separate newsletter that Mr. Gillis publishes occasionally, he noted that there were 77 core application companies in 1995. Now there are 51.

Though he stressed that the report focused on last year, Mr. Gillis was willing in the interview to offer a prediction. The technology companies that jumped on the Internet bandwagon with "me-too offerings," he said, will continue to go through a weeding-out process. "It's like they're all reading from the same script," he said. "The number of companies will shrink dramatically."

"Automation in Banking," 380 pages of data and Mr. Gillis' homespun opinions, costs $675.

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