WITH THE PLETHORA of software packages tailored for banking applications, the personal computer has in fact become a permanent part of the banking industry's infrastructure.

The banking industry currently owns approximately 800,000 microcomputers, valued at between $2 billion and $3 billion. The applications software used on these personal computers can be divided into three categories:

* Personal productivity programs. This software is the most prevalent. Spreadsheets, word processing, or personal data base programs are easy to use, familiar to many, and useful for executives and secretaries alike.

* Proprietary client-server applications. Clerical or production personnel interact with mainframe applications and data bases via client-server architectures or perhaps a dump terminal emulation mode. Either way, the PC becomes connected to the host-based core processing systems.

* Specialized packages. This type of software performs a wide variety of banking functions, generally without requiring excessive integration with the mainframe systems. These packages also generally do not require users to have programming skills.

The last category of PC banking packages is extremely interesting. In 20 or 30 years' time, it may become the principal way that technology is provided to the banking industry.

These packages apply the cost effectiveness of the PC directly to banking tasks. Within this category, the technology is not usually proprietary, but it is industry-specific.

The full force of the marketplace and its creative and capital resources is brought to bear on solving technology problems. Although this market is still getting under way, it has already achieved remarkable momentum.

We estimate that some 500 different companies now market one or more PC banking packages. That is, they determine the user needs, write the software, sell the product, and maintain and update it.

Some 500 different companies market PC banking packages

Most are small, privately owned companies that specificalize in this business and have the requisite industry knowledge.

A very few are banks, selling the results of their internal development efforts. A few are publicly owned -- like CFI Proservices or Sendero, a disivion of Fiserv Inc. -- but most are simply entrepreneurially driven.

Beginning about 1970, the first companies to write banking software targeted mainframes. Today, these companies -- like Hogan or Automated Financial Systems Inc. -- have products that are in common usage throughout the industry.

But these mainframe software firms are not the dominant providers of PC banking software -- some, in fact, haven't even entered the field. The leaders tend to be new companies that write only PC software -- many of them having entered the field since the PC ws introduced 10 years ago.

The market currently offers about 1,850 different banking PC packages. About 70% of these packages fall into 12 major categories of software: asset-liability management, loan accounting, loan calculations, credit analysis, loan origination, cash management, funds transfer, general ledger, platform and teller automation, investment and trust accounting, stock-performance analysis, and training and development.

The largest revenue category is branch and teller automation, because about half of banks' workstations are in branches.

The remaining packages cover an incredibly diverse range of functions and/or products. In fact, this diversity helps to explain why the PC banking software market has grown as large as it has.

Vendors have simply found unique need after unique need that would be slow and cumbersome to meet through traditional mainframe shops or would be a waste of time and effort for each bank to program itself.

A few examples illustrate this niche approach. Myrick Computer's Funeral Home Pre-Need Trust record keeping package costs only $650. It's very targeted, but for those who do need it, why look elsewhere?

Trust administrators can select from a multitude of other programs for very specific applications including age 70-1/2 distribution, Social Security's permitted disparity, and court accounting. Or they might select software for land trust accounting or precious metals inventory management. Some of these packages address simple needs, while others serve more complex applications. For example, we know of one risk management system that features such arcane elements as Cox-Ross high-speed options, delta equivalent positions, and gamma and vega volatility measures.

The bottom line for the typical bank technology user is this: Before you request development from your data processing department, check out the PC packages. If they have what you need, you might be a lot better off.

The packages that perform core bank functions (transaction processing or general ledger) are extremely interesting, but are targeted today at smaller financial institutions. Much of the market for them comes from thrifts and credit unions, but commercial banks with up to about 50,000 deposit and loan accounts can also be handled. While the number of installations of these packages today is limited, the potential for growth in capacity and robustness is obviously there because of the growth in PC capability.

Large banks do not dominate the market for PC software to the same degree they do for mainframe software. For example, CFI Proservices' Laser Pro is a loan closing documentation and compliance system. A major superregional uses the software, but has only five licenses. The typical community bank, possibly 1% the superregional's size, would still use one license. So, many PC vendors do sell to both large and small banks, depending on their product, but generally give the smaller banks considerably more attention than vendors of mainframe packages ever did.

The inventory of available PC banking packages covers a wide range of prices. Some go for a mere $99 -- and have capabilities to match. About half cost less than $1,000. But about 25% cost more than $10,000 and at the high end, prices exceed $100,000. BancA's POWER 1, a commercial lending software package, has a base price of $485,000 (for 200 users), yet runs on a machine costing $2,000.

Increasingly, these PC packages are sold as multiuser systems, rather than just as standalone programs. Some now also offer true client-server options, and some are actually designed as front or back ends to other host-based banking packages. As integration between the industry's traditional mainframe systems and its PC inventory grows, this trend should continue.

Sales in this market are about $200 million and are growing by about 20% to 30% per year.

But, growth is not uniform across all players. There will be a shakeout, possibly later in this decade. Far fewer than 500 banking PC vendors will survive. We also expect to see the vendors of mainframe banking packages make more substantive efforts in the PC within the next few years.

It's easy to think of the PC as "new" and the mainframe as "old." But the truth is that PC and microprocessor technology moves so fast that the bulk of these PC banking packages are also "old." For example, most will run on a 286-type machine, first introduced in 1985. Only 15% at best are configured to work with Microsoft's Windows and even fewer work with the new generation of 32-bit operating systems. Developers of these packages face significant decisions in deciding whether and when to adjust their products to keep up with evolving PC technology.

In summary, PC banking packages have entered the mainstream as a viable option in those cases where they meet banks' needs adequately. Greater capacity, robustness, and functionality can be fully expected in the future.

For small banks, many if not all core functions are now possible on a PC platform, creating an increasingly realistic option to microcoputer-based systems or service bureaus. With medium and large banks, most buyer consideration comes from the departmental side, where the targeted nature and "personalness" of PC packages may be very appealing. Look for the PC banking package to continue to grow in importance.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.