Co-op Data Centers Regain Appeal

Community Banks Find Savings by Sharing Costs

A growing number of community banks are joining forces to own data centers cooperatively as an alternative to buying their own hardware and software or hiring a third party to provide computer services.

Cooperative processing arrangements, employed by many community banks in the 1970s, are experiencing a rebirth in the 1990s among banks seeking to reduce the expense of their computer operations.

Banks participating in these data-processing associations typically report cost reductions ranging from 10% to 15%. Bankers who were handling their own data-processing operations reported significant savings, and those moving from service bureau contracts -- under which a third-party processor had taken over data processing -- reported increased control over expenses.

A Substantial Uptick

While companies such as the EDS Corp. subsidiary in Dallas of General Motors Corp. and Systematics Inc., Little Rock, Ark. said the trend hasn't made much of a dent in their service bureau business, experts have noticed a substantial uptick in the past year in the numbers of small banks banding together to form data-processing companies.

"Fifteen, twenty years ago, small bank associations were common stuff, and now, after a lull in the '80s, we're seeing them come back," said M. Arthur Gillis, president of Computer-Based Solutions Inc., New Orleans, which publishes annual reports on automation at community banks.

The recent sluggish economic climate parallels business conditions during much of the 1970s, and Mr. Gillis said that may be primarily responsible for the recent migration back to ccoperatively owned data centers.

Using Turnkey Software

Beyond that motivation, though, bankers remarked that the ready availability of turnkey software packages -- applications sold by vendors that require little or no customization by bank staffs -- have also contributed to the recent surge.

"If the [system's] maintenance proves to be a hassle and we have to hire a lot of people [to run it], the software is partially defeating our purpose of getting together with the other banks in the first place," said Steve E. Backlund, a vice president at the $10 million-asset Bartonville Bank in Bartonville, Ill.

Mr. Backlund's bank co-owns two data centers in Illinois with six other community banks, ranging in assets from $10 million to $75 million.

Midrange Computers Adequate

None of the banks individually generates enough data-processing volume to justify buying its own computer system, but by combining volume, the seven banks can efficiently own and operate the centers.

While some larger data-processing associations use mainframe computers, Mr. Backlund said most find smaller systems more than adequate for their needs. The data centers operated by Bartonville Bank and its partners employ two System/38 midrange computers from International Business Machines Corp.

Another data-processing cooperative, led by Flat Top National Bank, Bluefield, W.Va., a $167 million-asset subsidiary of FCFT Inc., just bought a new AS/400 midrange computer from IBM. In the 1970s, Flat Top was involved in a 19-bank data-processing cooperative that disbanded after the banks' needs outgrew what the association could offer.

Negotiating as a Group

"That's a problem that most banks wish they had today," said Robert L. Buzzo, a vice president at Flat Top National Bank. "What is similar between then and now is that the banks need each other to negotiate as a group."

Flat Top National will move from a service bureau arrangement with EDS to managing a data-processing facility with three other institutions also owned by FCFT.

Allocating Facility's Costs

In a cooperative, each bank does a different volume of transactions, and the facility's overall cost is allocated accordingly. The Illinois cooperative's prices are calculated by averaging transaction charge estimates from the Bank Administration Institute, the Federal Reserve Board, and several vendors.

While bankers and vendors emphasize that not every bank would save money by moving to such an arrangement, most feel that cooperative associations are worth a look. [Graph Omitted]

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.