A year ago, the notion that community banks would get involved in the Internet and electronic banking in a major way was far-fetched. As recently as mid-1999 only 22% of community banks had a Web presence, compared with 56% of big banks.

Say goodbye to all that. According to industry estimates, one-third of all community banks are now on the Web, and many more are moving hard to roll out e-banking technologies.

Against this backdrop, BTN contributing editor Brian O'Connell huddled with top executives from four tech-savvy community banks to discuss how the sea change wrought by e-commerce is altering their approach to financial services.

O'Connell: What impact has the Internet and e-commerce had on the community banking industry?

Bettendorf: The internet has had a tremendous impact on community banking and all industries in general as consumers and businesses alike are searching for more efficient and immediate tools for communications and information. The capabilities available through the Internet are becoming as necessary in doing business as fax machines, pagers and cell phones. Community banks must remain competitive and take advantage of the opportunities afforded with the Internet and e-commerce.

Eberhardt: I agree we've got to become more competitive. Today, where information is available at our fingertips, the community banking industry has to be technologically aggressive to remain competitive. Banking technology has historically been state-of-the-art to meet customers' financial needs. Busy lifestyles allow consumers to utilize the Internet and e-banking for knowledge and options.

Farmer: E-commerce has changed the way the community banking industry does business by forcing the industry to consider non-traditional channels of delivering services to customers. Customers are demanding products and services that allow them to conduct banking business at their convenience. This places most community banks in a difficult position because they do not have the financial resources or technical resources to implement these products and services in-house. Typically, community banks are forced to outsource a product or service like online banking via the Internet to third-party vendors. This will be a concern for most community banks in the future due to the cost of outsourcing and the inflexibility of a "one size fits all" software solution.

O'Connell: Is e-banking a threat or an opportunity for smaller banks?

Nadglowski: The Internet is an opportunity for smaller banks. For a nominal investment, even a small bank can have a presence on the Web and offer customers online access to their accounts and electronic bill payment. The Internet also expands a small bank's trade area without investing capital in a new office since there is always a convenient location, regardless of where the customer lives.

Farmer: E-banking can be a threat or an opportunity for smaller banks depending on how the banks are positioned for the future. Those banks that have invested in the technology and expertise to support e-banking will prosper by attracting new customers from other banks that cannot or will not offer comparable services. The banks that resist change and fail to implement e-banking solutions will more than likely find a shrinking customer base as these customers migrate to other institutions that offer e-banking services.

Bettendorf: We view e-banking as a great opportunity for Summit and other smaller banks in leveling the playing field with larger institutions. E-banking makes it more convenient for our customers to immediately obtain account information or submit transaction requests anytime of day or night without having to get someone on the phone. We are able to offer all the technological advantages and efficiencies available at larger institutions with the "high-touch" service a community bank is known for.

O'Connell: How are your institutions participating in the e-banking revolution, and is this strategy predicated mostly on retaining customers or actively acquiring new ones?

Nadglowski: The Bank of Tampa recently introduced Internet banking to both our retail and commercial customers. Both retail and commercial customers can obtain their account balances, view presentment items, transfer funds between accounts and pay bills electronically. (Our) commercial Internet banking program offers the additional features of wire transfer requests, ACH origination and multiple-user security.

I would add that the decision to invest in an Internet banking product was both defensive and offensive. Our existing customers requested the service, and our new customers and prospects expect the service. We found that in order to effectively compete for new customers, we had to invest in the technology to provide the same conveniences offered by the regional banks.

Farmer: Highlands Union Bank is participating very actively in e- banking. We offer more traditional services such as ATMs, ACH origination, merchant card services, as well as newer services, such as a Web site, telephone banking, Internet banking and electronic bill payment. We'll also soon be releasing an Internet-based corporate cash management product for commercial customers.

While we've certainly tried to keep current customers by implementing these products, we continually strive to anticipate what our customers could be offered by way of electronic services. This attitude translates into more convenience and accessibility to information for our customers, and allows our customers to interact with the bank on their schedules instead of the bank's.

O'Connell: Is there any interest in carrying your e-banking reach outside your

local market?

Eberhardt: Yes, with the technological commitment our bank has made, we'll utilize its resources to target new markets. This will allow us to not only continue growth, but to remain in touch with the needs of our customers. When we quit listening to our customers, when they become just another account number, we get lost in big-bank oblivion.

Nadglowski: At this time, we don't have any interest in reaching markets without interests in our trade area. We feel that personal contact with the customer is an important part of the banking relationship. The Internet improves the convenience of services provided to the customer, but cannot replace the value of a personal relationship. However, the Web has allowed us to service customers that have interests in our trade area but live in the surrounding areas.

Bettendorf: Same here. Currently, we're not actively pursuing out-of- market transactions or accounts through our Web page or Internet banking products. But down the road, we'll continue to explore opportunities to utilize these systems to create new funding sources and expand our markets in a controlled and manageable way.

Farmer: While it's certainly attractive to extend the bank's e-banking reach outside of its market area, federal regulation has been a deterrent to doing so.

O'Connell: What do community banks look for in an e-banking vendor?

Nadglowski: When we evaluated vendors for Internet banking, we first identified the features we needed to meet the demands of our customers. Our minimum requirements included the ability to view account balances and transactions, view presentment items, transfer funds, wire transfer requests, ACH origination and multiple-user security. The second factor was the reputation and financial strength of the company. We wanted to know that our vendor would be around in five years and was not likely to merge out of existence. We also wanted our vendor to have the capital and resources to continuously improve their products.

Bettendorf: We evaluated our e-banking vendor (on a number of) criteria. These were financial stability and the commitment to ongoing enhancements to their product; security of the product and Internet connections; technical support for implementation; marketing support for ongoing sales and training on the product; ease in interfacing data from our core system with the product; and establishing an ongoing relationship with all individuals and departments at the vendor.

Eberhardt: I'd say flexibility is at the top of our list. We are not one of those big banks that can throw out canned products to our customers. We need flexibility to tailor our products to our customers' needs.

Farmer: Community banks are looking for several attributes in an e- banking vendor. The vendor must be very stable in terms of financials, development staff and company history. A relatively large experienced development staff and strong financial statements demonstrate that the vendor will likely be around for a while and won't put the bank in the position of having to convert to a different vendor or product because of the lack of further development and support for an e-banking solution. Community banks should stay away from small, "one horse" vendors that rely on one or two individuals that keep the product line in existence and supported. Along the same lines, banks should look at the existing customer base for a particular vendor to gauge the amount of experience and depth of penetration into the market the vendor holds.

Customer support is also a primary concern in selecting a vendor. Most community banks lack the expertise to support e-banking products on their own and rely on prompt responses from vendors to resolve problems.

Personally, I feel it's very important to select vendors that develop e-banking solutions based on open architecture design concepts and standards, such as Open Database Connectivity-compliant databases. That puts a bank in a better position to adapt to future trends in software design and to recover and convert data to support a new system if the need arises at a later date.

The bank should also be able to design new products that will interface easily with existing applications and database. It's very important to select vendors that use one data base to support several products. For example, Highlands Union Bank selected Equifax E-Banking Solutions because they use one common SQL database to support online banking, telephone banking and corporate cash management products.

O'Connell: We've seen a number of attacks of late on high-profile Web service providers. How big an issue is security to your bank?

Farmer: Security is a vital issue when dealing with e-banking solutions, particularly in the financial industry. Financial matters are regarded as very personal and confidential by most individuals. This means that a bank cannot skimp on security measures. If customers lose confidence in a bank's ability to keep financial information confidential, there's no doubt the bank will suffer damage, and it is often irreparable. Community banks must invest in state-of-the-art security, which is often expensive in terms of hardware, software and the expertise needed to implement it.

Nadglowski: Security is an important issue to our bank. In fact, we exceeded the basic security configuration recommended by our Internet banking vendor. Our security uses the latest technology, including strong encryption and firewalls to ensure our customers' personal and account information isn't compromised.

Eberhardt: I'd go along with that. Security is a primary key in setting up e-banking. Our customers are our priority, therefore we hold security for their financial information to the highest integrity.

O'Connell: What are your overarching business goals in enabling online banking, and how do you expect that to evolve in years to come?

Eberhardt: Our near-term goal is to establish e-banking in our organization that will provide current and new customers flexibility and convenience while allowing us to expand our market. The Internet and e- commerce are growing exponentially. Businesses are scrambling to meet consumers' demands. Consumers are dictating the way the world is transacting business today, and they will dictate how the world will transact business in the future. It's those businesses that continue to listen to the needs of consumers that will prosper. Although we intend to continue growing, we do not intend to quit applying community bank philosophy, which is "listening to our customers."

Bettendorf: Once we've fully implemented our e-banking products, we plan to evaluate additional marketing and cross-selling opportunities that may be available through the Internet. And that may include possible joint ventures with other companies, adding more transactional features to our Web site and creating a portal for our customers to have direct connections to products and services we don't offer directly. We want to continue to take advantage of the ongoing technological opportunities to help us increase our customer base.

Nadglowski: Our short-term e-banking goals include adding an online brokerage system, interactive check ordering system and online loan applications. In the long-term, I envision our Web site as a "one stop shop" that meets all our customers' financial needs, from tax preparation to payroll and accounting services.

Farmer: I foresee imaging playing a big part in providing copies of checks and other documents that customers can access directly. Online customer service and support will also play a large role in e-banking.

Brian O'Connell is a business writer in Framingham, MA.

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