TO OUTSOURCE OR NOT to outsource, that is the question for many community bankers.
And the answer is that more community banks are turning to third parties to handle a variety of back-office tasks.
By outsourcing functions such as credit card processing, the nation's small banks can offer the same service as banks 20 times larger, industry observers say.
The American Banker/Tower Group survey of information technology in community banks found that outsourcing is becoming increasingly popular with community banks, more popular than in any other sector in the industry.
This year, some 19% of small bank technology budgets is earmarked for outsourcers, the study found, compared with 11% last year.
The survey of selected bank holding companies with less than $1 billion of assets found that credit card processing and issuance are the areas most likely to be outsourced. Some 89% of community banks turned to third parties for credit card issuance, 94% for merchant processing.
The figures were somewhat lower for automatic teller machine driving/switching (60%) and mutual fund processing (61%).
Chuck cqBrummel, president of Security Bank in Coos Bay, Ore., said the $135 million institution uses outsourcers for credit card processing and for driving its ATM machines.
"By performing these function outside, we are able to offer a high level of service and maintain our staff at cost-effective levels," he said. "There needs to be a balance between the cost of doing functions inhouse and sending it to an outside operation."
Security Bank recently converted to the Exchange, Bellevue, Wash., for ATM driving and credit card processing. The bank previously had used Fiserv Inc., Brookfield, Wis.
One area where outsouming has proven to be cost-effective - and employs advanced technology - is auditing.
Security Bank previously used a single inhouse auditor that cost approximately $40,000 a year.
Managers said they often felt they were behind the times in keeping up with new industry standards.
Now, Security Bank spends approximately 40% less for an outside auditor.
Mr. Brummel said the outside auditor has the task of staying up to date on compliance and other regulatory issues. The bank still employs compliance officers to ensure regulatory issues are met.
Some community banks say that using outsourcers allows them to stay current on new systems without incurring the cost of installing an expensive technology package.
Industry sources said that in small banks where transaction volume is low - management cannot justify the cost of serving customers with the latest and most advanced technology. And, such high-tech solutions are not required when volumes are low.
"We use outsourcing for compliance, audit, and data processing functions," said Waymon L. Hickman, president of First Farmers and Merchants National Bank in Columbia, Tenn. "Regulators put a tremendous amount of pressure on us to document our actions and by using an outsourcing company, we can ensure we document compliance properly."
His bank believes it is cost-effective to use an outsourcer.
Mr. Hickman said that the bank's outstanding rating from the comptroller of the currency is a result of the combination of "good people" and the implementation of "a good outsourcing program."
"Outsourcing allows us to be viable in a very competitive marketplace," he said. "It gives us all of the advantages of a larger regional bank while we remain a community bank." But not all community bankers believe outsourcing is the right way to go. Robert W. Snelling, executive vice president of the Mechanics Bank of Richmond, said management of the $850 million-asset California
institution is not interested in outsourcing.
"We have better control of our operation when we perform the tasks ourselves," he said. "We have the capacity to handle the operations and do not need to look outside for answers.
"Also, it seems that outsourcing is a trend, and usually it is not a bad thing to do to go against the trend," he continued.
At the Bank of New Hampshire, management looks at outsourcing with a hesitant eye.
Allen G. Tarbox, director of information systems, said the Manchester-based ba nk out sources some functions. Currently, it is evaluating fanning out its core process ing.
"We can only spend so much on technology. And the key is to find the tools whi ch will provide a payback," he said. "Outsourcing provides us with the opportunity to try technology that would otherwise be out of our budget."
Management of the Oklahoma Bank in Oklahoma City uses "quite a bit" of outsourcing to ensure its operation runs successfully and can meet its customer's needs, according to Ann Lee Suttles, senior vice president.
"Our entire back office is done with an outsourcer," she said. "We find that it is a lot easier to work with an outsourcer than it is to work with in-house staff."
Ms. Suttles said the bank is able to get top-of-the-line technology at a reasonable cost because the outsourcer has the resources to keep up with the latest technology.
For example, the Oklahoma Bank uses an outside firm to provide imaged check statements to its customers.
"It is very doubtful that a bank our size would be able to provide image statements at a cost-effective rate without working with an outsourcing firm," she said.
The Oklahoma Bank, with $120 million of assets, currently has 47 full-time employees.
Ms. Suttles said outsourcing allows the bank to operate without compromising the level of service it provides its customers.
"We don't need to have the staff working on technology; instead we can have them work on what's important: customer service," she said.
To handle its outsourcing needs, the Oklahoma Bank uses C-Teq Inc. of Oklahoma City.
Bank of A. Levy in Ventura, Calif., operates with the philosophy that if it can't build the proper system in-house, it will look outside. The bank is currently using Systematics Financial Services Inc. of Little Rock for data processing.
"We have been able to build some systems in-house but in order to stay competitive, we have to go to a third party," said Mary Kaiser, executive vice president.
When Silicon Valley Bank wanted to provide high-quality services at a low cost, it looked to outsourcing. The Santa Clara, Calif., bank outsources all of its data processing functions to Dayton, Ohio-based AT&T Global Information Solutions, formerly NCR Corp.
"As we are faced with increased competition and the continued consolidation in the industry, outsourcing can provide quality service at a lower cost," said John C. Dean, Silicon Valley's president and chief executive.
"We outsource data processing and have much success with it. But the key is to reevaluate the use of technology to make sure it is always working for us in the most efficient manner."