After completing its Eighth Annual Survey of Community Bank Executives, the word from Grant Thornton is get online or get out of the way. As tired as this clich is becoming, there may be some truth behind it as we enter the 21st century and community banks are forced to play catch up.
"Electronics are having a faster impact on business than (community banks) thought or would like to think," says Paul Pustarino, head of the financial services practice at Grant Thornton, the Chicago-based accounting and professional services firm.
He believes the Gramm-Leach-Bliley Financial Modernization Act triggered a sudden jump in community banks offering online banking. This year, 75% of them reported offering the service, up from just 55% last year. GLB eliminates many barriers previously facing banks of all sizes by allowing them to peddle non-traditional products, like insurance and brokerage. But it also makes it easier for non-bank financial companies to enter the fray. Because of this, Pustarino says community banks are increasingly looking to the Internet as a way of remaining in the game.
The Grant Thornton survey consisted of answers from 519 community bank executives. The banks varied in size, with small banks labeled as those with assets of $100 million or less, midsize with between $101 million and $500 million in assets, and large with assets in excess of $500 million.
Community banks are starting to realize that they should not implement electronic services simply to have them, Pustarino says. They should be used as a means of redesigning their business processes by adding convenience and reducing operating costs.
His advice to community banks is that they must be willing to change. "The Gramm-Leach-Bliley Act presents a tremendous opportunity to banks, but they can't go back. If they want to continue making money, they must find different ways."
He suggests that community banks take a serious look at the portal concept: Customers come in for one thing, but banks are able to sell them everything else. This applies both online and at the branch, where technology can be key to matching customers with the right products.
"Look at Mobil," Pustarino explains, referring to the service- station chain that now belongs to oil giant ExxonMobil Corp. "This is a company that understands the portal concept. Instead of repair shops, their gas stations usually have a quick-shop mini-mart. Mobil stations cover their overhead with gas, but make all their profits from the junk sold in the quick mart. It's easier to buy gas and bread in the same place instead of making two trips."
A few community banks have cozied up to the portal idea. First Federal Bank of Hazleton, PA, is one. E. Lee Beard, president and chief executive officer of the $750 million-asset bank, says that when First Federal decided to roll out its new transactional Web site, it wanted to keep customers' convenience in mind.
So when it launched 1stfederalbank.com in March, customers were not only given the option of filling out loan applications, opening new accounts and viewing imaged checks, but they could also purchase airline tickets. "I know as a consumer that I don't want to go all over the Web to find things," she says. "So the customer has the convenience of his bank as his homepage."
It's all about bringing new money in, says Pustarino. And there are many ways community banks can do this. "Community banks tend to be the depositories of last resort after people put their 401(k) money away with a Fidelity or a Putnam," he says. "All that money is going out the door. Why shouldn't community banks get a fee for helping companies and individuals do this?"
The Grant Thornton executive strongly believes that people trust their banks and would like to deal with them for all aspects of their financial lives. The potential for banks of all sizes to make money is "unbelievable," he says.
But he feels that banks need to do more. Once again, he cites ExxonMobil. The company offers a product called the Speedpass, a device that users wave in front of the gas pump when they fill their tank. By automatically charging the transaction to customers' credit or debit cards, it eliminates the need to pay a cashier. "And now, Mobil is thinking of using Speedpass for online payments," Pustarino says. "You wave the device in front of your computer." The fact that gas stations are using such technology but banks are not does not bode well for financial institutions, he adds.
What this all boils down to an unwillingness or inability on banks' parts to change. "They're going to have to change to survive. But they're afraid of change," says Pustarino.
It is this hesitancy, particularly among some community banks, that has lead to a technology gap in the banking industry. This is especially true among the very small banks, says Linda Garvelink, national director of marketing at Grant Thornton. "The smaller banks are not necessarily looking to get online. But there's a big difference between $50 million-asset banks and $100 million-asset banks. Once you hit $100 million, you see a change in technology strategy."
Caroline Mroz, CEO of Baltimore-based Bay Vanguard Federal Savings, thinks community banks are definitely at a technological disadvantage because of costs. But the chief of this $65 million-asset bank says Bay Vanguard has "made a concerted effort to spend the money" to keep on track with technology. The bank has even partnered with a local commercial bank to increase Bay Vanguard's ATM network. "This is especially important to our online customers," she says. "Our network jumped from two machines to over 500."
However, she adds, a bank's bottom line is almost always affected when thousands of dollars are spent on equipment and training people. It was an investment Mroz felt was crucial, nonetheless.
First Federal's Beard agrees, even though her bank is fairly large, and technology did not have a significant effect on its bottom line. "Our goal is to think long-term," she says. "We view technology not as an alternative to something else, but as a requirement."
She adds that once vendors make their prices more reasonable, perhaps smaller banks will use technology to a greater extent.
However, the folks in the Grant Thornton camp say this price decline is already happening, since most vendors' fees are calculated according to asset size. So cost should not be a deterrent to anyone, the consultants insist.
Also related to costs is the issue of staffing. The Grant Thornton study found that community banks are having a tough time retaining key employees, especially information technology personnel. Most community banks cannot afford to offer stock options to lure good people into their fold. Many of them are privately or closely held companies.
However, 8% of those community banks polled are offering "phantom stocks," compensation based on the performance of the company, but that doesn't involve actual equity ownership. "Seventy-one percent of respondents who offered this say phantom stocks have been instrumental in retaining employees," says Garvelink.
But worker turnover might be a moot point, since banks need to become more automated. As more processes are performed electronically, banks need fewer personnel. The staffing issue is something big banks understand-perhaps too well-and community banks often do not.
Garvelink says banks need to look at different channels as profit centers that add on to their service offering rather than substituting for something else.
But Pustarino disagrees. "Technology is not an add-on, but something that requires banks to change and make tough decisions. To effectively use electronics means reducing your workforce." Community banks, he says, are unwilling to make such decisions because "they are too close to home. Who's going to fire Mary Smith, who has been working there for 30 years?"
Community banks that Bank Technology News spoke with have certainly found ways to get around firing people. Both Mroz and Beard say that increased automation hasn't forced them to fire anyone. Rather, they've reassigned people whose jobs became obsolete because of technology.
"At Bay Vanguard," says Mroz, "employees' jobs change. They may become a customer service rep rather than a hands-on teller." So far, two employees were converted to CSRs for the bank's online customers. "You're always going to need warm bodies."
Her counterpart at First Federal says that due to the new technology it has implemented, the bank has become more productive and efficient. "We've made no staff cuts because there is a greater volume of customers," Beard says.
And she offers deeper insight into another alleged problem with community banks: "Community banks haven't been good change agents, so they hire people who aren't comfortable with change. When we hire people, we tell them they can't be afraid of change, because they don't know what their next job in the company will be."
But what about online banking-the "branch killer?" Bay Vanguard and First Federal were not shy about going into cyberspace and were able to maintain the status quo among their employees to some degree. Does every community bank need to offer Web banking? Yes, says Grant Thornton.
Yet some community banks say no. Among study participants without Web sites, 57% saw no need and 39% saw no value in a Web site.
"This is idiotic," declares Pustarino. "I was giving a speech about online banking to a group of community banks once, and there was a real skeptic in the audience. He said most of his customers were farmers, so what would they know about the Internet? Farmers happen to be among the most technologically savvy people. They use computers and GPS (Global Positioning Satellites) to calculate where to plant and when."
Needless to say, some community bank executives-and plenty of big bank executives-fail to see that their customers are a lot smarter than they think. The potential market for an online banking offering is always there, especially as the younger Internet generation grows up. "Do you really think my seven-year-old nephew, who knows how to access the Disney Web site, is going to stand in line with a passbook?" asks Pustarino.
Bay Vanguard's Mroz knows the answer to this question. "Our online bank is helping draw in and keep younger customers. Our customer base is getting older, so we're going to have to replace it somehow."
But Beard says age is not everything. Her bank services six counties, one of which has the second-oldest population in the United States. "Some of these seniors actually log on to our online bank. They might do simple things like check their account balances, but they're still online."
Yet even Pustarino concedes that technology is not the end all for banks. "It's change-a willingness to change and use what's available to build a better mousetrap."
