BANKERS ARE FINDING that their expanding use of networked personal computers is creating both opportunities and risks.

The 1994 banking technology survey, conducted by American Banker, Tower Group, and Andersen Consulting, found that a growing reliance on linked groups of PCs is exacerbating issues regarding network and data security.

The survey -- of the top 150 bank holding companies in the United States, representing 43% of the industry as measured by noninterest expense -- showed that 79.3% of respondents have already installed physical security measures to protect their networks. At the same time, only 39.9% of all respondents have installed some form of data encryption -- which scrambles information being transmitted.

But for those who had yet to secure their networks, the survey found that 28.7% of the respondents said data encryption was a high priority.

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Maintaining reliable and up-to-date data bases was also of increasing importance at the banks surveyed. The results showed that by 1997, central data warehousing will rank as the most important aspect of the technology area; it currently ranks as No. 4.

Donald Hollis, an executive vice president at $59.8 billionasset First Chicago Corp., said he sees more and more electronic connections between the bank's systems, and ultimately to customers.

"In order for the business to be successful, people need to be able to get information from various systems very easily," Mr. Hollis said.

"In order for the use of networks to work successfully, we need to be able to ensure security and have a strong system in place," he said. "Data encryption and physical security measures will work for now, but I think biometrics [such as electronic fingerprint readers and automated signature recognition] will provide the necessary security for the future."

Mr. Hollis said despite the growing use of PCs, the mainframe computer will continue to play an important role at First Chicago as the central point to store data.

"The mainframe lets us do things the personal computer does not," he said. "By harnessing the power of both technologies, we will continue to improve the level of service and expand to the next horizon.

"There is no constraint when it comes to hardware; the problem we are running into is the software," he continued. "Software is on a critical path, and as we continue to develop tools to create the software, the path will shorten."

Los Angeles-based First Interstate Bancorp is pursuing a number of new applications to improve its overal operation and strategy for success in the future through the use of technology.

In 1990, the company announced a strategy to install common software across its affiliates in 13 states by 1995.

To date the project seems to be on track. The bank made an investment of over ten million dollars to equip its banks with personal computers and local area networks.

It is currently in the process of installing a common deposit system, an image processing system, and platform automation for its branches.

Executive vice president Hayden Watson said the bank is on schedule for completing a common deposit system in all of its subsidiaries and plans to have it completed by 1995 to be ready for what he sees as the inevitable, interstate branching.

"We are right on track and we want to be ready for interstate branching when it comes down the road," he said.

The company is also working on implementing a common electronic check presentment system in all 13 subsidiaries.

Currently, four of its banks have the system in place and others are scheduled for installation by the end of next year.

The bank has stayed away from installing an imaging system for its check processing operation because it cannot find software that can handle the volume of checks it processes daily. On average the bank processes at approximately 12 million checks a day and about 3 billion a year.

"We want to do it [image the checks] but, until we find the software that can handle the load, we cannot commit to the technology," he said. "We are being forced to proceed slowly."

First Interstate also sees personal computer data security as a very important factor in its operation.

"First Interstate has been addressing the problem, we have taken the same disciplines of the host system and used them for the small systems," he said.

One area of technology the bank considers an important part of its strategy for ensuring success is the disaster recovery plan.

"We have spent a lot of money on developing and implementing a [disaster recovery plan] and we realize the importance of having one in place," he said. "It is a huge task to ensure all areas are covered because there is no one single location and each area has to be done individually. By the nature of the personal computer network environment, it is more difficult to get your arms around."

Harry DeHaven, a senior vice president at National Westminster Bancorp, Jersey City, said the banking company is moving toward PC networks to better service its customers and increase its market share.

Using PCs "allows us to have centralized control while providing us with the ability to provide users with the space to do their own thing," he said. "We want to take advantage of the wealth of information that is out there and [the use of PCs] lets us ... increase our efficiency."

At First NH Bank of Manchester, N.H. network security is a "major" issue.

Senior vice president Kenneth Lynch said the $3.4 billion-asset Bank of Ireland subsidiary needs to be able to ensure that transactions are secure, and data encryption provides it with such a guarantee.

"Before we allow the public to communicate through the network, there needs to be a complete overhaul of the security of the information to ensure that the information is not compromised," he said. "The public needs to be able to trust the network as a safe place to conduct transactions without the worry that data is being looked at."

First NH has seen growth in its use of technology and sees the successful implementation of technology as a key to its continued growth.

"We are using technology to capture every interaction between the bank and our customers, which is allowing us to improve selling ratios and product exposure to customers," Mr. Lynch said. The bank's technology strategy, he said, is to capture the data for use in "outbound selling and telemarketing."

The bank is also expanding its delivery channels through the opening of supermarket branches. It plans to open three locations this year and have a total of 15 by 1997. Management believes that supermarket branches "bring the bank to its customers."

"There has been a change in the culture of banking, and customers want convenience. In order to survive, we need to do everything better than our competitors. Supermarket branches will give us an edge," Mr. Lynch said.

"By having branches in supermarkets, 24-hour telephone banking lines, and automatic teller machines, we are providing the convenience in banking customers have come to expect in today's marketplace."

Another area the bank is trying to make more efficient through technology is the decision-making process for loan origination.

"We want to be able to make loan decisions quicker and more efficiently then our competitors.," Mr. Lynch said.

First NH is looking into the use of artificial intelligence software to help speed the origination process. "Technology will allow us to meet and exceed the customers' demands while ensuring we are making good loans," he said.

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