Community banks are eyeing the acquisition of new information technology, which has suddenly come within their reach.
"The industry has had much improved finances and, therefore, a much improved latitude to spend," said Greg Schmergel, vice president of Tower Group, a consulting firm based in Wellesley, Mass..
A Tower Group survey released in August revealed that community banks, defined in the study as those with less that $1 billion of assets, were expected to increase spending on information technology by 12% this year. The industrywide rate was expected to be 6.5%, a significant jump over the 2% average of the past few years.
While banks were tussling to get costs under control in the late '80s, nonbank competitors pulled smartly ahead in the technology game, taking advantage of the greater flexibility the new electronic products offer.
"Take mutual funds as an example." Mr. Schmergel said. "They are technologically ahead because they are newer companies and they have no huge investments in mainframes to maintain."
Meanwhile, mainframes, which were previously considered cost-prohibitive for community banks, now have been replaced by the comparatively inexpensive PC. Small bankers can purchase the same hardware and have access to vendors of the same quality as those that service bigger banks.
Outsourcing Still Popular
Still, for bankers with less than $500 million of assets, outsourcing remains the most common way of upgrading back-office technology since they do not have the resources to maintain a separate information systems staff.
Community banks usually employ an in-house staff to take on core processing, support branch automation, and PC networking. More complicated upgrades, such as document imaging and optical imaging, have been popular only among the bigger community banks and have been done mostly through an outsourcer.
"As you get closer to $1 billion in assets, you will see five to 10 people hired for technology purposes," said Mr. Schmergel. "The trend definitely on the rise is mixing and matching between in-house development and outsourcing."
Branch automation, or the movement from "dumb" to "intelligent" machines that can process information on the spot, is "without doubt the highest priority among community banks and large banks," Mr. Schmergel said.
Of the community banks surveyed, 55% had intelligent automation, 39% had dumb automation, and 6% had no automation on their platform stations. At teller stations, however, only 29% had intelligent machines, 60% had dumb automation, and 11% had no automation.
But telephone banking, a service offered by almost all big banks, has been slow to catch on at community banks.
Among those surveyed, 28% offered telephone banking, 14% were installing the system, 25% listed it as a high priority for the future, 20% considered it a low priority, and 13% had not considered it at all.
While community banks are not expected to offer global networking and other high-technology features that some of the big banks offer, at the retail banking level most customers demand state-of-the-art technology.
"Customers won't accept the excuse, |We can't do that because we are a small bank,'" Mr. Schmergel said.