U.S. commercial banks have too much computing power chasing after too few transactions.

That, at least, is one conclusion that can be drawn from responses to the American Banker/Tower Group 1995 Survey of Technology in Banking.

"We believe the industry has overinvested in host-based transaction processing capacity," said David Medeiros, technology analyst with The Tower Group, the Wellesley, Mass., technology consulting firm that conducted the survey. And this excess, he suggested, will only intensify as the pace of industry consolidation picks up.

Areas where the survey found overcapacity most apparent include transaction account processing (demand deposit and negotiable order of withdrawal accounts), credit cards, funds transfer, and mutual funds processing.

Bankers have enough computing power in their back shops today to process about 220 million transaction accounts, 370 million credit card loans, 4.4 million mutual fund transactions, and 750 million funds transfers annually, The Tower Group estimates.

Yet, the survey indicates, the industry this year will process only 160 million transaction accounts, 260 million credit card transactions, 2.5 million mutual fund transactions, and 450 million funds transfers. This translates to overcapacity rates of between 27% and 43% in these key product areas, far more than what is needed to accommodate reasonable growth projections, said Mr. Medeiros.

Yet, Mr. Medeiros said, bankers appear rather blase about the issue of overcapacity; 43% view overcapacity and consolidation as only somewhat important to the strategic planning process, the survey indicates. The top attention-grabbers for bankers these days are cross-selling and the development of new products and services: 49% of bankers consider new- product development "very important;" 29% rate cross-selling that way.

This could create problems, Mr. Medeiros said, because demand for banking products is fairly inelastic; people aren't inclined to buy checking accounts in two-for-one sales the way they might buy shoes. Translation: overcapacity will worsen, unless bankers begin viewing the situation differently.

"This is not the best way to look at the problem," Mr. Medeiros cautioned. "These are products for which demand cannot be increased simply by increasing the number of products in the market."

True, but a bank can use up a lot of its excess capacity by enhancing the service it provides customers, suggested John August, director of marketing for the worldwide financial line of business at Unisys Corp. "A customer should always feel he's actually dealing with an organization that truly understands him," observed Mr. August. That means having available at every interaction the ability to analyze a customer's financial health and needs. Supporting that capability, he said, requires more, not less, computing power.

Mr. August, whose Blue Bell, Pa.-based company has seen no slackening in the demand by banks for its mainframe computers, said he believes bankers are beginning to understand the need to expand the way they use mainframe legacy systems. Rather than limiting the use of these systems to the posting of debit and credit transactions, as has been the case historically, Mr. August said, some banks are looking to these systems to support real-time on-line access to multiple customer data bases. The philosophy is that when a customer comes into contact with a bank (in person, or in an automated fashion), it should be able to provide on the spot a complete picture of his or her finances - loans, deposit accounts, investments. That means traversing multiple data bases instantaneously.

"That takes a lot of processing cycles," explained Mr. August.

Richard Poje, a partner in the consulting firm Treasury Strategies Inc., Chicago, sees industry capacity as an issue of control. As industry consolidation picks up, Mr. Poje said, processing capacity will become more centrally controlled, and will be brought in line with demand by the few big banks that dominate the market. "As an industry, banking is being oligopolized; fewer loci of power are controlling bigger chunks of turf," Mr. Poje said.

Indeed, said Tom Hollister, group executive for retail and small business banking at Bank of Boston, overcapacity is a driving force of the trend toward consolidation. "That's why these mergers make a lot of sense," said Mr. Hollister. "You can take two banks and cut that (capacity) in half."

Mr. Poje believes that instead of worrying about whether they can soak up the supply of technology in the market, bankers should focus on how to make the best use of the technology they have."It's the intellectual property surrounding the payment system that is and will remain in scant supply, and the oligopolists realize that" he said. "Knowledge is where the battle gets fought and won; knowledge about how to use technology, not technology per se."

In the cash management business, said Mr. Poje, this means knowing enough about technology to help corporate customers effectively use the technology at their disposal. "It's the old relationship banking thing in a new suit," he said.

In retail banking applications, leveraging knowledge means providing consumers with the information they need, when and where they need it, including as they travel along the information superhighway. "They need someone who can pull together information from all these legacy systems," said Mr. August.

That suggests potential new product opportunities, observed Richard Crone, senior manager of the financial institutions consulting group at KPMG Peat Marwick, Los Angeles. "Electronic banking opportunities with personal computers accessing the bank through the Internet's World Wide Web should be utilized for new product development and take up some of the excess capacity" that exists today, said Mr. Crone.

Some of this new product development will result in new information products. "People want information," said Mr. August. "They want to know where they stand financially."

To get that information to customers in the most expeditious fashion, will require banks to invest more in technology, not less, said Mr. August. The key, he said, is the creation of "middleware" applications that can pull together information about a customer from various processing applications and deliver it to where the customer can make the most use of it. The technology Mr. August sees supporting this transition is client/server based and designed for an "open" architecture - meaning it can operate with any type of computer platform, regardless of make, model, or operating system.

Mr. August said Unisys is working with several banks - which he declined to name - on this middle ground approach to processing.

Clearly, client/server technology is changing the way bankers serve customers. "We are now beginning to see the effect of PCs and client/server systems moving up the data processing food chain," said Mr. Crone. Mr. Crone sees these technologies displacing mainframe applications.

Mr. August, however, is not convinced. Nor is Kevin Roden, director of consumer banking systems at Bank of Boston. Mr. Roden, who is responsible for developing systems that support Bank of Boston's retail services, sees more focus on adapting mainframe computers to function as servers in a client/server environment. Client/server technology enables a bank to move data and logic away from its back shop and closer to the point of customer contact, for quick and easy access. Mr. Roden said Bank of Boston can make better use of mainframes by adapting the machines to client/server technology. "We've redesigned our applications on the mainframe for server functionality," he said. The idea is to build the functionality once and then spread it across multiple functions, he said.

Whether approaches like this can be used to soak up the processing overcapacity that exists in banking today remains to be seen. What is clear, however, is that bankers need to change their technology priorities, or risk losing significant amounts of money, and market share, through underutilization of resources. "What they should be doing is focusing on meeting the demand that's in the market," said Mr. Medeiros.

And that means giving the customers what they need, because, as Mr. August observed: "At the end of the day, if you don't satisfy the customer, you're living on a short string."

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