FACING A GROWING horde of competitive pressures, small banks are increasingly turning to technology vendors to handle back-office processing tasks.
The American Banker/Ernst & Young 1993 Community Banking Technology Survey shows that outsourcing is again on the rise, with a hefty number of community banks having taken the plunge and hired outside help.
The survey also shows small banks are finding that partial outsourcing - farming out specific lines of business - may be useful. Many banks with $1 billion in assets or less also see partial outsourcing as a quick way to add a new product offering.
For example, a community bank can open a trust department and process accounts in a matter of days just by signing a contract.
"Outsourcers are giving smaller banks the tools to keep up with their larger competitors," said M. Arthur Gillis, president of Computer Based Solutions Inc., New Orleans.
Community banks with in-house systems are finding that the same problems that plague larger banks - keeping up with rapidly changing and highly specialized technological change - affect them, regardless of size or volume. These problems may drive them to outsource particular lines of business in which the technology needs to be up to date.
The survey shows credit card processing topping the list of businesses that community banks have outsourced. Credit card merchant processing tasks have been outsourced by 72% of community banks. Credit card issuance also weighed in at 72%.
Other areas that community banks have outsourced include ATM support, with 64%, and securities safekeeping, with 59%.
"We have outsourced a couple of lines of business because a bank our size would need to add staff and spend more money on maintenance to do them in-house," said Toni Poole, senior vice president at Security Bank, Coos Bay, Ore.
The $108 million-asset bank has outsourced its credit card processing and ATM tasks, keeping other tasks in-house.
Like many small banks, Security found the costs of handling these tasks to be prohibitive, and decided that it could achieve greater economies of scale and a higher level of performance from a service bureau arrangement.
"We don't see the need to reinvent the wheel for bank data processing," said Terry L. Myers, vice president and manager of bank operations at Second National Bank of Warren, Ohio. "Instead, we want to take the best technology available to us and maximize it."
The $620 million-asset bank has outsourced its entire data processing center to Dayton, Ohio-based NCR Corp. The bank has also outsourced its payroll, security, and cleaning services.
The rationale behind the bank's decision is simple. Second National is up against stiff competition in its market, including Society National Bank and National City Bank.
With rivals like that, spending time and resources keeping up to speed with the latest technology was a gamble the bank just couldn't afford to take, Mr. Myers said. "We have to spend our time working on things that are critical to meeting the bank's goals."
The bank, Mr. Meyers added, is comfortable with its agreement with NCR and is likely to sign on for at least two more years in April 1994, when it has the option to cancel or continue the agreement.
That option to cancel has put the ball in Second National's court. Mr. Myers said. "The decision we made with NCR lets us watch what develops. if NCR doesn't have the premier systems that everyone else is using, we'll look elsewhere."
Union Bank and Trust Co. offers another David-and-Goliath scenario. The Montgomery, Ala.-based bank, with $463 million in assets, is up against Amsouth and Central Bank of the South in its prime market.
"When we looked at our systems a few years back, our bank was behind the times," said Lee E. Moncrief, executive vice president. "We realized we'd have to be able to do the same things as the larger banks in our market."
After an intensive search early in the year, the bank decided to outsource its data center to M&I Data Services Inc., Milwaukee.
Bank technology vendors are well aware that more community banks are outsourcing these days.
"We're seeing that community banks [with assets] between $200 million and $1 billion are showing a greater amount of interest in outsourcing," said Paul Bourke, president of Bisys Group Inc., a Houston-based provider of data services to banks.
Fiserv Inc. is another technology vendor that has found community banks a viable marketplace. Of the 984 banks serviced by the Milwaukee-based company, about 90% have assets of less than $1 billion.
"Community banks are interested in outsourcing more pieces of the total pie," said Dean C. Schmelzer, executive vice president of marketing and sales.
Mr. Schmelzer sees a number of potential areas in the market, including electronic funds transfer and item processing.
But while outsourcing is the answer for some banks, it's not for everyone. Some community banks prefer to keep data processing in-house.
The 1993 technology survey showed that 74% of community banks handle at least some of their core account processing in-house, while just 23% are depending on service bureaus.
Capital National Bancorp, Lansing, Mich., is one bank that has employed a do-it-yourself strategy. The $250 million-asset holding company handles all data processing tasks for its four banks.
"Doing our own processing is more cost efficient for a bank our size, and we can be more flexible with product offerings and modifications," said Charles McDonald, vice president of corporate systems at Capital National. "When you become part of a large service bureau, it's difficult to get changes made."
National Bank of the Redwoods is another example. Located in Santa Clara, Calif., the $150 million-asset bank is doing its own data processing.
"We were afraid that we might lose control over our own future," said Patrick W. Kilkenny, president and chief executive. "Staying in-house has given us the flexibility to retain our own information and control the cost in subsequent years."
One hurdle that institutions like National Bank of the Redwoods need to overcome is over-capacity. Because many of the systems that are available today are built to handle the processing needs of bigger banks, some small banks find their computers have too much down time. To address that problem and offset some of the costs of running its own data center, National Bank of the Redwoods acts as a service bureau to four local credit unions.
"Processing other institutions has created an income stream to help utilize the over-capacity and reduce costs," Mr. Kilkenny said.
To further control overhead, the bank doesn't keep a team of programmers on staff. Instead, Mr. Kilkenny prefers to work with local programmers on an independent contract basis.
One area where National Bank of the Redwood has given local giants like Bank of America and Wells Fargo Bank a run for their money is cash management. The bank is offering an internally developed software program that allows cash managers or small-business owners to make inquiries about the status of their loans and deposits and to transfer funds through their personal computers.
Whether or not they choose to outsource, community bankers have a smorgasbord of options to get an edge in their markets.
"A small bank can now decide more than ever how to control its own destiny," Mr. Gillis said.