A new electronic system that automates the process of trading certificates of deposit could help community banks attract more deposits from outside their markets.
A handful of banks are already using the IPFS eTransaction Network. But today Index Powered Financial Services LLC of Denver, which runs the system, and SunGard Financial Networks, the SunGard Data Systems Inc. unit that developed the technology behind it, plan to start offering it to the financial services industry as well as to institutional fixed-income investors.
Certificates of deposit are "a very fractured and inefficient market that is screaming for technology," said Thomas Nelson, a vice president at SunGard Financial Networks, of Wayne, Pa. The new system "can, in one fell swoop, radically change that."
IPFS will continue to operate the QwickRate online posting system for CD rates. Robert Colvin, the president and chief executive of IPFS, said QwickRate is the largest bulletin board of its type for matching CDs issuers with purchasers.
There are about 900 community banks that quote CD rates on the network, along with 1,000 institutional investors, including banks, credit unions, brokerage firms, trust companies, insurance companies, and mutual funds. Each participant pays IPFS a flat annual fee for access to the information.
Though QwickRate provides some accounting for the CDs, the settlement process is largely manual. An issuer typically mails the purchaser a contract and signature card. The purchaser then mails or wires the money to the bank, and the interest payments are typically made by paper check.
The new system uses SunGard's trading technology to streamline this process. Investors will be able to shop for rates and terms and then execute purchases through their computers.
Mr. Colvin said the new system could stanch the hemorrhaging of deposits out of community banks as other markets strengthen.
"More and more money is flowing out of community institutions into 401(k)s, mutual funds, brokerage firms," and that is not likely to change, he said. But at the same time, institutional custodians have cash to invest that could end up in community banks. "We've opened up the conduit to allow that money to flow freely."
The cumbersome process of investing in CDs has also been complicated by banking regulations. For example, to avoid exceeding the $100,000 per-account limit on Federal Deposit Insurance Corp. coverage, an institutional investor with $10 million to invest must split its deposit among 100 institutions.
The IPFS eTransaction Network will help an investor find enough issuers for its deposit. It will also automatically handle the disbursement and settlement and will send the interest payments back to the purchaser, so from the purchaser's standpoint, "it looks as if they spent one $10 million piece of money," Mr. Colvin said.
IPFS tested the SunGard software during the first quarter, and a handful of issuers began pilot tests in recent weeks. Seventy-five institutions have completed the paperwork to move to eTN from QwickRate and are now setting up their systems to begin putting live transactions on eTN. This week "we'll start seeing more activity in earnest," Mr. Colvin said.
First National Banking Co. of Ash Flat, Ark., was involved in the early tests, and Martin Carpenter, the president of the $255 million-asset bank, says he hopes the eTN system can bring new funds to his bank.
"It should be more efficient, more transparent, and easier for everybody to place funds or acquire funds," he said. "We're fairly heavily loaned up from a loan-to-deposit standpoint. We're selling CDs, and they're buying, which gives us the money we need for liquidity purposes or for lending."
Jochim Brown, the president and chief executive of First National Bank of Ottawa, Ill., said his $293 million-asset bank has the opposite problem. "I have a relatively low loan-to-deposit ratio," he said in an interview. "Like all community banks, I would be better off making loans than making investments."
But with slack loan demand in his area of north central Illinois, First National can buy CDs through QwickRate that pay 80 to 100 basis points more than it could earn on comparable Treasury securities, Mr. Brown said. "There's a nice yield advantage for me. That's more important to me than to a bank that makes a lot of loans."
Dan Clancy, the director of services at the Independent Community Bankers of America, a Washington lobbying group, said the system could improve community banks' access to funds.
"Where it's really going to help is in the actual back-office work, the communications back and forth between the issuing bank and the buying party," Mr. Clancy said. "It is streamlining the process significantly for them."
SunGard shares closed Thursday at $27.93, down 0.01% for the week.
