Union Planters Corp. has already had its New Year's Eve party, and not just because many of the bank's employees will be working on the night. The $33.1 billion-asset Memphis-based bank wants to reinforce to its customers the message borne on its publicity materials: Y2K, We're Okay. To that end, it hosted a sort of New Year's party on Sept. 9 in a branch where a cross-section of its customers withdrew paper money and did other transactions as if it were January 3.
Managing customers' perceptions of the millennial date change is arguably banks' main focus as we face the final countdown to the year 2000. Computer systems have been fixed to accommodate a new century's designation, tests have been run, third-party businesses have been checked out, and contingency plans put in place. Now, it's wait and see, all the while keeping a finger on the consumer's pulse.
"Anticipating and modifying customer behavior is our biggest concern, a bigger issue for us than how third-party businesses will perform," says Austin Adams, executive vice president of First Union Corp. Speaking just days before the Charlotte bank's Nov. 1 freeze on all new technology deployment, "the Y2K issue is transitioning from being technolgy driven to one of planning."
Anticipating a 30% to 50% increase in customer inquiries in the weeks straddling Jan. 1, First Union has already ordered extra telephone lines for its call center and is lining up six-to seven- hundred customer services representatives in addition to the 3,000 it ordinarily has. Most of these are being retrained from other areas in the bank, Adams says, noting that the bank is allowing staff "essentially no vacation" in the last few weeks of December and the first few weeks of January. First Union has had a Y2K hotline since the start of the year, which, by late October, had received 15,000 inquiries.
Some, notes Adams, were on the order of "Will my garage work?" Others, more relevant to banking, include customers voicing concern over whether their checks, dated "19__" will still work in the new year. "Of course, the 19 has nothing to do with the way the computer reads the checks, but the example is important," Adams says. The last thing he wants is for customers to be trying in vain to phone the bank or to encounter a "forty-deep" line of customers in the branch and jump to the conclusion that the banks' systems have failed.
Howard Rubin, whose firm Rubin Systems has been doing Y2K quarterly studies for the consulting firm Cap Gemini America, also thinks that the issue is now more perception than reality. That wasn't the case a year ago, when Rubin's bleak reports of technology vendors slipping behind schedule were at odds with the regulators' optimistic perspective. Rubin became satisfied with the readiness of American businesses upon analyzing the results of his Sept. 22 survey, he said, adding, "If anybody's ready, it's the banks. They are consistently ranked number one with very little sign of slippage." Since June, all types of federally regulated banks, thrifts and credit unions have collectively been deemed over 99% satisfactory by examiners.
Rubin is somewhat concerned about the threat of contamination from overseas, considering that "just 80 of 190 countries have supplied information on their Y2K status, and there is [as of late October] no internationally agreed deadline for them to do so. The Merill Lynch's and the Chase's are tracking their overseas' operation as best they can," he says. (Of course the biggest fears are evoked by less regulated and less wealthy sectors, be they local chemical plants or Russian missile centers that might make unintended emissions.)
"This is more of a religious experience than science," adds Rubin, the chairman of computer science at New York's Hunter College. For him the biggest domestic threats are any events triggering a crash in consumer confidence and, in turn, a crash in the stock market. He was one of a few sources who noted the stock-market hiccup caused by IBM Corp. predicting that its fourth-quarter revenues will be well down as companies stop buying and installing new technology in deference to the Y2K date change.
One of the least discussed but most important aspects of Y2K preparations for banks is employee education, says First Union's Adams. A customer, such as his mother, who deals with the bank only through a teller will have her perception of the Y2K problem formed almost entirely by bank employees, Adams notes, so it is crucial that they know what preparations the bank has made.
Somewhat ironically, a firm that provides bank training courses told USB that a month after introducing a special Y2K course for banks' call center reps, in September, not one bank had signed up. Adams, though not familiar with the courses of Sausalito, Calif.-based Omega Performance Corporation, responded, "When did they come to the party?" First Union has been doing Y2K staff training, including via closed-circuit television in the branches, for two years, he said.
Charlie Peirmerini, who oversees the call centers of Harris Bank, Chicago, says it has done individual Y2K training sessions for reps. The bank has done "a ton of things" for employees, generally, adds the executive vice president. The volume of Y2K-related customer inquiries--a steady 10 or 15 per week all this year--has been lower than the bank anticipated, Peirmerini adds.
Everyone consulted anticipates no problem with the security or accessibility of consumers' money, but expects consumers to seek reassurance of that--either verbally or in writing. Subsequent to the regular statement, mailed to most bank customers on December 15, many are expected to demand a last-minute statement. First Union says it can readily make exceptional statements ready on demand, but doesn't plan a special, mass mailing--not least because doing so would cost an estimated $6 million to $8 million dollars. The bank has 16 million retail customers.
First Union did its own research on consumers' likely behavior around Y2K, which tallies with others' findings Adams notes. Besides foreshadowing balance inquiries, it indicates that customers expect automated teller machines to work, but will likely withdraw an extra $500 to $600 before New Year's to be safe. First Union has ordered 30% more cash than usual for that time. The Federal Reserve, expecting many banks to do likewise, ordered extra currency early this year and, in a recent advisory, regulators warned banks to prepare for businesses withdrawing extra.
Business customers remained a concern after banks largely contented themselves that their own houses were in order. If businesses failed over Y2K, they would be unable to repay their loans to the banks. Consequently, more than a year ago, the regulators added commercial borrowers--along with technology vendors, suppliers, utilities, telcos and other third parties that could impact banks--to banks' laundry lists. First Union has incorporated Y2K readiness into its credit reviews of businesses for two years, but the bank can't do on-site reviews of its two million commercial customers and the regulators haven't the power to call for action beyond asking the right question. To do so would constitute getting into individual banks' business practices, which regulators don't do, said a spokesperson for the Office of Thrift Supervision.
Other peripheral causes for concern include desktop applications. IST Development Inc., a Boston firm specializing in debugging desktops, mid-1998 began publicizing that it's not just mainframes that are mission critical. Alan Falcon, executive vice president of IST said "some could, for example, mistakenly trigger trades in a corporate trust department."Frank Hartigan, program director for Y2K initiatives with the Federal Deposit Insurance Corporation, dismissed the desktop threat in a recent interview. "Banks have actually been over conservative in categorizing systems as 'mission critical,'" he says. Just one of the 10,300 FDIC-insured banks and just one vendor was deemed not satisfactory in the agency's latest examination round (ended Sept. 30) and Hartigan expected them to be satisfactory before this article goes into print.
Federal regulators took in September the strongest action open to them against a vendor--requiring it to release bank customers from their contractual obligations without penalty. Although there was talk more than a year ago that it was already too late for any bank wishing to switch vendor to do so, Mark O'Dell, director of Y2K supervision at the Office of the Comptroller of the Currency, said that a couple of banks affected by the recent disaffection switched vendor within a month.
A newly raised issue also being dismissed as a red herring is that of the systems' freeze, which BindView Development, a Houston, Tex., firm says has banks "setting themselves up for disaster." Having the network static--what BindView terms a lockdown--leaves a network "open for users to download applications that are not Y2K compliant while simultaneously increasing the opportunity for attacks," it claims in recent publicity material. First Union's Adams says he has heard no such thing from "anybody reputable," adding, "unless we bring the entire network to a point of stability and revalidate then, then we don't have the necessary comfort level."
The regulators' focus now is on contingency planning, which the OCC's O'Dell, says is "quite varied, including operational, policy, funding and credit issues." Some concrete examples, which wouldn't immediately spring to mind: Bear Sterns & Co. has scheduled catering staff for nearly continuous food service in its canteen, an insider says. The brokerage has also booked 80 hotel rooms in New York City for several nights around Jan. 1 because it doesn't want to risk employees being unable to drive in from the suburbs because traffic lights aren't working.
Banks are supposed to be able to revert to pen-and-paper accounting, if need be, though few think they could. Union Planters has bought 35 gas generators, so that even if the electricity fails, "We will have minimum lighting, alarms and service at our drive-throughs and ATMs," says Linda Kilgo, the program manager in charge of its Y2K efforts. Some of Union Planters' 872 branches in 12 states are in hurricane zones, so the generators are a good long-term investment, she adds.
What distinguishes Y2K from the disasters banks routinely circumvent, says Adams--whose own bank is no stranger to hurricanes--is the potential breadth of impact and the visibility of the problem.
Another potential distinction, should trouble occur, is that everyone could be calling on the same few disaster recovery providers at once. Banks with more to spend, reportedly are securing higher-priority status. Asked about this, Adams said, when it comes, say to getting your ATMs replenished, "It probably helps to have a $5-million contract with a service provider, rather than a $0.25-million contract." Steven King, president of Disaster Recovery Services, Inc., a Charlotte, NC, back-up facility for check imaging, said he hears of some banks securing exclusive rights to disaster recovery services in a given region, adding that smaller banks are disadvantaged in what they can afford.
Asked whether problem banks at this point--those not rated satisfactory in Y2K readiness--have any particular profile, the OCC's O'Dell said no. There are too few for them to have any common characteristics, even in their size, he said.
One source proposed that the worst-off banks are mid-sized ones that actively acquired other banks and now have all their systems to fix, suggesting Union Planters as a case in point. Kilgo, however, said all its systems have been Y2K compliant since February, adding that Union Planters even fixed systems that it planned to convert to its own (the last was converted in August). She guessed that the misinformation stemmed from a report last year by Paine Webber Inc. (a firm that doesn't cover the bank). It cited Union Planters among banking's laggards, but corrected its information in a subsequent report. Just two of numerous analysts that follow Union Planters were reached, and they disagreed on the likelihood of it having Y2K woes. Both speaking on condition of anonymity, one noted that Union Planters acquired 10 banks in 1997, 12 in 1998 and just one this year.
The bank is not allowed say whether the regulators rated it satisfactory, as the regulators apparently are as mindful of vendors not to give any guarantees that might ultimately expose them to litigation. Although scores of Y2K suits were brought last year, the only substantive development was the passage this year of a bill (HR775) that limits Y2K liability and, thereby encourages the different entities involved in remediation to share status information with each other.
No banks are known to have been embroiled in the Y2K lawsuits that started coming in 1997. The first of the settled in Sept. 1998 when a Michigan supermarket operator obtained costs and damages from its supplier of date-challenged credit card readers. (See USB, Nov. 1998, "The Y2K Blame Game.")
Rather than blame the defendant for causing the Y2K problem, a new wave of suits attempts to make the defendant cover the cost of Y2K remediation. These suits, filed against property insurers, use reasoning along the lines of the proverb 'A stitch in time saves nine.' "They're saying, 'I incurred money to fix my systems so as to avoid larger losses," says Alan Martin, an insurance lawyer with Mayer, Brown & Platt in Chicago, of the three suits that have been filed since June. Xerox Corp., the first to file, says its total Y2K bill will be $183 million.
Martin expects such claims to become "widespread," though banks haven't turned to litigation as a means of covering their Y2K tabs. Union Planters was a paltry $1.5 million (plus salaries), First Union Corp.'s a relatively low $65 million, compared with other Top Six banks: Wells Fargo & Co.'s $300 million; Bank of America Corp.'s $550 million; and Citigroup's $900 million.
And it's all leading to what one Morgan Stanley Dean Witter & Co. insider expects to be a nonevent--except that he'll be working a 12-hour shift while everyone else is at a party.