Rockland-based South Coastal Bank has increased its technology spending in the past three years, and expects to focus on Internet banking in 2002.
Despite banks pulling back on everything from credit to year-end bonuses, at least one area of spending may be growing.
According to a recently released study by Boston-based Celent Communications, the largest banks in the United States are projected to increase their information technology spending over the next year.
Celent found that most of the new IT spending was focused on improving the availability of self-service mechanisms for customers, the efficiencies of technology to help offset the drop in fee income and a re-emergence of concentration on the branch systems.
Now that the wave of stand-alone brand Internet banks has passed and the prophecy of physical branches being obsolete has proven unfounded, banks ranging from the largest to the smallest are concentrating their efforts on modernizing branches, which often means installing new technologies for teller work stations and sales people, said James R. Eckenrode, group director of consumer banking at TowerGroup in Needham.
We did some work right after Sept. 11, talking to banks about what their IT spending priorities are, and we don’t necessarily see them cutting way back. But they’re taking a hard look at what their priorities are. And for a lot of them, branch renewal is a high priority, said Eckenrode.
Celent’s study also pointed to recent mergers and acquisitions causing unavoidable IT costs for banks. That was the case with $50 billion-asset Citizens Bank’s recent purchase of Mellon Bank’s mid-Atlantic franchise. William K. Wray, chief information officer at Citizens Financial Group, said the bank’s IT spending will be up this year because of the acquisition.
We continue to grow and, to support that growth, we need to do a certain amount of IT spending, he said, adding it’s difficult to separate spending related to acquisitions from other IT spending.
Citizens’ technology spending revolves around its customers, said Wray, instead of dwelling on the technology available. Thinking of IT spending as a category [isn’t’] that important. It was when it was an esoteric subject unto itself, but now it’s part of what we do … We don’t look at IT spending as a category unto itself any more than we would look at HR [human resources] spending or PR [public relations] spending or marketing spending. IT’s an integrated aspect in the way we take care of our customers.
Citizens also plans to beef up its branch infrastructure as part of its overall emphasis on customer satisfaction.
Our customers like to bank anytime, anyhow, anywhere, so we’re there to make sure we fulfill that commitment. That means the systems have to be available and they have to be where the customer wants them and they have to do what the customer wants, Wray said.
We’re a bread-and-butter retail bank – we have a strong commercial presence as well – and so branches are very important to our customers and therefore to us. I think our approach is, we don’t try to be technology-driven, we don’t see ourselves as bleeding-edge players, said Wray.
Our job is to make our customer base happy, whether it’s technology, balloons, dog biscuits or otherwise, he said.
IT spending at both regional and community-level banks isn’t likely to be cut this year, despite the recession.
Community banks feel one of our competitive advantages is we can communicate at the same level that the big banks can, with Internet banking, ATMs and things of that nature. So as the technology changes, you have to change with it, said John J. O’Connor III, chairman of the board, president and chief executive officer of the $146 million-asset South Coastal Bank in Rockland.
The bank’s IT spending has increased over the past three years, due first to Y2K preparations followed by a systems conversion and upgrade, but O’Connor said he expects the spending to flatten out over the next few years. O’Connor’s bank is not fee-income driven.
Your IT is a function of your strategic plan and you spend strategically, he said, pointing out that IT spending is cyclical in at least one regard: Every few years the systems are out of date and must be upgraded.
Over the next year, South Coastal will focus on Internet banking to develop and deliver an Internet product, said O’Connor. In my view, Internet banking will not pay for itself. It’s a cost of doing business, another delivery channel. It’s a way for us to communicate with our customers, he said.
Part of the focus of many banks includes enhancing Internet banking capabilities. But while banks are spending money on an Internet banking system, it’s often not an end in itself.
There’s a recognition that the Internet channel is exactly that; it’s not a business, it’s not a way to fundamentally remake what you’re doing but it’s an important part of an overall delivery strategy, said Eckenrode.
‘Compelling Advantage’
Celent predicts that in order to save money, financial institutions will increasingly turn to outsourcers to provide IT services.
Stephen K. Ryan, senior vice president of corporate marketing at BISYS Group’s Cherry Hill, N.J.-based banking solutions unit, said he’s seen an increase in small banks using his company.
Many of the community banks are embracing technology now to try to either attract new customers or to reduce expenses, said Ryan. We’re seeing specifically they’re investing in either electronic-based technology, the Internet, e-commerce initiatives – we’re seeing a lot of activity in our own check-imaging software – and in CRM [customer relationship management]-related investments that will help banks retain or attract customers.
Outsourcing reduces the cost of developing a product in-house, said Ryan. Most of the technology they’re attempting to acquire today already exists, is already proven and is up and running, said Ryan. The cost for them to develop and implement it is far more expensive than an existing platform a vendor may have. And the ability to attract and retain talent to build and maintain these systems is increasingly difficult.
The outsourcers will facilitate quick and easy entry into entirely new businesses, according to Celent.
Portland, Maine-based Banknorth Group also uses outsourcing on a case-by-case basis where there’s a real compelling advantage to outsource, said John Petry, the bank’s chief information officer.
Outsourcing works well in a couple of areas. One is where something’s already been more or less commoditized and there’s little strategic advantage for the corporation to be doing that themselves, he said.
Other reasons for outsourcing may include shortening the time to market and mitigating the risk of a new product that might not succeed, he said.
Banknorth is also increasing its IT spending overall, said Petry, to provide additional services to its customer base and remain in a competitive position.
Some of the services the bank is looking to improve include Internet transaction capabilities and becoming more efficient. CRM is a major driver behind the technology budget. In other words, allowing customers to do more transactions and more self-service through electronic channels, as well as making the bank more efficient and increasing the quality of service provided to the customer, said Petry.
Most of the costs to keep customers happy are necessary, said Petry. The recession has not affected Banknorth’s intentions to proceed with its strategic plan. Instead, some smaller items may be delayed, such as internal infrastructure plans.
According to Celent, banks that have relied on fee income will continue to see reduced economic activity, which will mean reduced volume in checking, ATM withdrawals and other fee-generating areas: As banks become less able to rely on fee-based income, they must find new ways to improve customer satisfaction and value, both in terms of offering new products/services and the delivery of those offerings. Information technology has a critical role to play with all of these issues.
