JAMES D. JONES
‘A conservative industry’

Part One of a Two-Part Series
Banks have been slower than some industries to add high-tech capabilities, but would do well to consider technology heavily in their 2007 business plans, local and national experts say.

“It’s the legacy of the industry and the regulation of the industry,” as compared to others, that’s behind the slower technological pace, according to James D. Jones, founder and president of First Wellesley Consulting, a Wellesley financial industry consulting firm with local and national clients.

“My sense of banking is that it’s a conservative industry that on average is hesitant to replace technology or invest in emerging technology,” added Jones, who said electronic commerce companies such as amazon.com and eBay are examples of industries that are more “aggressive” and “innovative” in that area.

But technology will become “increasingly important” to community banks in 2007 and the years to follow, according to Jones, who consults to them and others – both because more of their customers are banking online, and also to help them keep up with increasing state and federal regulations.

The financial and training costs of technology changes such as replacing or upgrading “core lending systems” – the basic software frameworks under which everything from teller services to bank statements and lending operations fall – cannot be ignored, suggests TowerGroup, a Needham-based global financial services research and consulting company, in its recent report, “Consumer Lending’s Top 10 for 2007: Business Drivers, Strategic Responses and Technology Priorities.”

But there are many reasons to take the leap, the company suggests.

For example, the report predicts that new technology will allow lenders to cross-sell more products faster; add new loan products quickly; eliminate paper in many cases, which will save time and money; and address compliance issues more efficiently.

In terms of timing, today’s relatively slow lending environment is an ideal one in which to bring on new technology, according to study co-author Bobbie Britting.

Just three years ago, Britting noted, consumer lending – generally about 10 percent of most banks’ loan volume, not counting mortgages – was so busy that lenders couldn’t handle all the applications coming in. “They didn’t want the technology to add more,” she said.

Today, following two years of increases in the federal funds rate – which affects the prime rate on which most loans are based – consumers are more cautious about borrowing, Britting explained.

Lower loan volumes mean “it’s a good time to consider technology, when you have more time to test the system,” she said.

The October 2006 report, based on ongoing conversations with TowerGroup’s financial services provider and software vendor clients, suggests which technology investments that consumer lending operations – including banks – should prioritize next year. They include “core lending systems transformation,” new tools to reach untapped markets, and transformation of information-technology architecture, “the underpinning of core lending systems transformation” – which allows for another suggested priority: automating the means by which the lender specifies, implements and monitors tasks directed at achieving specific goals.

Other priorities include adding specialized compliance technology.

“Many lenders are now making integrated compliance systems a higher priority in Â… home equity and mortgage lending,” the report notes.

Such a move will both “improve efficiency” and help a lender comply with new or revised laws and regulations, it suggests.

Emerging Software
One type of software that increases compliance and workload efficiency is a smart-document type of loan application that automatically enters certain information relating to federal, state or local laws governing a certain type of loan, once the loan type is entered, Britting explained.

“For example, you type in that this is a document for a Massachusetts loan,” she said. The program automatically enters information applying to Massachusetts, she noted, in the same way as some tax software automatically enters taxpayer information based on initial information the user enters.

Other new or emerging software technologies identified by Britting include those enabling fixed-rate loans on home equity lines of credit, credit cards attached to home equity lines of credit (which have belied the negative press they got initially from those who feared consumers would use them frivolously) and electronic loan files in which companies “image,” for example, a 300-page mortgage loan file, which enables them to find information about a loan very quickly.

“What used to happen is a bank would get a question, and send a request to have a file pulled. In the best case it would take 15 to 20 minutes,” Britting said – while the scanned files allow the same information to be looked up in seconds.

Officials at two Massachusetts banks interviewed by Banker & Tradesman said they are planning at least one similar technology step for next year: adding online mortgage and home equity application forms. A third, South Shore Savings, has had an online mortgage application in place for the past three years, and online home equity since 2005 (see related story on Page 1).

Jones said that’s a smart choice. He said many vendors “have good, solid, proven systems” offering that capability.

The top 10 lenders in the United States also are busy replacing their mortgage loan origination software, Jones said, according to a recent First Wellesley Consulting survey. Massachusetts lenders have been doing that less often, he said. But the larger lenders might have systems that are 25 years old, or else want to take advantage of the electronic mortgage trend, for which you need the latest technology.

Document imaging, such as scanning in the 300-page mortgage origination file Britting described, “is being used more often and was a top down adoption, where the very largest banks saw [it as] an economic issue and got on it,” Jones said.

Some community banks have been adopting that technology, added Jones, who described it as “the halfway house to electronic mortgages.”

Credit unions, Jones noted, actually are often out in front of the banks on document-imaging technology.

“They actually have a very interesting profile when you talk about technology innovation,” he said.

Jones said the first thing he advises new clients to do, before investing in anything new, is to make sure they’re using their current system to its fullest.

“When a bank puts a system in, they may have 60 [percent] to 65 percent functionality. Typically, we first ask them what features they aren’t using, that they might want to unlock,” he said.

Whether technology can replace people and to what degree, and just how secure all that scanned and online data is, remain key topics in the ever-expanding technology conversation.