LLOYD HAMM
‘Important mechanism’

It involved a lot of toil and considerable expense, but the returns are finally coming in. Three years after being required to make computer system upgrades to meet Year 2000 regulations, bankers say the work done then is now having unintended beneficial effects.

With new security-related regulations and requirements at the forefront of the financial industry, bankers are putting more effort – and money – into technological enhancements. But the Y2K initiatives, they say, laid the groundwork that is allowing them to successfully meet today’s increased technology demands.

Regardless of the asset size, location, or number of branches, banks around the country were required by law to update their technology infrastructure in 1999 in an effort to lessen the possible effects of computer failures at the turn of the millennium.

Three years later, as the nation tightens security and re-examines corporate disaster-recovery plans, banks have again been forced to update their technology. The process has been eased because of the Y2K platforms that were established, many bankers say.

“Spending [on Y2K technology] was worthwhile because the ’90s was an era of extreme growth for financial institutions. As a result, we had grown so quickly that we had added on to existing infrastructure and we were forced to look at that infrastructure when we came across Y2K,” said Lloyd Hamm Jr., executive vice president and chief information officer for Eastern Bank in Lynn. “Y2K forced us to re-examine what we had and, like all businesses, we were faced with that challenge.”

Hamm said the “economic rumblings” of the past year have caused banks to readjust their spending amounts and budgets. The big difference in technology spending today, however, is that the challenges facing businesses are different.

“We spent so much money on Y2K [compliance] … organizations could have survived solely on their investments,” said Hamm. “But the differences, I think, are that the challenges have changed and the [areas in which banks] are spending money are different than when they were for Y2K.”

Hamm said most of the money spent on Y2K upgrades was invested in hardware and software programs, while today a large portion of the money is spent on disaster recovery, privacy and security initiatives.

But because of the Y2K compliance initiatives, Hamm said businesses had a foundation to build upon following the terrorist attacks of Sept. 11, 2001, and as a result, businesses are more resilient in the face of disaster.

“Today’s new battle is the aftermath of [Sept. 11], instead of the Y2K hype. Thankfully, everything was updated since Y2K and we were better off as a nation [after Sept. 11] from a technology standpoint and more current with our technology standings,” said Hamm. “Because of our preparation with Y2K, we were so resilient after [Sept. 11]. Some businesses were devastated and destroyed, but our technology wasn’t and that is because of our compliance with Y2K initiatives.”

Unlike the mutual fund industry, which grew because of their sophisticated technology, banks did not have the systems and infrastructure needed to grow with new business demands and, according to Lisa Rose, vice president and chief investment officer of Danvers Saving Bank, banks had to start from scratch with new technology.

Rose said banks focused on bringing technology up to standards so that they would be compliant with Y2K regulations, but also to provide a foundation for further updates to support new business strategies.

The Federal Deposit Insurance Corp. originally started soliciting Y2K compliance initiatives to banks in 1996 in an effort to give all banks the necessary amount of time to prepare for, and invest in, new technology.

‘A New Era’

While the FDIC required all financial institutions to invest in a new security system structure for their computer networks, Hamm said that Y2K preparations provided banks the foundation to build on future technology enhancements.

“We started early – the FDIC started talking to banks in 1996 – so [banks] knew well in advance this was coming,” said Hamm, who said that Eastern Bank’s most recent increases in technology spending have been put toward enhancing the bank’s Internet infrastructure, virus protection, disaster recovery planning and contingency planning. “For years and years, our millions of dollars of a technology budget was spent toward Y2K and we’ve continued to put forth our budget toward more compliance issues,” Hamm said.

Since the completion of Y2K compliance, Rose said other developments have required banks to rethink their infrastructure and software capabilities, and with the recent additions of the Gramm-Leach-Bliley Act and USA Patriot Act, Rose said banks are required to look at still more compliance and infrastructure updates.

“Since Y2K, we have been forced to look at software and network enhancements and now we have an infrastructure in place to work from to be compliant with Gramm-Leach-Bliley and the Patriot Act, so we are building on a foundation that we placed for Y2K,” said Rose.

But while the investments made in Y2K compliance are now paying off for banks, there were many challenges that banks faced as a result of the required technology enhancements.

Danvers Bank opened its subsidiary company, Partnership Process Corp., in 1999 as part of an effort to help smaller banks with technology enhancements for Y2K and acted as a service bureau for smaller community banks without the necessary financial backing needed to make the Y2K technology investment.

Y2K set a benchmark for technology spending, but with new privacy and security bills coming ever more quickly onto the banking stage, Rose said, “We are leveraging the work we did before but maintaining the functionality of our systems.”

According to Rose, equipment depreciates over three years and at the beginning of 2003, many bank systems are losing their competitive edge because of outdated systems. But, Rose said, having the Y2K platform already in place has provided banks to the ability to enhance their infrastructure without disrupting an entire network.

“We’ve tried to keep [Danvers Bank’s technology] budget level – if we take money off the budget, it’s hard to get it back,” said Rose. “But, people are taking a look at the business and technology relationship and asking what technology can support our vision. There is more of an effort to tie technology to business goals and not so much about just meeting requirements of legislation.”

Rose said that technology budgets tend to grow over time, but with the advent of recent banking legislative initiatives, many banks have begun competing against one another to implement the most effective security systems, increasing technology spending greatly.

With recent bills including Gramm-Leach-Bliley and the USA Patriot Act affecting businesses, Rose said banks have been made aware that the most important part of technology spending today is focused on protection and security.

Besides security and safety in a bank’s technology infrastructure, Rose said e-commerce and online banking strategies have put many banks in a competition for market share.

“We have more acts in place that we have to comply with … more imaging and scanning and a different type of infrastructure,” said Rose. “Now that banks are becoming more technology-focused … it is creating a new era for banking.”

The latest compliance issues include Web-based delivery of customer information, which Hamm said “we’ve had to invest in to make sure our Internet infrastructure can handle the volume.”

“If I had a billion [dollars] to spend each year on tech I could easily do that,” said Hamm. “Technology is an important mechanism to operating an enterprise – what we did before Y2K and what we’ve done since is all relative to our business expectations.”