Customer needs should drive technology choices for community banks
Editor’s note: Dale Nelson recently retired as CEO of Liberty Savings Bank, a $200 million financial institution in St. Cloud, Minn.In the following interview, he discusses customer demographics, local market forces and cost control as some of the reasons his bank made significant changes in the scope and management of online customer services. This is the first in an occasional series of Q & As with RSM McGladrey Advantage editorial board members.
What prompted you to consider upgrades to your bank’s technology services?
We took a look at two things: the general growth of our local economy and the demographics of our current and future customer base. Most bankers would agree that their primary customers are borrowers, and that the loans they provide to those customers are the entry point for other services. When we looked at it that way, it was pretty clear that our existing Internet banking options were not enough to meet the needs of our current and future customers.
What online services did you offer before the change?
We offered several online account management tools, such as online bill pay, balance checks, and account transfers — but nothing on the loan side.
How did you analyze your customer demographics?
We looked at all the research that’s been done in recent years and applied it to our market. The Generation-X, Generation-Y and millennial groups embrace technology much more easily than do baby boomers and older generations. Much of our future growth will be driven by people now in their early 40s and younger, so it was important to invest in technologies that will help us attract and keep those customers.
Here’s a funny story that may help make the point. A few months ago, a high-school junior came to one of our downtown branches, where the ATM was broken. The poor guy came in looking pretty perplexed, and finally walked up to a teller and said, "Your machine is broken. Does that mean I can’t get any money out of the bank?" He had no idea he could work with a live person.
How big a role did the growth of your local economy play in this decision?
That is a strong factor to consider. We’re a $200 million bank — not overly large when compared with the regional players — but we’ve got a really active mortgage division. That has helped us grow at about 21 percent a year for the past decade. Also, St. Cloud has the largest state university in Minnesota, which fuels a lot of local business growth and provides a consistently large percentage of younger potential customers. When we added it all up, we believed that modernizing our technology was not optional — it was necessary.
Can you elaborate on the decision-making process?
We had three board meetings on the subject over the course of 18 months. We decided to move away from operating our own mainframe network and peripheral software systems, and sign on with a large information systems (IS) vendor. There were two big reasons we made the change. First, the 9/11 attacks exponentially increased the industry’s need for online storage of data and records in off-site locations. Second, we felt that the level of security, backups and ongoing compliance was better done through a firm that does this as a business, rather than us trying to do it as a sideline.
Can a community bank manage these technology improvements with in-house resources?
Sure.But from a cost point of view, it is getting increasingly difficult for community banks like ours to justify the staff time and technology upgrades needed to do it right. Look at what’s happening in the industry: The big banks can afford to do their technology work in-house, and the midsized regional banks do some things with their own networks while routing other functions to vendors. That leaves the small urban or rural players, and more of those are now going to outside providers.
What are the new online services you now offer?
The biggest change is on the loan side. Before the change, we had a series of dummy screens talking about future services where you could do full loan applications online, but they weren’t functional. The vendor provided us with a much more sophisticated series of Web applications that will enable our customers to use online loan tools that are faster and more efficient than anything we could construct on our own.
Did you have concerns about privacy and data security with an outside party?
While we were OK with our security program before, this change provides us with much better and more comprehensive firewalls to prevent incursions. Data privacy and security has become huge in banking, and the simple fact is that the outside provider has the programming capacity and staff expertise to stay on top of all of the potential risks.
How long will the transition take, and how are you communicating this to your customers?
Over a six-month period, we’ll gradually remove our mainframe and plug-ins from the system as we transition to the vendor. If we do this right,the process should be almost seamless, and the current ways that customers can interact with us will not change. We want to make sure we provide continuity to customers and not have this change cause them to get concerned.
Are there other places where this change has helped make your operations more efficient?
We’ve really seen some of that in the so-called "back-room" operations. This change will enable us to reduce our workforce by about 10 percent, especially in jobs for proof operators and balancers.
Where does this change put you in terms of technology use with other midsized community banks?
I would say we’re now at about the 90th to 95th percentile for a bank of our size.
Where might this type of investment not make sense?
When you’re working with an outside provider, the more transactions you have, the cheaper the investment becomes. Many rural banks believe they don’t have enough growth potential in their customer decks, or enough transactions, which would mean that upgrades to technology could be a waste of money. But it’s worth putting a pencil to it, because the potential for reduced IS costs and greater efficiency may still make it a viable choice.
