When I wrote last week's blog, I knew I wasn't going to get off easy. There's a lot more to tell about bank software, and some clever readers spotted my short cuts. This second installment was inspired by a reader who pointed out that applications are often packed with superfluous features that don't necessarily serve business needs. I agree with that statement. The reason I chose to bring up the matter of sub use is that "superfluous" is in the mind of the beholder. Bank tech vendors work for thousands of FIs, so they pack their software with the max and rely on the users to take it or leave it. I worked for 321 banks - all of them hungry, greedy, curious and with a pent-up demand for information that had accumulated for decades when I met them. Had I gone into the proverbial closet to select my idea of the "best" system and forced it down their throats, I would not have lasted 37 years in the business. Instead I recommended a good fit for each client based on where they were heading. EVERY client is still using the system that the banks' employees and I decided was the best for them.My last job, before I launched my consulting practice, was at a very nice bank in Rhode Island. In 1970 it was the 27th largest U.S. bank, the equivalent today of Bank of the West at $60 billion in assets. Our bank was very strong in the residential mortgage business. I didn't know why until I got to know the community I lived in. Rhode Island was populated by four groups of citizens - Portuguese immigrants, Italians, Irish, and Old Money. They all had one thing in common - they loved their homes. Make them a mortgage and you've got a loyal bank customer forever. Our bank went after the mortgage business, and in today's parlance, those loans would have been called "Above-Prime Mortgages." But for the IT group, it meant we had to grow our mortgage system to accommodate all kinds of custom features. Our sophisticated system for our own bank was doing so much processing that it showed up in our data center cost accounting reports. (It's just like a human. The more work one does the more time it takes and as they say time is money.) Our mortgage department loved the technology because it gave them the flexibility to handle all kinds of special situations. But even though our downline correspondents didn't need the extra work, the system went though the same motions for every mortgage account. and it was hurting the profitability of our service bureau business.
Our down-line correspondents, however, didn't require sophistication. So we decided we needed two systems: a do-all system for our bank and a plain vanilla system that did the basics, ran cheaply in our IT environment, and produced a profit. We found such a system in Orlando at Florida Software Services (later known as Kirchman Corp., then Metavante, and now FIS). We sent our top software guru to Florida to see if the software would work for us. He called back and gave us a quick-and-dirty assessment after only a one-day examination. He said, "It's a good head-start and my team will make it work for our customers." We said, "Give them the $15k and come home with a tape, all the documentation you can carry and a couple of bags of honeybells." [Honeybells are a cross between a tangerine and an orange. They are wonderful and juicy and they peel very easily.] Everything turned out well because the vendor had the goods, and our software team never disappointed. I'm using this story to clarify a point. For some banks less is more. So even though I said banks aren't using their systems to the fullest, there are times when this is a good thing.
Here's another story about cheap but good. During my rubber chicken circuit days I conducted lots of seminars about the new idea of small banks bringing their processing in house. I'll tell you right now that Don Dillon (Chairman of Fiserv) and the late Jack Henry deserve lifetime achievement awards for inventing that business. The ICBA sponsored the seminar program; I was the instructor. About 35 bankers showed up at each seminar and they wanted answers, not academic instruction. On "graduation" day at one session a young man came up to me for a private consultation and said, "The president of the bank sent me here to find out which system is the cheapest." I said, "Kid, didn't you get anything I said for three days about price vs. value? Does your daddy know you cut school to be here with all these grownups? He said, "My daddy is the owner of the bank." "OK, here's the answer to your question - Precision BAIS" (now Precision from Fiserv). There are 95 core system options available for any of today's 15,723 U.S. financial institutions. The "best" option could very well be a disaster if acquired by the wrong bank. The cheapest might be a perfectly good answer for some banks. Another example of less is more.
I was hired by a bank (it's now part of TD Bank) to evaluate its in-house system and make recommendations. I recommended a switch to outsource mode using Systematics (now FIS). Three years after the conversion, the CFO called me back to do a follow up assessment. I was ready to deliver after only two and a half days of sniffing around. There were about 15 IT people in the room when I presented my analysis and recommendation. I could feel the tension. I cut to the chase and said, "I'm recommending that you go through another conversion, back to the pure Systematics system that I recommended originally. You managed to screw up a perfectly good solution with all kinds of custom features that are too costly and too difficult to manage. And they are not bringing in any fresh revenue or new customers to the bank." There was a round of applause and relief. Sometimes it's necessary for IT departments to have a "no" Nazi in their ranks who has the chutzpah to tell users they can't have everything they want. This was an example of over-the-top use. Today TD Bank is the 13th largest U.S. bank and it still uses the Systematics core system. After five major bank acquisitions, it would appear reasonable that customization is still in their blood, and superfluous is not in their minds. They know what they're doing. (In the last quarter of 2009, Citibank North America signed a deal to bring in the Systematics product. Manhattan and Long Island will never be the same after hundreds of Razorbacks from Little Rock show up for the customization of all time. As long as I've known Citi, they've had the same theme song - "My Way.")
So what do I think about sub usage of bank software? I still think it's a problem for too many banks. And it's not a question of size - of the system or the bank. It's a matter of system capabilities and what's appropriate for each institution to use. For example, every core system is made up of six parts:
1. architecture 2. mechanical processing 3. functionality 4. analytics 5. customer database 6. protection
The places where utilization is delinquent, and thus harmful for any bank, are functionality, analytics, customer database and protection.
I'll cover those next week, if you can still take it. I'm prepared to hammer home my point that there's valuable stuff in bank software that bankers are ignoring.