Beating the Community Bank Drum

Bridge Community Bank (Mount Vernon, Iowa; $54 million in assets) is a rural community bank with a can-do attitude toward technology. CEO Bob Steen points out that technology is critical to the bank's survival in its overserved market, and he's quick to take advantage of emerging technologies such as check imaging and remote deposit capture by offering Bridge as a beta site for technologies he believes will deliver value to the bank. A long-time banker, Steen is passionate about the community banking proposition, and he believes his peers must be as willing as he is to adopt new technologies.

BS&T: You've been involved in helping to further industry awareness about the importance of payments to financial institutions, especially community banks. Why are you so focused on this issue?

Steen: You know, we're just a small bank in Iowa and we don't do everything right. But I'm very concerned about the community banking franchise as it relates to payments. There are a myriad of studies that support the premise that community banks are largely dependent on revenue from their piece of the payments system, yet as an industry our basic check-processing methods have not changed for more than 40 years.

We now are competing with cell phone payment methods and a host of other payment systems that do not need a bank in the loop. You can get a mortgage loan in a hundred different places. Luckily, low-cost technology gives us a chance to stay competitive and maintain our customer relationships. That's the drum that I beat to get our community banking peers to listen.

BS&T: As CEO, do your responsibilities at Bridge include IT or do you also have a CIO or CTO?

Steen: We're a small bank with two locations, so consequently our employees wear several hats. One of mine is pretending to be somewhat knowledgeable about technology and how it can keep us in the game. The COO and I run IT at Bridge.

BS&T: As a small bank, what are the major technology challenges you face?

Steen: We are looking at replacing our in-house core processing system, and that will unfortunately be an expensive project. It's an old product and it's being sunsetted.

Even though we've done some progressive technology initiatives, we've been able to do so without a lot of capital by being a beta test site for products such as check imaging and remote deposit capture and a test bank for the Federal Reserve's FedForward electronic image file product. So the cost of a core system replacement is a big deal for us.

BS&T: Are there any other technologies you are considering purchasing in the near term?

Steen: We'll probably take a look at document imaging and archival, but I doubt that we'll spend a lot of money on that. As a bank with two locations, moving documents between locations is not that big of a deal.

We believe that the recent NACHA rule changes on back-office check conversion offer both our bank and our customers some additional item processing savings and efficiencies. But we think that window of opportunity is relatively narrow and we need to take advantage of those initiatives now.

BS&T: One of your most-progressive initiatives -- especially as a rural bank -- was rolling out check imaging back in 1996. How did your customers react?

Steen: Our customers are largely elderly, so we were scared to death to roll out check imaging. I know that a lot of banks decided to offer customers both images and physical checks, but that defied logic to me since we would need to run two systems. We made check imaging an all-or-nothing deal, but I did sweat blood over it. We did some customer focus groups to get input and feedback, but in the end, we never lost a single account.

BS&T: Any words of wisdom for community banks still struggling with check electronification?

Steen: For those banks out there that are still worried about taking checks away from their customers, I'm telling you, it's a nonissue. Customers are happy that we can provide item research for them so quickly.

My other advice would be to change your mind-set. It's difficult to think in terms of not having a proof machine if you've been a banker for a long time and have had a proof machine for 40 years. When my vendor said that we won't need to encode items, it was hard to get my arms around that. Today, we have no equipment that can encode an item.

I talk to bankers all the time who say they bought an expensive pocket-proof image machine so they can't justify buying equipment at the branch level to process checks. That's a shame because they really are missing an opportunity.

BS&T: What's the banking market like in Iowa?

Steen: We're on the edge of the Iowa City/Cedar Rapids corridor. While many rural communities are struggling to keep their populations from moving to the more metro areas of the state, we have the advantage of being a bedroom community for those areas.

That said, there are dozens of banks moving into Iowa City and Cedar Rapids, and the competition is just fierce. We have had respectable deposit growth and some loan growth, but competition from both our banking peers and nonbanking financial entities -- including credit unions, farm credit services and mortgage lenders -- is more of a free-for-all than I have ever experienced. We are just eating each others' territories to the point where it's dangerous. Our market is over-served, and we continuously work to be a survivor. Technology is really important for us to stay competitive.

BS&T: What technologies will help you survive?

Steen: We do full check image exchange with the Federal Reserve and have implemented a very efficient merchant remote capture product that offers real opportunities. We know that our per-item cost for check clearing is significantly less than when we were in the full paper presentment environment. We also know our cost structure will get better as our peers can accept electronic check images.

Big banks really figured out quickly how to take advantage of the best pieces of the Check 21 process. I give them credit because they weren't ready when Check 21 passed, but they got ready really fast. But I have community bank peers who are still not ready to move forward, and I'm concerned about that.

BS&T: How difficult is it to compete with nonbanks as a regulated entity in what you call a "free for all?"

Steen: There are so many competitors now that it is hard to distinguish between those that are regulated and those that are not. The regulatory burden that we are faced with at all levels of our bank has now failed the reasonableness test. We spend a lot of time and resources trying to compete, but the formal policy requirements, overwhelming risk assessment and associated documentation expectations may very well be more than we can handle. Competing with entities that for all practical purposes have little or no oversight is our biggest challenge, not to mention the tax inequities.

BS&T: What has been your greatest career challenge?

Steen: That would take a book! I have been at this for nearly 40 years and I still haven't figured out when to start keeping score. I do believe that the challenges ahead are as great as those behind us. Our immediate challenge is interest margin. We do not like where we are and expect to take a couple of years to wear this out. Nonetheless, I'm optimistic about our ability to serve our small communities, and we plan on doing exactly that. **--Lisa Valentine