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The Changing Face of Banking - Jack Henry & Associates

The Changing Face of Banking
By Michael E. Henry, Michael R. Wallace, Tony L. Wormington, Steve Tomson, Ed Rhea, Doug Childress, and Jack Prim
Jack Henry & Associates

What does a look into the proverbial crystal ball reveal about the future of banking? Years ago, we were told to expect a checkless society. Banking gurus also warned of massive consolidations that would lead to the demise of community banks, leaving only a handful of mega financial institutions to dot the landscape. Obviously, neither prediction has come to pass. More checks are written today than ever before. And while mergers and acquisitions have caused a slight decline in the number of community banks, it is clear that the American public will continue to demand the personalized service and accessibility offered by their local bank.

So just what does lie ahead for the banking industry? If the recent past is any indication of the future, change is something we can count on. Given the conservative nature of banks, the industry has historically evolved at a very slow pace. However, two developments of late have forced traditional financial institutions into a much more aggressive posture. The Financial Services Modernization Act of 1999 has, in essence, removed the barriers imposed by the 1933 Glass-Steagall Act. The business of banks, insurance companies and securities institutions now overlap, which means non-traditional competitive players are staking their claim in the banking marketplace. That, combined with the rapid expansion of technology, particularly the Internet, has set the stage for changes in banking, the likes of which have not been seen before.

The New Competition
"Fifteen years ago, a community bank's competition was the community bank across the street," says Mike Henry, Chairman and CEO of Jack Henry & Associates. "They offered basically the same types of products, and customers were won through superior service. Today, the same community bank looks across the street and sees a mega bank with new products and services designed to woo customers. Even more disconcerting, brokerage firms and insurance companies that aren't even in town are vying for the bank's business. Competition is coming from entirely new directions today and banks must adapt by entering the financial services world of the future."

A Balanced Strategy
How do community banks survive in this increasingly competitive marketplace? Steve Tomson, Manager of Complementary Products at Jack Henry notes, "It can be quite a challenge to attract and retain deposit accounts when a good number of those deposits are headed out to the markets in the form of mutual funds or direct corporate stocks." Large insurance companies are branching into banking and have adapted fairly aggressive lending policies. Even automobile manufacturers are taking business away from banks, as they become more involved in lending and auto financing. The bottom line, according to Tomson, is that, "Tomorrow's consumers will have more choices than ever, so banks must work harder to retain current customers and attract new ones."

The good news is technology is available to meet any competitive threat in the marketplace. As community banks become more aggressive and embrace technology, they can increase efficiencies within the bank and provide the same products and services offered by mega banks and alternative financial services institutions. What these local institutions have that their financial service competitors don't is a community presence. The backbone of differentiation for community banks has and will continue to be service. The truth is, people still want a brick and mortar institution where they can walk into the lobby and sit down across the desk from someone to discuss financial needs. As long as community banks balance technology with their high touch, personal service, they will have a distinct advantage over the no-name, no-face big bank or the intangible e-trade organization where financial activities go out into cyberspace.

That said, the technology side of the equation is critical to the future success of community banks, as customers are demanding the convenience of services such as telephone banking, ATM and debit cards, credit cards, Internet banking, bill payment, and commercial cash management via the Internet. In addition to offering new products and services made available through technology, banks are moving beyond the traditional boundaries of the deposit and lending relationship. They are meeting customer needs through brokerage and insurance services - even financial consulting. Doug Childress, Manager of Installation Services at Jack Henry, asserts, "For banks to remain competitive in their marketplace, they must diversify into total customer relationship portfolio management."

As banks are looking at how to manage customer relationships, they are analyzing the types of products and services that will bring new opportunities to the bank. "They must develop a stronger sales culture to effectively compete with non-traditional financial institutions," according to Jack Henry's National Sales Manager Ed Rhea. This involves asking some serious strategic questions. Will banks sell insurance and stock directly? Or should they partner with someone to do that? Will they utilize the Internet for such services? Larger, more aggressive banks with the money and resources to spend on these services seem to be paving the way for the smaller institutions, which are waiting to see if the investment is worth the return. One thing is certain, the bank of the future will be a broad-based financial services institution.

Implications of the Internet
"Technology has changed the face of banking significantly over the last ten years," says Jack Henry Vice President of Research and Development Tony Wormington. Utilizing this technology to provide state-of-the-art products, while maintaining the stellar customer service associated with traditional banking will enable banks to win business in most markets. It's not just the small towns that desire personalized service - it's communities all over the country. "As national Internet banks have popped up, there has been a real reluctance on the part of the American public to deal purely with an Internet bank," says Henry. "That is not to say, however, that people don't want or even expect Internet banking as an added convenience."

The Internet serves as an alternative delivery channel, providing customers with account information, account transfer and account aggregation capabilities. Add to that bill payment, voice response transaction, and ATM transaction processing available via the Internet, and consumers will basically be able to bank from home.

The Internet is evolving faster than anything banks have seen in the past. While it was once possible to look five years ahead with regard to technology and make predictions, it is difficult to see past six months where Internet advances are concerned. We are beginning to see a wireless strategy as a means to connect to the Internet. That will no doubt continue to grow. "ASP's (Application Service Providers) make sense for certain applications of the banking industry," says Rhea. "It may be more cost-effective for a bank to rent time on the Internet to access particular applications, rather than licensing the software itself."

A virtual safe deposit box is an offering that may be found in the not-so-distant future. By leveraging imaging, optical storage and Internet technologies, customers will be able to use the Internet to go into a repository of information. Stock certificates, wills and other important documents can be scanned into an optical system, then saved into the customer's virtual box. All this technology is available, it's affordable, it's deliverable, and it's supportable. "If banks do not move forward with e-technology services, customers will look somewhere else," concludes Childress.

As Internet capabilities grow, speed, reliability, security, and availability of the system will continue to improve. Specific technological advances, however, are harder to nail down. What kind of bandwidth are we going to have in a year? How fast are servers going to be able to handle transactions? What types of new companies are going to emerge with a service that threatens banks with something they don't have? Nobody knows.

Web Portals
What we do know is that the Internet will continue to shape the banking industry over the next two decades in terms of e-technology and e-commerce. Web portals are becoming increasingly popular and will serve to reinstate the bank's image as the center of commerce in a community, while also providing a means to generate revenue. Customers can use the bank's web portal as an entry point to the Internet and even design their own home page to provide information from stocks to weather to news to sports.

The portal is unique in its offerings such as a community bulletin board that posts local events, sports information, >
The portal becomes an e-commerce site when used for online shopping. Rather than using a credit card to make purchases, customers will be able to debit their accounts. The institution can generate fees from the customer as well as the commercial retailer that has leased space on the site.

Consolidation of Technology Vendors
As more and more ancillary products and services such as Internet banking are evolving to surround core processing, technology vendors are consolidating to better meet the growing needs of banks. "Only a few years ago, there weren't that many products surrounding the core," says Henry. "As a result, banks had several stand-alone systems and different vendors providing the various solutions. The marketplace today is adapting to change by moving toward complete solution providers that offer an integrated approach."

While the development of complementary products such as document imaging, check imaging, payroll, teller software, ATM cards, debit cards, Internet banking, and platform solutions have provided unprecedented convenience to customers and bankers alike, it also has complicated matters. For banks that employ as many as a dozen vendors to provide the products that surround the core, frustration levels have grown. Integrations and interfaces have failed while support issues multiplied.

"That's why banks are looking to do business with a technology partner - a vendor that can provide a comprehensive solution that is tightly integrated into the core," says Jack Henry President and COO Mike Wallace. Bankers want functionality, stability and reliability in their data processing. "By securing an integrated solution from one vendor, banks receive a higher quality product that is ultimately delivered to their customers," Wallace continues. "Greater efficiencies enable financial institutions to better leverage their human resources." And headaches disappear when there is only one point of contact to deal with all components of the system.

Customer needs have driven this shift in the vendor marketplace, causing mergers and acquisitions among solution providers to increase. Organizations that once provided only the core system are now offering entire solutions. It takes a fairly large software company to offer that breadth of product. "Technology vendors are finding that they must continue to evolve and expand the products and services offered," says Wallace. He warns, however, that "They must not fall into the trap of chasing technology for technology's sake." The solution providers that prevail will be those that find the development tools to roll out systems in an affordable fashion, while at the same time providing significant value. Vendors that concentrate in only one area will soon be a thing of the past.

The Two Philosophies of Data Processing
Technology partners are critical for tomorrow's bank, whether they provide in-house data processing capabilities or outsourcing services. Today, approximately 60% of banks are operating in-house, while 40% rely on service bureaus. "That percentage has flipped over the years," says Henry, "as more banks have sought to compete by taking control over products and services they had to offer their customers."

It is the observation of Jack Prim, Manager of Electronic Services at Jack Henry & Associates is that institutions turning to service providers are doing so in response to increased complexities associated with data processing. He explains, "The application, functionality and level of integration are so much greater than they used to be that bankers are outsourcing so they can focus all their efforts on the business of banking." Then, of course, there will always be banks that maintain the philosophy of managing cash flow through a relationship with an outsourcer. In the future, it will be ever more important to ensure that the outsourcer stays current with technology and is flexible to respond to needs of the institution.

Big Bank Mergers & Acquisitions
The issue of big bank consolidations must be addressed, because it is not going away. While bank mergers and acquisitions haven't occurred at the predicted rate, stronger, more viable institutions have steadily acquired those that lack the opportunity, strategy or management to be successful in the markets they're attempting to serve.

Rather than creating a major disruption in the marketplace, however, consolidations often serve to stimulate growth for institutions. When large financial institutions move into town, many businesses and individuals gravitate to the community bank where they can do business with people they know. De novo's are opening at a healthy pace throughout the United States. We have even seen community banks buying branches of super regionals. As long as community banks can compete on a technology level, consumers will continue to seek the traditional service they offer.

A Strong Future
"Some have underestimated the ability of community banks to adapt and become more aggressive in expanding their business and effectively competing through the use of technology," says Wallace. In reality, banks are embracing technology, as they recognize the role it plays in increasing efficiencies, paving the way into new markets, and returning value to their owners or shareholders.

Banks of the future will be strong. Change will no doubt continue to be a key and fundamental piece of the equation. Those who don't address it will be going backwards. Institutions that are prepared to usher in this new era of banking will flourish.

This article was a corroborative effort on the part of the following Jack Henry & Associates executive team:
Michael E. Henry, Chairman and Chief Executive Officer
Michael R. Wallace, President and Chief Operating Officer
Tony L. Wormington, Vice President of Research and Development
Steve Tomson, General Manager, Complementary Products
Ed Rhea, National Sales Manager
Doug Childress, General Manager, Core Solutions
Jack Prim, General Manager, Electronic Services

Jack Henry & Associates, Inc. provides integrated computer systems as well as a complete suite of complementary solutions including Check and Document Imaging, Internet Banking, WEB Portal sites, Platform, Teller, Voice Response and ATM networking products for banks and credit unions. Jack Henry markets and supports its systems throughout the United States and has over 2,850 customers nationwide. For additional information on Jack Henry, visit the company's web site at

First published on 4/2/01

First published on 04/02/2001

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