Back to the Future

Co-op data centers—an idea whose time has come (again)?

By Judith Sears

In 1969, Neil Armstrong became the first person to walk on the moon, and that same year the first two nodes of today’s Internet were connected between UCLA and Stanford Research Institute. Meanwhile at Lake-Osceola State Bank in Baldwin, Mich., Deborah Smith-Olson, working a summer job at her father’s community bank, was assigning checking account numbers by hand.

Back then, Lake-Osceola State Bank was numbering its customers’ accounts so it could move to computerized data processing. “Previously, we had all of the accounts ordered by name because we knew all of our customers,” recalls Smith-Olson. “But a very big technological change was coming.”

As the computer revolution gained steam, many community bankers quickly recognized that they wouldn’t be able to match the large banks’ investments in computing capacity, at least not in the same way. In response, Lake-Osceola State Bank and two other Michigan community banks—Manistee Bank & Trust Co. in Manistee and State Savings Bank of Scottville—formed West Shore Computer Services, an independent co-op data center. The idea behind the co-op, owned equally by all three community banks, was to allow the banks to keep pace technologically with the bigger banks by pooling their resources and sharing the costs.

Forty-three years later, staying continually up to date technologically is still a challenge for many community banks—and West Shore Computer Services continues to deliver the timely financial, technological and operational benefits for which it was originally formed. Due to industry consolidation the co-op’s ownership lineup has varied over the years.

Today, four independent community banks, representing a total of more than $1 billion in assets, each own one-fourth of the co-op. Those banks are West Shore Bank, a $335 million-asset bank in Ludington, Mich.; ChoiceOne Bank, a $495 million-asset bank in Sparta, Mich.; Honor Bank, a $190 million-asset bank in Honor, Mich.; and Lake-Osceola State Bank, a $180 million-asset bank in Baldwin, Mich. A fifth bank, West Michigan Bank & Trust, a $41 million-asset bank in Frankfort, Mich., is a customer.

Economies of scale

In keeping with its charter, West Shore Computer Services handles the core processing for all five community banks, including item processing, statement printing, handling of debit and ATM cards, as well as Internet and mobile banking services systems. In addition, the co-op provides computer-related staff training, helps with system trouble-shooting and handles vendor contract negotiations.

Each community bank remains responsible for its own WAN, employee workstations and desktop computers, phone systems and ATMs.

West Shore Computer Services’ board of directors, comprising the four owner-bank presidents, sets all fees. Prices are based on a combination of per-unit pricing as well as shared allocation components, usually allocated across the banks based on their relative asset size.

“Our high-level objective is to break even,” says Bob Stone, president of West Shore Computer Services. “We try to ensure that costs are being recovered in our revenue streams based on what is driving the underlying expenses.”

The CEOs of West Shore Computer Services’ owner community banks meet monthly to discuss finances and strategy. In addition, various IT and operations staff committees meet regularly to work out the details of operational controls and services. The ongoing collaboration at several staff levels helps ensure consensus among the community banks.

The co-op bank presidents agree that West Shore Computer Services has produced cost savings by reducing their requirements for full-time employees as well as spreading the cost of computer equipment and other IT overhead expenses. But the same goal could be accomplished by outsourcing to a data vendor.

So why a co-op?

The data center co-op members answer this question by stressing the increased control and leverage the co-op gives them over their technology and investment decisions. The community bankers are especially appreciative of the access they have to the data center, comparing it to the kind of access community bankers offer their customers. “We know West Shore, and we can walk in their office,” observes Jim Bosserd, president and CEO of ChoiceOne Bank. “We’re not calling a big corporation that’s several states away. These are people we know and trust. We can get answers and get things done.”

Whereas another data center might be inclined to dictate certain terms to a community bank, West Shore Computer Services enables its co-op banks—the joint owners—to have control over their technology decisions and priorities. “We’re not at the data center’s mercy,” says Smith-Olson, now president and chairman of Lake-Osceola State Bank.

Owning the data center co-op also gives the four community banks the flexibility to choose a variety of vendors, rather than being locked into one vendor for all services. Different technology companies provide the center’s mainframe, its EFT services and its item processing. “We have a more independent, best-of-breed delivery system,” explains Stone. “It gives you the flexibility you’d have if you had your own data center.”

The community banks’ combined assets and purchasing power also greatly amplify their leverage to negotiate contracts with the vendors they use, adds Rick Benson, chief information officer for Honor Bank. “Instead of four individual banks, we go to the vendors as one entity with $1 billion in assets,” he says. “We can negotiate a better contract with better pricing.”

While increased clout and cost-savings are critical, the community bankers are just as enthusiastic about the advantages of sharing knowledge and best practices with their co-op partners. “It’s much easier to solve problems in a group of people who are using the same equipment and software and can say, ‘Here’s how we fixed that,’” says Doug Cook, president of West Michigan Bank & Trust.

Because the community banks all use the same equipment for transmitting data and documents to the data center, they’re also able to serve as continuity and business recovery resources for each other. Last year, for example, utility crews accidentally cut Honor Bank’s data line. But Honor Bank was able to use another co-op partner’s system to process checks and get their daily work transmitted to the data center in a timely manner. “None of our customers was impacted,” Benson says.

While the West Shore Computer Services owners are satisfied, the data center’s co-op structure itself has never been widely embraced by other community banks. Industry observers says the reasons for this may range from the declining number of community banks, to reluctance to change a current IT system to convert to a new co-op data center, to a lingering association of co-ops with credit unions.

While the choice to join a co-op that’s a going concern mainly would be a matter of finding the right match, clearly there would be some hurdles to creating a successful startup co-op. Just acquiring space to house the center and buying new equipment would require significant investments. In addition to the capital expenditures, one or more banks might need to convert its IT systems when forming a co-op. That’s a lot of work.

Other considerations include the need to find stable partner banks, both in terms of finances and their commitment to staying independent for the long term. Co-op partners also need to be reasonably well aligned in their business strategy. If one community bank is focused on delivering services to high-net-worth individuals while another bank’s focus is commercial banking, it could be difficult to agree on strategy and priorities. endmark

Judith Sears is a writer in Denver.