Transformative Trends


Emerging outsourcing tactics are changing how the most successful community banks operate

By Scott Hansen

The good news: We made it. The economy is on the comeback trail, and community banks are feeling it. The Federal Reserve reported that 2012 was the second-best year for bank earnings in history—so expectations are high for the future. The regulatory requirements that initially sent the industry into a tailspin are now simple facts of banking life.

Yet, there are challenges. Big-bank and nonbank competitors have significantly upped their games. Mobility has given consumers unprecedented power, creating a world where waiting for an answer just isn’t acceptable anymore.

So, what does a community bank need to compete?

In a word: speed. More specifically, the nimbleness to quickly react to customer needs, introduce new products and adjust strategies with market demand. Agility is now a differentiator, and technology is the undisputed enabler, giving community banks the power they need to stay in the game.

This new competitive environment has spawned six important industry trends:

1. advisory banking,

2. channeling mobility,

3. leading payments options,

4. scalable efficiency,

5. resilience in risk and

6. smart sourcing.

Much has already been written about advisory banking, mobile and new payments products. So, let’s focus on the other, lesser-sung three—each very much worth discussing.

Scalable efficiency: not just for cost control anymore. Five years ago, community banks looked for ways to automate workflows as a means for controlling costs. An investment in automation was justified by a tangible reduction in overhead, period. “How can we get more done in the back office with fewer people?”

Now, the question has changed to, “How can I get rid of the inconsistent, manual processes that are increasing error rates and slowing my customer response rate down? How can I write more loans, more efficiently and more consistently?”

Today, through technology, community banks can automate their lending process, from origination through documentation. Not only does this enable financial institutions to output more, but it also allows them to react faster. A lending officer can talk to a customer and have a $500,000 business loan decided that same day. Automating lending documentation, including the aggregation of credit reporting and other verifications, improves the customer experience along with productivity.

No matter what size your community bank is, the returns from automated lending processes can be substantial.

Benton, Kentucky-based, $605 million-asset Community Financial Services Bank, for example, employed automation to reduce its loan documentation process by nearly 50 percent, while increasing its assets by more than 15 percent. Integrating an electronic signature solution, for example, both reduced errors and delighted borrowers by saving them time at loan closing.

Texas-based, $1.3 billion-asset Austin Bank had an inefficient, error-prone lending process, marred by multiple, redundant data entry. By investing in a loan origination solution in 2007 that automates credit underwriting and feeds directly into a compliant loan documentation system, the institution streamlined its entire lending process, reduced compliance risk and eliminated the need to re-key information from system to system.

Both of these community banks can now do more with less, and respond to customers more quickly.

Resilience in risk: end-to-end visibility leaves nothing to chance. While risk management has been a hot topic since the economic meltdown, today the conversation has substantially changed. In the past, the regulators came in and if they saw problems, they dealt with those problems. So risk resilience became a means for keeping the doors open.

Now, when regulators come in, they want to see if you know how to run your community bank. What justifications do you use for loan decisions—and are these consistent from lending officer to lending officer? Do you manage your bank’s loans by disparate spreadsheets—or do you have transparency baked into your end-to-end lending processes? A clear, visible audit trail not only improves agility, but also ensures your community bank leaves nothing to chance.

Take the case of New Mexico-based Lea County State Bank, a three-location, $245 million-asset community bank whose leadership got tired of pulling 17 spreadsheets and 18 different reports to accurately gain its loan portfolio performance—a process that was not only cumbersome, but also took two people four days to complete.

With an end-to-end portfolio management technology and a full suite of credit systems, Lea County State Bank can handle the same reporting in about two hours, and gain visibility into its loan data, all the way to the account level. It can stress-test certain segments, perform risk-rating migrations and do everything quickly—including making auditors happy.

With the right partner, even a smaller institution can get the tools it needs to compete with the big guys, and scale up as it grows.

Smart sourcing: It’s not just for IT anymore. Finally, community banks are turning to smart sourcing to get the talent and resources they need for non-core, non-strategic functions. The most familiar scenario is technology outsourcing, where, instead of running their systems in house, community banks turn hardware and software management and maintenance over to one trusted, sole-source provider.

Now, the concept has expanded to include sourcing specialized talent—particularly in the legal and marketing analytics areas. Community banks are now looking to their partner of choice to gain access to these seasoned pros as needed, in a shared cost, shared services model.

Hawaii National Bank, a $606 million-asset community bank in Honolulu, went with one provider for the purchase and ongoing management of its all of its technology, including core processing, Internet/mobile banking, commercial lending, business intelligence and other ancillary systems. Not only does this move offload the day-to-day IT burden of keeping an increasingly complex mix of technology running, but it also ensures bank customers get a more consistent experience across all channels. With this approach, Hawaii National Bank gains efficiency through automation and can now focus internal resources on developing competitive strategies and serving its customers.

In this new market environment, opportunities abound for community banks with the agility to respond to changing customer demands. Scalable efficiency, resilience in risk and smart sourcing are three ways community banks can gain the speed they need to stay in the game—and win.