Owning the Code

A core processing cooperative gives community banks an ownership stake

By Judith Sears

All community banks today face the information technology challenge of maintaining competitive functionality and services with limited operating budgets. Sometimes squeezed between the high fees of service bureaus and the costs of trying to maintain their own IT infrastructure, many community banks have retreated, limiting themselves to playing catch-up with the megabanks only on selected IT applications that fit their marketplace demographics.

Enter the Community Bankers Cooperative, a new not-for-profit member-owned and controlled co-op, bent on pioneering a new business and computing model. The model: cooperative ownership of core banking systems.

Still in its formative stages, Community Bankers Cooperative was underway this past summer when Waldorf Computer Systems, provider of BANCADO, a core banking system, went looking for a buyer. WCS’s owner, Leonard Waldorf, wanted to retire, but he knew that nearly any vendor that bought his company would only support BANCADO for a few years. After that, the vendor would likely drop the software system and require its client banks to convert to other software programs.

Waldorf discussed his plans to retire with a few community bank customers with which he’d developed strong relationships. Those community banks were eager to ensure the continuity of their core systems after Waldorf retired. “We’ve been using the BANCADO core banking system for 32 years,” says Sandra Dudding, CEO of The Farmers & Merchants Bank of Craig County, a $58 million-asset community bank in New Castle, Va. “It’s been a natural progression to keep using it.”

“We believe in this software and wanted to continue with it as long as we can,” adds Mary Howell, president of Maxwell State Bank, a $28 million-asset community bank in Maxwell, Iowa.

After a few phone calls and meetings, the wheels were set in motion to form the Community Bankers Cooperative and purchase BANCADO from WCS. The co-op, which will be chartered in Iowa, is launching with member community banks in Alabama, Virginia, Illinois, Nebraska and Iowa.

The co-op’s initial organizers, a group of community banks, decline to give the specific amounts, but they say that its member community banks will make relatively modest initial investments to join the co-op and gain the rights to use its core processing software. Member banks will also pay monthly fees that will support the co-op’s staffing, overhead and software maintenance costs.

“The concept is to make it affordable for banks to join the co-op,” says Mark Field, president and chairman of Farmers Bank of Liberty, an $88 million-asset community bank in Liberty, Ill., and a co-op board member. “This is going to be banks helping banks, not a for-profit vendor looking to sell out at an obscene profit some day.”

Field says the co-op should be particularly attractive for owner-operated community banks, because owners can “better appreciate the fact that whistles and bells come at a price.”

The BANCADO software will run as an in-house system, running on individual members’ servers, not a service bureau. Pacific CodeWorks Inc., a San Francisco-based company that provides an image-processing solution for the BANCADO program, is on board to provide technical support, including product upgrades and software development. BSI-Eagle Computers Solutions Inc. of Gardendale, Ala., which has served WCS for 30 years, will provide installation and help desk support to the co-op.

The participation of Pacific CodeWorks and BSI-Eagle in developing the co-op is designed to ensure continuity with current operations, and Leonard Waldorf also plans to remain involved to oversee the transition to co-op ownership and management.

At least initially, the co-op will not have any employees. Its founding board of directors, which is still forming, currently has six community bankers, including Dudding, Howell and Field, who are donating their time to the startup project.

While acknowledging that their venture is just getting off the ground, the co-op’s organizers are cautiously optimistic that the new model will deliver some major benefits to participating community banks. The first and most important benefit is cost savings, a major impetus for the co-op’s formation, they say. “We will be a low-cost provider, and we will help our independent banks to stay independent,” says Field.

Over the years, Field has made occasional price checks of the core banking system market. Based on quotes from competing core system providers, he estimates savings of nearly $50,000 annually for comparable services to those that the co-op is expected to provide.

“For a small institution like us, the IT and core systems costs are so far beyond what we can really afford,” Dudding offers. “By banding together, we can keep those costs down. That’s the premise of the co-op—to keep it that way.”

The co-op’s joint ownership model also is designed to give member banks the significant advantage of wielding more influence over software development and rising costs in the future as the co-op grows, Field says. Smaller community banks often have less leverage with service bureaus or third-party vendors and can sometimes pay a steep price for their relatively limited scale, he says.

“There’s been a lot of consolidation in this industry and customers have been forced to migrate to other software,” Howell adds. “The co-op allows us to continue with this software and not be held hostage.”

The co-op’s members will have a voice in directing software development to meet the needs of its member community banks, Field says. “We will go where member banks need us to go to keep them competitive in their own marketplaces,” he adds.

Rob Tarte, president of Pacific Codeworks, adds that he believes the co-op model will facilitate simpler software development cycles. He points out that most core banking software is developed for multiple banks of a variety of sizes and with widely varying practices. The resulting software has to be complex to be able to accommodate such variety.

In contrast, members of a data processing co-op can agree to and establish some standard best practices, which will aid the core software system’s ongoing development, Tarte says.

“Standardization of best practices feeds back to how code is developed,” he explains. “It’s a simpler software development cycle.” In IT, as with most things, simpler usually translates to cost savings.

However, Tarte emphasizes that the co-op’s member community banks will retain the flexibility to add their own functionality if they so desire. “Some banks may want to have their own IT efforts to customize applications, generate special reports or capture special information,” he says.

Another advantage co-op members anticipate is the support they’ll get from each other. “There will be great value in creating a true community spirit amongst the operations and the IT folks at the user banks,” Field says, “to enable and encourage them to communicate and share ideas and come up with creative solutions to IT issues. You’re talking banker to banker, not going through a vendor relationship.”

Community Bankers Cooperative may have begun out of necessity, but Tarte, for one, believes that necessity may produce a breakthrough invention. “I see this as being a real game changer,” he declares.

Tarte points out that many years ago data processing systems were so large and expensive that only major banks could afford them. Today, much of that functionality and technology has moved to the server level, a shift that still takes a sizeable IT staff to run. However, a cooperative—particularly one that owns the code its members use, that combines member resources and divides the cost of IT services across several institutions—will have increased financial resources while reducing the operating expenses for each participating bank, he says.

“By pooling these resources, the community banks can stand with the large banks in terms of IT functionality and processing ability,” Tarte continues. “This is brand new—banks being in control of their own destiny. They only stand to win.”

Time will tell if the fledgling co-op fulfills expectations. But members of the new Community Bankers Cooperative believe it’s a risk worth taking. “The key is going to be that a lot of us stay involved and oversee it and make sure it does work,” Howell says.

Judith Sears is a writer in Colorado.