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Outsourcing Allows Small Banks Access to the Top Technologies

Community banks, which are in a constant battle to capture business from the big banks, find that when it comes to technology, it’s almost a level playing field.

While the smaller lenders readily admit they cannot hope to build the kind of technology systems operating at the biggest institutions, they can effectively compete by outsourcing those functions.

“I can’t think of any product that is offered by the big banks that small banks do not or cannot offer,” said Greg Mitchell, chief executive at Chula Vista-based Pacific Trust Bank, with about $860 million in assets. “With the plethora of third party vendors, you can get pretty much whatever you want.”

PacTrust and virtually every local community lender contracts with a third party vendor for the core data processing functions every bank must have to process all its transactions and run its main business lines, and all the automated services customers expect to receive from every bank.

For example, PacTrust, which uses Fiserv Inc. for its IT systems, offers customers such services as remote-deposit capture and online banking along with real-time deposit. For the bank to construct its own core processing system with all these services would be cost prohibitive, Mitchell says.

“You can’t afford to build your own IT platform,” he said. “The hardware would be cheap. It’s not the hardware; it’s the people and all the monitoring. That would be the real cost.”

Mitchell didn’t divulge what his bank pays for the processing service, but noted that the cost is significant, and has been rising in recent years due to security concerns and a continuous increase in new regulations.

Scott Parker, chief executive at Vibra Bank with about $90 million in assets and with a single office in Chula Vista, agreed that technology costs have increased, but the “effectiveness and efficiencies have also gone up at least as fast.”

The contracted IT services that Vibra gets from Jack Henry & Associates Inc. are virtually invisible to customers, and have been working well since the bank was launched in 2008, Parker said. “It’s a competitive environment they’re operating in and a demanding business so there’s not a lot of room for error,” he said.

Larry Hartwig, chief executive at California Community Bank in Escondido, said while his bank embraces technology that benefits both customers and workers, the costs have “at least doubled” since the bank opened in 2003.

The reasons for the increase in costs are that CCB is growing and the number of transactions it handles is exceeding the package the bank has with Fiserv. In addition, banks are facing additional costs for complying with regulations.

CCB is about to purchase an anti-money-laundering software, which makes it easier to spot fraudulent activity, Hartwig said. What was done manually in the past will now be performed automatically, making the filing of required reports more efficient, he said.

The added software will cost about $450 a month, he said.

Ted Monzingo, chief executive at Balboa Thrift & Loan with about $200 million in assets in Chula Vista, said his institution is very different from many other community banks because its main customers are auto dealers, and it doesn’t offer checking accounts.

He estimated his technology costs have also risen in recent years, and were averaging about $60,000 to $65,000 monthly.

While community banks aren’t operating and maintaining their own core processing systems, the vendors have so many backup systems and redundancies built into them, it would be difficult to take them down, said Mike Perry, chief executive at San Diego Trust Bank, with some $200 million in assets.

Should a glitch threaten the system, operations are automatically re-routed to servers in different locations. “We also have different servers internally so if something happens, we can switch over to a site in Encinitas. We have backups to their backups,” Perry said.

Paul Rodeno, chief executive at Security Business Bank of San Diego with about $200 million in assets, said much has changed from the days a few decades past when many community banks did their own check processing. “That’s almost 100 percent gone as far as the community bank sector,” Rodeno said.

The national vendors like Jack Henry, which his bank uses, are providing a level of service that easily equals whatever the largest banks have, he said.

It removes an essential but noncore operation from the equation, and that’s a good thing, Rodeno said.

“None of us want to be in the data and item processing business. We’re bankers.”

Send any news about local financial institutions to Mike Allen via email at mallen@sdbj.com. He can be reached at 858-277-6359.

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