Banks have a choice when it comes to technology: Do it yourself or have someone do it for you. But for small and medium-sized banks, it’s not really a choice at all.

“A small bank may feel they need to offer Internet banking, but they don’t have any Internet expertise,” said Kathy Burger, editorial director at Bank Systems & Technology, an industry publication. Without a host of programmers and IT staff to support the development of a sophisticated in-house program, smaller banks need to outsource much of their online banking and back-office operations.

“Technology is a major factor in a bank’s success,” said Arbi Barseghian, senior business analyst at IndyMac Bank in Pasadena.

With $16 billion in assets, IndyMac Bancorp Inc. is far from a small community bank. But it’s not quite big enough to develop its own technology. “The type of services we wanted to provide, and the types of services you need to be ahead of the game, takes up a lot of resources and is quite costly,” Barseghian said.

When IndyMac launched into online-banking four years ago, it outsourced to Westlake Village-based Digital Insight Inc., one of a handful of companies that offers specialized online technologies for banks.

“For a long period of time there’s been an un-level playing field,” explained Jeff Stiefler, chief executive of Digital Insight. Smaller banks and credit unions could offer the local presence and customer intimacy, while the larger banks offered products and services that small banks couldn’t.

“In the last five years, those traditional lines of competitive differentiation have blurred a whole lot,” Stiefler said.

A host of companies offer back-office technology services and online banking platforms. Besides Digital Insight, others include Chantilly, Va.-based Online Resources and Portland, Ore.-based Corillian Corp. The Banking Administration Institute lists about 20 companies that provide online services to banks and credit unions, and another 20 to 30 that provide back-office technology.

“The technology available does make it easier for a bank to get its operations up and running,” Burger said, citing software packages that can manage and host data. “It’s not literally plug-and-play, but you can start fresh with the latest and greatest.”

Indeed, one of the biggest challenges for older, established institutions is updating their “legacy systems” or worse, integrating new systems into existing platforms.

Affordable technology


Tech companies actually manage and host a bank’s Web site, with fees determined by the number of users. The startup fee for such a service can range from $40,000 to $100,000 not bad when compared to the costs of hiring an IT staff to spend months developing an internal system.

The goal is to offer service that can compete with larger banks. A nationwide survey last year by Grant Thornton LLP found that 57 percent of small banks (under $500 million in assets) offered 24/7 online account access, while 30 percent of small banks offered online bill payment 24 hours a day. By contrast, 97 percent of large banks offered 24/7 online account access and 94 percent offered round-the-clock online bill pay.

Earlier this year, San Diego-based California Bank & Trust began offering a remote check deposit program to its small business customers. Customers deposit checks by scanning them in their own office. The image is then transmitted to the bank for verification, and the money is deposited in the account within a day.

Charles Wood, president and chief executive of the newly minted California Business Bank in Los Angeles, plans to adopt the same type of technology. “We have embraced technology that is as good as large banks, if not better,” Wood said.

Small banks used to be bound by the number of branches, but online banking can extend a bank’s reach much faster and more cheaply than traditional marketing channels. IndyMac’s branches are concentrated in Southern California, but in recent years its customer base has exploded all over the country.

“Any time you can eliminate a piece of paper the transaction gets cheaper,” said David Primes, partner with Sobul Primes & Schenkel, technology and cyber security accounting consultants that work with financial institutions.

“A bank starting out today can say from the beginning: ‘Our internal systems are gong to be built to do these types of transactions,’ instead of having to add it afterwards.”