08 May 2006

Memphis Business Journal - May 5, 2006

by Mavis Scanlon

Enter a bank chief information officer’s world: Beefing up data security, improving infrastructure and adhering to regulatory measures are expensive budget items that are top of mind. Going paperless and updating and streamlining business continuity plans should a disaster — natural or otherwise — strike, are also priorities.

As hacker schemes have evolved, so has the level of banks’ security software.

“In effect we are hacking ourselves and going in and fixing” the problems we encounter, says Michael Roberts, chief information officer for Alameda, Calif.-based Bank of Alameda.

Roberts expects his firm’s information technology budget to increase by about 70% this year. A Voice over Internet Protocol (VoIP) telephone system accounts for a large portion of the increase, Roberts says, but the majority of the increase is security related.

Banks of all stripes have to keep up with behemoths such as Bank of America N.A. and Wells Fargo & Co., says Aaron Silva, national alliance manager at South Coast Metro, Calif.-based Compushare, Inc., which supplies IT security and compliance software to community financial institutions.

“There is more pressure to enhance the relationship with the customer, and the best way to do that is through technology,” he says.

In 2005, banks spent about $50 billion on information technology, according to TowerGroup. The Needham, Mass.-based research and consulting firm expects that figure to increase 24% by 2009 to $62 billion, with more than half of that being spent on consumer banking systems.

“Online banking has become a staple item,” says Lee Wines, CFO of Walnut Creek, Calif.-based Bank of Walnut Creek, which last month launched an updated Web site.

In addition to online banking and bill paying features, which Wines says it offers at no charge for competitive reasons, the bank is moving toward allowing customers to apply for loans in a secure online environment.

Three previous versions of the bank’s online home were updated as technologies improved. The latest site was no small project. The total investment was north of $25 million and was a year in the making, Wines says. The bank’s roughly $1 million in direct IT expenses on software and hardware amounted to between 10% and 15% of its approximately $8 million in 2005 net income.

“I do not see any drop-off,” he says.

The Bank of Walnut Creek’s other priority IT items include setting up offsite backup facilities. And in the last year the bank made a big investment in loan information software, Wines says.

Data security, which all banks are eyeing closely this year, thanks in part to dual-factor authentication regulations that go into effect at year-end, is another high priority.

IT prerogatives are obviously different at different banks and shift from year to year. Regulatory compliance related software is typically a large IT budget item, but some banks made investments earlier than others.

“I expect (IT spending) to continue to increase,” says Maureen Young, a partner in the bank, commercial and structured finance group of California law firm Bingham McCutchen LLP. Ongoing data breaches and security troubles at the largest financial institutions are helping drive that spending, Young says.

“What’s clear is that user name and password is no longer going to be deemed sufficient for consumers doing online banking,” she says. “It’s a very interesting time for bank IT investment, because there are a lot of different and moving paradigms. The interagency bank guidance really allows banks to take a step back and decide what type of security will be allowed.”

To date, no dominant program or system for dual authentication has emerged. And because Internet fraud and computer crime comes in so many flavors, from phishing and spoofing scams to Nigerian money schemes and fake lotteries, banks are experimenting to see what works.

“Unfortunately, it’s a moving target,” says Roberts at Bank of Alameda.

In many ways, technology has leveled the playing field for smaller banks, allowing competition with larger institutions.

Wider adoption of imaging and remote capture of deposits will drive further efficiencies. Where smaller banks are having a harder time keeping up is in the areas of compliance and security spending.

“If we are able to come up with better and more secure transactions, that would over time cut losses” due to fraud, Young at Bingham McCutchen says, and thus increase a bank’s efficiency. “Right now we’re not in a spot where security investment is making a difference in preventing fraud losses.”

It’s a scary thought, and one that will continue to drive spending on technology.

mscanlon@bizjournals.com | (925) 598-1405