Small Banks, Big Tech
Bank-owned data processor gives community financial institutions technology edge
By Matthew Doffing
TWO WISCONSIN BANKS − Baylake Bank, Sturgeon Bay, and Bank First National, Manitowoc − have created a data processing and e-banking provider which is helping community banks beat the risk, complexity and cost of technology. Increasingly, technology plays a central role in relationships with customers – both in retail and business banking. Alongside this trend, the cost and complexity of providing the tech-based products customers expect has steadily increased. To deal with these trends, banks often have their choice of mutually exclusive options. They can either buy the data processing and e-banking services of a vendor or they can host processing in house; both have pros and cons. A vendor can spread out the cost of staff, hardware and software over many banks. Economies of scale help a vendor provide a better product, albeit standardized. In-house processing, however, offers more options for customization giving a bank more control. The downside is that a bank shoulders the risk, complexity and cost of running its own processing. With their data processing company, called UFS, Baylake Bank’s CEO Rob Cera and Bank First National’s President and CEO Mike Molepske have created a provider that walks down the middle between outsourced and in-house processing. UFS allows its community bank customers to offer big bank tech combined with the nimble service of a small bank.
Scale and service
The Grafton, Wis.-based UFS was founded in 1991. Since then it has attained the economy of scale required to offer leading edge data processing, digital banking, cyber security, treasury management and other products. Today the company serves 56 community banks between $50 million and $1.5 billion in assets in Wisconsin, Illinois, Missouri and Arkansas. UFS represents $14 billion in assets. But the bargaining power that comes with scale isn’t all UFS has to offer. UFS can match the service level of in-house processing. It does so because its owners are UFS customers. They require UFS to be as nimble at data processing as they are at the loan negotiation table. Cera and Molepske want UFS to be a clone of the community banking model, only as a data processing company, the bankers said. Its model is to focus on serving a niche of small businesses – community banks.
“UFS’s entire livelihood is linked to these community banks. We have to do everything in our power to serve our niche; otherwise we won’t survive,” said UFS President and CEO Mike Tenpas.
Baylake Bank and Bank First National each own 49.8 percent of UFS; Tenpas owns 0.4 percent.
In the big leagues
Cera and Molepske expect UFS to provide a level of service that wins customers for community banks and UFS has delivered. Because of UFS, community banks have treasury management relationships with businesses that would have been way out of their league. An example is the $212 million River Cities Bank, Wisconsin Rapids, Wis., that has won a treasury management relationship with Heartland Farms, Inc., one of the largest suppliers of potatoes to Frito-Lay. Headquartered in Hancock, Wis., Heartland Farms is a 24,000- acre potato and vegetable operation. It grows roughly 400 million pounds of potatoes per year. The company wanted to work with a local community bank. But “our loan needs are substantially beyond a community bank’s capability and [we weren’t sure] a small community bank could serve the needs of our company for treasury management as well as a bigger bank,” said Jeremie Pavelski, the 33-year old president of the company. Pavelski, who worked as Heartland’s IT director before becoming president, is the fifth generation of his family to own and manage the company. Under his leadership Heartland has incorporated leading edge technology into its grading and shipping operations, irrigation, planting and harvesting. The operation even uses drones to monitor production. Pavelski wanted hiccup-free, leading edge tech in his banking relationship. When River Cities Bank approached Heartland, it had been with a regional bank for 15 years and Farm Credit Services also was courting the company. For Heartland’s approximate 2,000 transfers a month, Pavelski needed a treasury management portal that made it easy to audit the actions of his accounting department. He needed real time transfers between accounts with the ability to create saved transfers so that transfer instructions didn’t need to be entered for every ACH. Not only did Pavelski become a River Cities customer after trying its product, he has become an advocate for the bank in its market. “For me, the treasury management portal and the level of customer service is the deal maker. River Cities is very responsive in making it userfriendly. I am to this day extremely satisfied and my expectations are constantly exceeded,” Pavelski said. “Many bankers think they brand themselves with loans but loans are a one-and-done product. The real branding opportunity comes from treasury management; businesses use it every day.”
Beating the big guys
The ability to bank customers like Heartland depends on the quality of the banking vendor’s products and services, said Fred Siemers, River Cities’ president and CEO. UFS, however, isn’t just in the business of helping banks service treasury management, it also helps banks customize their offering. With the help of UFS, the $1.2 billion Bank First National has created a treasury management relationship with ACUITY Insurance, Sheboygan, Wis., a $3.5 billion, nationwide company offering business, home and car insurance. ACUITY processes roughly 4,000 transactions a day. “For a Wisconsin-based regional bank, ACUITY was one of their top three customers for treasury management,” Molepske said. “They do as many transactions in a day as one of our branches.” With its transaction volume, ACUITY can have as many as 200 stop payments a day. It needed an automated process via its bank’s treasury management portal for stop payments. It also needed a fast turnaround on payment files so that it could audit funds it received for fraud. “The treasury management product would have a direct effect on their cash flow,” Molepske said. “Everything needed to be automated and happen as efficiently as possible.” Bank First went up against two regional banks and one of the largest, nationwide banks. It won ACUITY’s business because it had two pocket aces. Its first ace was its community banking model. Its second ace was UFS’s IT experts who attended Bank First’s meeting with ACUITY and customized UFS’s treasury management service to ACUITY’s needs. “The larger banks could have served ACUITY’s needs, but they had only one way of doing it,” Molepske said. “UFS designed it to their exact specifications, with all the safety nets they required. “Essentially ACUITY skipped the bank; they dealt straight with UFS,” Molepske said. “With a large data processor, our customer would have been far removed from the IT experts. With UFS, the experts are right there and they can get the IT elephant to dance.” As a larger community bank with 11 branches in Wisconsin, Bank First’s return on assets and efficiency ratio is above average for a bank its size. Bank First had an ROA of 1.18 percent and an efficiency ratio of 51 percent at year end 2014. That compares to 1.06 percent ROA and a 63 percent efficiency ratio for U.S. banks between $1 billion and $10 billion in assets. Bank First also performs well next to its Wisconsin peers which averaged a 0.93 percent ROA and a 70.2 percent efficiency ratio in 2014. “Overhead is the primary component that drives ROA down for a bank our size,” Molepske said. “Cost savings and efficiencies from UFS play a big part in driving our performance.”
For a smaller community bank like The National Bank of Waupun, Wis., it is do or die when it comes to offering leading edge technology. The collaboration created by UFS is one more tool the $138 million bank can use to remain competitive, said Jerry O’Connor, the bank’s president & CEO. S i n c e a l l UFS customers use a common platform, one bank can give tips and help train another bank looking to launch a new product. The largest, publicly traded banks in UFS – the $987 million Baylake Bank, Bank First National and the $1.2 billion Nicolet National Bank, Green Bay – contribute by introducing fellow, and usually smaller, UFS banks to products. UFS’s pricing is similar to most data processors. UFS’s “unique offering is, however, that I pay for the base service but I get a lot of extra expertise and a community of shared knowledge in return,” O’Connor said. “Look at the learning curve on well-known software like Microsoft Excel,” O’Connor said. “I am proficient at Excel but I likely only know about 50 percent of what it does. Within that unknown 50 percent, there may be great tools that I could find if I had a team of experts to help. “For the mobile deposit capture that we will launch in the next few months, I have both UFS staff and my fellow community banks to help us get ready,” O’Connor continued. “In fact, some of my staff are going to another UFS bank this week to learn from them. UFS also had a team of people here looking for opportunities to develop our effectiveness. If I had to try to employ that kind of expertise in house, I could not handle the risk and cost of employing that kind of personnel.” The next generation of customers will not open an account at a bank that does not offer mobile banking products, O’Connor said. “That’s especially true when you compete as we do in a market against Wells Fargo, a retail focused credit union, a saving bank and another community bank,” he said. “If you are not participating in technology you will not be in this business in a short amount of time. People are bypassing computers and even tablets to mobile phones; even the baby boomers are becoming tech driven. As time has gone on, however, technology has multiplied in expense and complexity. It will cause consolidation if banks try to go it alone,” he said. Offering digital products is a major advantage in keeping customers, O’Connor said. “If you have a customer using two to three electronic banking services, you have a 90 percent chance of retaining them,” he said. “The large, nationwide banks know this. Without the convenience brought by their technology, their customer turnover would be much higher.” With the partner created by Baylake Bank and Bank First National, there is no technology The National Bank of Waupun cannot match, even from the largest, international banks, O’Connor said. “With UFS, we community banks are like one large bank,” he said. “We have that kind of scale without having to merge and without losing the service that wins us our customers.”
Originally appeared September 2015 • Reprinted with permission.