Combining The Internet And Imaging To Streamline Operations

Steve Vaughan's vision of his bank did not include stacks of papers on every desk and rows of file cabinets along every wall. With the opportunity to build a community-based bank from the ground up, this 24-year veteran of the banking industry envisioned a nearly paperless operation. New banks, such as Vaughan's Texas National Bank, aren't established everyday. Vaughan, president and CEO, says Texas National Bank is one of only two new banks granted a charter to open in Texas in the last two years.

The bank opened in October 1997; it is owned by 150 shareholders who live, work and raise their families in Tomball, TX. Located approximately 30 miles north of Houston, Tomball is home to some 8,000 residents. The town is in a fast-growing business corridor, which includes the world headquarters for Compaq Computers. The Texas National Bank serves a 10-mile radius of about 236,000 people. The bank currently serves 1,300 customers, 30% of which are small- to medium-sized businesses with gross sales of $12 million or less. Texas National Bank employs 14 people. The bank's assets have grown to $30 million since its inception.

Planning For Technology
"Banking overall is behind in its use of technology," says Vaughan. He attributes this to three factors: people's general resistance to change, which technology brings; the cost of adopting new technology; and, in the case of imaging, the amount of historical data the banks would need to scan. Because Texas National Bank is a new operation, Vaughan did not have to worry about imaging historical data. He overcame the other two factors by hiring technologically savvy employees and incorporating technology costs into his startup.

To help keep pace with technological advances, Vaughan seeks advice from one of his board members, a computer reseller. "I also surf the Web and research on my own," says Vaughan. "I recently flew to Atlanta to learn more about a vendor's new software product. I want to see it, feel it, find out what makes it tick," he explains. "I may not buy it now, but it will be added to my ‘toolkit' of solutions for possible use in the future," says Vaughan.

Regarding his bank's use of technology, Vaughan says, "I knew that if I wanted to incorporate technology, I'd have to do it from the start." Vaughan insisted upon a first-class LAN (local area network) as well as desktop workstations for each employee.

The bank uses an automated teller system that enables tellers to do more transactions in a shorter period of time. Consequently, fewer tellers are needed and customer lines are shorter. The system also reduces keying errors and keeps a running total of each teller's cash drawer. "At the end of the day, the tellers simply count the money in their cash drawers and press a button," explains Vaughan. The system does the rest, balancing the drawer and identifying any shortages or overages.

"Because the bank is new and has limited resources, technology, such as imaging and the Internet, offers many benefits," says Vaughan. For example, technology enables Texas National Bank to:

• Competitively operate within a niche – As a community-based bank, Texas National Bank specializes in small- to mid-sized commercial accounts. Typical commercial customers include specialty retailers, such as hardware stores, and professionals, such as orthodontists.

  "I'm planning to implement a system that will make it easier for commercial customers to do business with Texas National Bank. The system includes software that acts as an 'electronic cash register' enabling businesses to accept credit and debit cards and offer financing terms," says Vaughan. Essentially, it will allow Texas National Bank to operate as its commercial customers' accounts receivable department.

  Vaughan adds that smaller businesses often don't have the resources to evaluate the credit-worthiness of their customers. "The process, which includes pulling applicants' credit reports and scoring credit histories, takes only a matter of minutes. This allows us to bring sophisticated financing credit tools into our commercial customers' businesses. It frees our customers to concentrate on managing their businesses," explains Vaughan.

• Leverage the education and skills of bank employees – Vaughan isn't planning to add staff to the bank any time soon. "I have enough people to easily take the bank to $70 million in total assets in the next two years," says Vaughan. "The key is to hire people with advanced technical skills who have used Internet-based applications. You have to pay them more than the average bank employee," he admits.

  But, Vaughan adds, highly trained and experienced staff handle more customer transactions in a shorter period of time. "In the past, the general measure of bank employees was one employee for every $1 million in assets. That was the standard. Today, the standard is pushing more toward one employee for every $3 million in assets. Technology is a big part of this change," says Vaughan.

• Extend banking hours – "Texas National Bank is essentially open 24 hours a day, seven days a week," says Vaughan. "Customers can access their checking, savings, CDs (certificates of deposit), and money market accounts anytime using a PC with Internet access. Customers enrolled in direct deposit and online banking programs can also pay bills from their homes or offices. It's almost like having a bank branch office in your home," says Vaughan.

• Get information to customers more efficiently – Vaughan says mailing monthly statements and returning canceled checks to customers greatly adds to a bank's cost of doing business. Having tellers answer customers' questions, whether in person or by telephone, also costs a bank money. "Getting information to customers becomes very inexpensive when the information is Web-based," says Vaughan. "We put as much information as possible onto our Web site (www.texnational.com). Teller transactions cost approximately $5 each. Online transactions cost the bank pennies," explains Vaughan.

Incorporating Imaging In Bank Start-Up
One service Vaughan wanted to offer his customers early on was the ability to view canceled checks online. To do this, Vaughan planned to use document-imaging technology. Because the initial cost of the imaging system was high ($250,000), Vaughan opted to use an imaging service bureau. The problem was, the service bureau Vaughan chose did not have the imaging equipment needed for the job.

"The service bureau wouldn't invest in the imaging equipment unless the bank signed on as a customer. I wouldn't agree to sign on until the service bureau purchased the imaging equipment. It was a fight, what we call in Texas a Mexican standoff," he admits. Vaughan eventually won the battle. The service bureau made the investment in new equipment to accommodate Texas National Bank's business.

Since the first day the bank opened in 1997, checking account customers have had their checks imaged and made available online. One drawback to the current system is that the service bureau is based in Dallas. "It takes four days to send the checks to the service bureau and have them scanned. Once the checks are returned to the bank, they are indexed and posted on the Web site," Vaughan explains. His goal is to reduce the four-day lag time to one day by switching to a Houston-based service bureau later this year. Ideally, bank customers will be able to view their checks online the day they clear Texas National Bank.

The Concept Of A "Virtual" Bank
Vaughan has no plans to open additional branches, either freestanding or within supermarkets. He says, thanks to technology, he doesn't have to spend money to physically expand the bank.

Opening a small branch within a supermarket, for example, costs upwards of $80,000 not including staff. Vaughan foresees "virtual banking" using video and audio in PCs to connect directly with bank personnel. "You could be at work on your PC, connect to the bank via the Internet, and see the teller who will open your new account," explains Vaughan. Virtual banks could be located in shopping malls, airports and other public places.

Texas National Bank, for the time being, is not completely paperless. The bank is required to keep historical records, such as original loan documents. These are indexed and stored in an offsite warehouse. There are only four file cabinets in the Texas National Bank. Still, Vaughan may have slightly underestimated how technology would streamline his bank's operations. "We built the bank with three drive-through lanes. The problem is, the lines are never long enough to open the third lane," he explains. "Since so many people are banking online, maybe one lane would have been enough."