ZIFFPAGE TITLECalifornia Challenge

By Mel Duvall  |  Posted 2004-11-01 Print this article Print

Bank of America spent $47 billion to acquire FleetBoston to get a stout presence in New England and New York. The bank will spend tens of millions to convert its 1,500 branches onto its Model Bank platform, so it can provide the same services nationwide.

California Challenge
Still, the Florida experience didn't slow McColl's buying spree. In 1998, he seized the crown he had long been after–BankAmerica, the parent of Bank of America.

The merger of two companies with national ambitions created a bank with a presence on both coasts, and a footprint in fast-growing markets such as Los Angeles and Silicon Valley.

And more savings were to result. "There are real efficiencies to be achieved, probably to the tune of $2 billion," BankAmerica chief executive David Coulter said at the time. Eliminating duplicate computing systems and using the Model Bank platform could save $500 million a year. Among other things, software licenses for previous banking systems could be cancelled, and support personnel laid off.

Benefits from converting BankAmerica branches to the Model Bank system were to arrive in two years–an ambitious timetable, considering BankAmerica operated about 1,900 branches, including close to 1,000 in California.

But by late 1999, "tough budgeting choices" meant the conversion would be delayed until 2001. Other factors in the delay were a loss of $1 billion due to bad loans held by BankAmerica and from a scandal involving a New York hedge fund. In early 2002, officials said the conversion had been put off indefinitely, again because of financial considerations.

"When they came in," says a former integration project leader, "they said within a year we're going to have you converted. Then they said two years. Then they said we don't know when it's going to happen."

Money for the project evaporated as the Internet bubble burst and the post-Sept. 11 economy hit the ropes. Keeping up earnings, which had been $2.28 a share in 2000, became the company's primary goal, says Salamasick, the former Bank of America executive. "They do not miss their earnings-per-share numbers. Period."

The Model Bank's ability to handle the volume of transactions coming out of California, estimated at about 7 million a day, was a concern, according to Salamasick. But, he maintains, "We had figured ways around it.''

The solution, he says, was to spread the workload between three data centers in the bank's East, West, and Central operations areas, and then synchronize the results. No single data center or database would be forced to absorb all of the transactions.

Upgrading the California branches to the Model Bank was difficult and expensive, however. The branches connected to the bank's data centers primarily through 56,000-bit-per-second frame relay networks. About a third of that bandwidth was dedicated to running transactions for branch ATMs; the rest was open to any other branch business.

That was a sufficient amount of bandwidth–if you ran banking applications on servers in your branch, which is what the California branches did.

But Model Bank requires branch computers to tap directly into Bank of America mainframes to conduct everyday business. That meant enabling the connections to handle 1.5 million bits per second, which meant upgrading to T1 communication lines.

The cost to rewire branches and install the right networking equipment? As much as $77 million, or $77,000 per branch.

As the economy cooled further in 2001, management lost its enthusiasm for spending millions of dollars to convert the California banking systems, says Salamasick. The Barnett experience in Florida, after all, showed that money could be spent and the conversion still might not go well.

Speaking at a Citigroup Smith Barney financial services conference in January, Lewis said California is on hold indefinitely "until we get a major innovation in technology that would allow for [the type of] massive conversion that California would entail. It's a good running system as we speak, and there doesn't seem to be any big advantage to do that."

But without one nationwide retail banking system, Bank of America's promises of "higher standards" rings hollow to customers who actually want to take advantage of its services, in the same manner, in New York, Florida or California.

Plus, this puts the $500 million a year in technology savings in software, service and support costs on hold. As long as the California banks execute transactions on different databases from the rest of Bank of America's operations, account records have to be synchronized through a workaround. Transaction information is shuttled between mainframe computers after branches close for the day.

These overnight processes translate into delays of several days for actions such as depositing a check, says Jerry Thurman, a banking technology and strategy consultant. "I happen to be in Reno at the moment, and if I deposit a check here, it takes about five days to show up in my California account," he says.

But to Bank of America's benefit, the differences between systems are not apparent to most customers, most of the time. That's because customers, Salamasick notes, do the majority of their banking within state lines.

The workarounds in California have been largely successful in keeping customers happy. Bank of America was and remains the leader of the banking pack in California, the country's biggest market, according to data from the Federal Deposit Insurance Corp.

The bank's California market share in 1998, at the time of the merger, was 21.8% or $90 billion in deposits; in 2003, it was 21.6% with $132 billion in deposits. The state represents more than one-third of Bank of America's nationwide deposits.

Contributing Editor
Mel Duvall is a veteran business and technology journalist, having written for a variety of daily newspapers and magazines for 17 years. Most recently he was the Business Commerce Editor for Interactive Week, and previously served as a senior business writer for The Financial Post.


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