Thrift Thrives on Low Tech

It's one of the West's fastest-growing savings and loans, with 119 branches in eight states and $7.4 billion in assets. Yet it owns no automated teller machines. It has no online banking. No voice mail. No "press 3" automated phone system. Typewriters still sit on desks at headquarters, and there are only five Internet-connected PCs.

So, how does this business survive?

Superbly, says Washington Federal Savings and Loan Association in Seattle, which last year reported record earnings of $144 million, a 27% increase over fiscal 2001. At a time when critics are questioning the value of IT, Washington Federal seems to be proving those contrarians right: Less is more.

Washington Federal keeps its technology spending down to 1% of its annual operating expenses and has a 1980s-style IT department of seven.

"We say, 'Don't spend a dollar when a dime will do,'" says Roy M. Whitehead, president and CEO.

Whitehead boasts that Washington Federal has the best efficiency ratio in the thrift industry: 18%, compared with the industry average of 45%. That means that while other thrifts spend 45 cents to produce $1 of net revenue, Washington Federal spends 18 cents (including the 1 cent for IT) to earn a buck.

"We measure any investment—whether in people, in brick and mortar, or technology—relative to the impact it will have on our efficiency ratio," says Whitehead.

'High-Touch' Service

One reason Washington Federal can spend so little on IT is that it has a simple, low-tech collection of services: passbook savings, certificates of deposit, money market accounts, interest-bearing checking accounts and fixed-rate home mortgages.

"We use technology when it allows us to deliver a higher level of customer service more profitably," Whitehead says. "However, our customer base is one that is older and probably longing for 'high-touch' levels of service that they can't get at other institutions, which seem focused on delivering product at the lowest per-unit transaction cost."

So Washington Federal employees answer their own phones. And if they don't use typewriters, they use the WordPad applet that comes free with Microsoft Windows 98. The company's Web site provides customer and investor information, with a single e-mail contact for inquiries.

"The whole concept of not having a high-tech environment isn't particularly new, but it seems [Washington Federal has] raised it to an art form," says Jerry Silva, an analyst at Needham, Mass.-based TowerGroup.

So, what does Washington Federal's IT chief think of this low-tech operation? "You really have to let go of anything that's 'cool' or 'gee whiz' or 'would this be great,' " says Terry O. Permenter, manager of information systems. "And you have to say, 'What really makes sense for the bottom line?' Sometimes that's frustrating, because that 'cool, gee-whiz' stuff is pretty fun. The discipline of our business model is pretty powerful." Permenter started working at the thrift as a programmer 21 years ago. "I am very proud of Washington Federal," he says. "We are so off-the-chart that people have a hard time believing it."

Whitehead acknowledges that technology produces efficiencies and increases productivity in many environments; he joined Washington Federal in 1998 from high-tech Wells Fargo & Co.

"On the other hand, we have a very simple business, and the key to our profitability is our efficiency," he says. "A simple business requires a simple technology platform."

Sometimes, however, even Washington Federal has to upgrade its systems. Two years ago, the company decided that it needed to upgrade the teller hardware and software that's connected to its 20-year-old core banking system.

Why? Because it was no longer possible to find parts to repair the old teller PCs, which used the ancient Z80 chip and CP/M operating system. The last units Washington Federal had acquired were bought by the pound as scrap and refurbished, Permenter explains.

So in November 2001, the company installed a new teller and branch-automation system from Benchmark Data Corp. in Roswell, Ga., which was willing to scale down and simplify the system to meet Washington Federal's need for speedy customer service.

Homegrown Cobol Rules

Washington Federal didn't want to replace its core banking system, though, so it was pleased to find that the Benchmark system was compatible with it, recalls Permenter. The banking system runs on a Hewlett-Packard Co. fault-tolerant S76 server with homegrown code that was written in Cobol in the late 1970s. "Things like Java and XML get a lot of press, but most of the world's real business still happens in Cobol, and I suspect it will after I retire," Permenter says.

When it comes to advanced technology such as the automated credit-scoring models used by other financial institutions, Whitehead remains suspicious. He notes that Washington Federal's mortgage delinquency rate is 0.77%, compared with the industry average of 3.4%.

"Looking at those numbers causes me to wonder over the long haul how effective that technology will be in managing risk," says Whitehead. "Technology is a wonderful thing if it works. But if it doesn't work and it's widely applied in society or an industry, it can lead us all right off a cliff."

Winkler is a freelance writer in Seattle. She can be reached at

Old-fashioned account record book
At Washington Federal, where "high touch" is more important than high tech, customers still get old-fashioned account record books such as the one above for passbook savings.

Off the Chart

BIG BANKS More than $70 billion 15% to 22%
MIDTIER BANKS $5 billion to $70 billion 9% to 18%
SMALL BANKS Less than $5 billion 4% to 10%
WASHINGTON FEDERAL $7.4 billion 1%

*As a percentage of operating expenses and overhead expenses, not including interest expenses

Source: Industry averages from TowerGroup, Needham, Mass.

Copyright © 2003 IDG Communications, Inc.

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