Proposed Bank Merger Would Push Technology Envelope

The proposed acquisition of FleetBoston Financial Corp. by Bank of America Corp. blends economy-of-scale savings with an ambition to push the envelope in technology. Like Lewis and Clark two centuries ago, the companies seem intent on charting a trail across the North American landscape. With combined assets of about $930 billion, second only to Citigroup Inc., the company that would be created by the deal, announced Monday, continues a trend that began five years ago with deals that created Citigroup, Wachovia, J.P. Morgan Chase, and the present Bank of America. The banks hope to complete the deal in the first half of next year, although regulators from Connecticut and Massachusetts have said they will keep a close eye on it.

The new Bank of America would have operations spanning the continent. It would claim 9.8% of bank deposits in the United States and will be among the three largest banks in 21 of the 29 states in which it does business. The entity is "only a stone's throw from the national franchise that the banking industry has been waiting for," says Bill Bradway, an analyst with Financial Insights.

Bank of America's aspirations for a national franchise date at least to its 1998 merger with NationsBank, which established its presence on the East Coast. For its part, Fleet has displayed a healthy appetite for acquisitions but will now have to adapt to the role of fitting into a larger organization.

The game plan disclosed by the companies will generate more than $1 billion in cost savings by eliminating redundant systems, combining data centers, and other efficiency gains. The companies spend a combined $3.6 billion a year on IT. A chunk of those savings will be plowed into strategic investments, company officials say.

Bank of America is likely to migrate many of Fleet's operations onto its own systems for consumer banking, credit card, mortgage, Internet banking, and wholesale banking, Bradway says.When the deal is completed, Eugene McQuade will head the company's technology operations. Supporting him will be two savvy technology executives, Joseph Smialowski, vice chairman of technology and operations at Fleet, and Tim Arnoult, head of technology and operations at Bank of America. The two are likely to act as co-CIOs, one for the consumer banking side and the other for wholesale and investment banking, Bradway says.

Beyond attaining a national banking operation, the merger illustrates the potential for using technology to deliver banking services The retail network, featuring nearly 6,000 branches and more than 16,500 ATMs, will easily be the largest in the nation.

The deal comes at a time of renewed vigor in IT investment by banks. According to a report released Monday by the American Bankers Association and TowerGroup, technology investments by U.S. banks are trending away from short-term cost reduction toward longer-range objectives. Investment in branch renewal remains strong, the report says, redeeming the faith banks placed in their bricks-and-mortar assets at the height of the dot-com boom. Among banks with assets greater than $20 billion, technology spending is projected to grow at a 4.5% clip in 2004, up from this year's 4.0% growth rate. Spending on business-process outsourcing is expected to grow 28% next year, while software spending is expected to grow 9.4%.

The highest IT priority is customer-relationship-management, according to the ABA/TowerGroup report. The top five technology infrastructure priorities are replacing communications networks, PC and server upgrades, mainframe upgrades, and operations center improvements. Virus protection and intrusion-detection software are also high on the hit parade.