The guiding concept in banking these days, digital transformation, puts pressure on legacy core systems to enable banks and credit unions to meet ever-increasing customer service and efficiency demands. These financial institutions increasingly are taking note of innovative offerings by new core industry entrants that directly facilitate digital transformation.
These upstart companies, however, often are limited in scope and some of their solutions are difficult to incorporate into current core banking packages. The largest core providers increasingly recognize the dynamic nature of the industry and are adopting various strategies to satisfy their financial institution customers. So far, indications suggest these efforts are meeting with mixed success.
“There’s a general rule of thumb that as banks and credit unions grow in size they tend to become more demanding, to have more complex needs,” says Brad Smith, Partner, at Cornerstone Advisors, which helps financial institutions select core providers. “As that happens they often will look for things outside of their core for best-in-breed third parties.”
Smith confirms that the greatest frustration comes from smaller community institutions that feel like they’re limited to solutions that their core vendor offers, and that these solutions are not keeping up.
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That there is such dissatisfaction among banks can be seen in an American Bankers Association survey conducted in September 2020. It found the average satisfaction score for core providers was 3.38 out of 5, with 25% of banks saying they will likely leave their core when their contract expires.
Eight in ten financial institutions are at least considering adopting modern cloud-based core technology.
Reflecting the push toward digital transformation, 80% of respondents said they would consider migrating to a cloud-based core. Their main challenge with their current provider relationship was “the ability to customize.”
The grass that seems greener comes in the form of several new core providers, including Finxact, Nymbus and Mambu. “These newer next-gen cores might be a good option,” says Smith. “They’re lighter, they’re smaller, they’re more nimble, and built for digital. But the reality is they are still very new companies. The lifecycle for selling core systems, getting people converted and scaling, takes a long time. Most of those vendors only have one or two, if any, U.S. banks using their product today.”
Echoing this observation, Martin Whybrow, founder of NextGen Core Banking Solutions, observes that “Some [new core providers] will fail, some will be acquired, some will come to fill niches, and a few will enter the mainstream.”
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The Big Tech Providers Seek to Meet a Changed Industry
The established core providers recognize the changing nature of the industry and have adopted strategies to cope with it. “They are motivated to retain that business,” says Smith. “But it’s always a balancing act. If they have a thousand different banks and credit unions on their product they can’t meet everybody’s needs. They try to find the highest priorities, the most common needs.”
The Financial Brand reached out to the four largest full-service bank technology providers with questions as to how they are responding to the sharply and rapidly changing needs of their client institutions. The following sections reflect their responses.
In a sign of the times, FIS has revamped its approach to providing core systems through its Modern Banking Platform, described in company literature as “an all-new and purpose-built solution for digital-native banking.” Chief among its features is a “set of flexible, scalable, and highly configurable core banking product processors that are built on a common platform with open API access.”
“It is a brand-new platform taking advantage of all the latest and greatest technologies at the time,” says Andrew Beatty, head of Global Next Generation Banking at FIS. “It creates a level of flexibility in our architecture to be able to move as the industry moves.”
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This has been put into practice at Cincinnati-based Fifth Third Bank, which is replacing its legacy deposit and trust servicing with FIS components. “The approach that the bank has taken is one of an iterative approach versus a big-bang approach of immediately replacing everything,” says Beatty.
Jack Henry & Associates
Jack Henry & Associates prides itself on devoting most of its attention historically to community banks and credit unions, counting 8,500 institutions as clients. It also claims to sign up 50 to 55 new clients each year, according to CEO David Foss.
“We have built an open ecosystem that gives community banks and credit unions the power to leverage our technology or connect to other fintechs of choice, curating digital banking experiences that fit the unique needs of their businesses and communities,” Foss told the publication Finopotamus.
He points to Jack Henry’s Banno Digital Platform. “The things you used to refer to as internet banking and mobile banking, we don’t call it that anymore,” says Foss in an interview with The Financial Brand. “It’s one single digital banking platform.”
Providing a unified digital banking platform is a priority for Fiserv, which conducts “an ongoing dialog with our clients to help us better understand their evolving needs and strategic priorities,” says Dave McIninch, SVP, Strategy, Marketing, and Product Management.
“Our approach is to provide a variety of systems that serve a variety of clients,” he says. “For example, some client strategies value open architecture and deep customization, while others need something that is more SaaS [software as a service] oriented.”
Along these lines he mentions Fiserv’s Abiliti platform, which the company says provides financial institutions “a simplified, unified digital banking platform that makes life easier and guides consumers to more informed financial decisions.”
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CSI points to its “deeply integrated technology offerings,” says Giovanni Mastronardi, Group President, CSI Enterprise Banking Group. “What is even more important than specific product features is unparalleled depth of integration both with our suite of in-house products and services and those provided by our vendor partners.”
For example, he cites CSI’s digital banking platform that uses a single code base for all digital banking applications, such as mobile, online and business banking, “so users get the same experience regardless of the device they use to access their banking services.”
Mainstream bank technology companies, while pointing to their advances, acknowledge that startup providers have pushed them to modernize.
As for the effect of the rise of new core providers, the mainstream tech companies acknowledged the startups’ contribution, using words and phrases to describe them such as “innovation,” “modernization,” “healthy for the industry,” “open API,” and “evolving.”
“We certainly respect our competition from all angles,” says FIS’s Beatty. “Our decision to invest the way we invested in [Modern Banking Platform] is really a reflection of these new engines coming into the marketplace and bringing some of these technologies that need to keep us on our toes.”
Reshaping a Core Banking Strategy
With core banking systems rapidly changing and transforming as new and improved technologies reach the mainstream, financial institutions need to have a plan if and when it becomes imperative to change.
“Most banking leaders are aware of the significance of their core banking system, but many do not have explicit strategies tied to the core,” according to a McKinsey article. “As banking continues to be disrupted, the traditional core architecture may not be able to deliver for incumbent banks; and given the long lead times required for transition to a new core, they need to set their strategies in motion now.”
McKinsey suggests such strategies may be crafted by answering a series of five questions, each of which contain several alternatives to consider. In brief, these are:
1. Does your legacy core banking system require change? “Can the core system interface with other systems using modern communication methods such as APIs?”
2. What changes are possible to stave off a full transformation? “Contrary to popular opinion, a rip-and-replace is not the only possible intervention — and often it is actually not the right choice.”
3. If a core banking replacement is needed, what are the options? “Armed with a microservice-based architecture, the new core banking applications will become core enablers of the shift to this architecture. Traditional core banking providers have become aware of the need and potential inherent in a cloud-based microservice architecture; banking leaders should keep a close watch on developments here.”
Microservices are applications that are broken into small autonomous chunks that run independently and talk to each other via APIs, says Paul Taylor, CEO of Thought Machine.
4. What are the elements of a good core banking business case? “Traditional core banking replacements have tried to make their case by adding in cost-saving elements through process automation and clean-ups, but it has proven very difficult to pay for a core banking transformation purely through efficiencies.”
5. What does a financial institution need to do next? “There are several no-regret moves banks can make now:
- Make a list of tactical modernization needs for the current core banking system, but invest only if there is a burning need.
- Maintain general preparedness for a migration.
- If you can experiment with a new application, do so.
- Build up core talent.