Rapid consolidation in the banking industry is creating a growing band of regional banks that find themselves stuck in a core banking solution market that isn’t fully capable of serving them. In recent years, IBS technology and digital strategy have become integral parts of the bank shareholder value discussion. However, for the 90 or so large regional banks in the $10 billion to $50 billion asset size range, core banking solutions providers remain ill-equipped to assist regional banks in enabling the execution of evolving innovative banking system technology strategies.
As banks have consolidated, so have the core baking technology partners serving them. Let’s imagine how concerning and tenuous it must be for a regional bank CIO looking to execute and innovate in today’s banking vendor market with the following options available to them:
FIS has captured a dominant share in the regional IBS banking space with its IBS core platform (formerly Metavante). However, this share has been gained more by competitor weaknesses than new FIS’s innovative banking strengths. Scalability and feature-rich commercial banking functionality have made FIS safe from a core standpoint despite aging IBS software and platform architecture. However, the company’s slew of rollup acquisitions has failed to translate into any meaningful development and innovation. For example, regional banks would gladly take improvements in service level and capability over whatever “benefits” the Sungard deal brought them. “Innovation” to FIS is a multi-year effort to bring core banking architecture out of the punch card era and open up IBS to where it can integrate with other providers in a simpler, financially less punitive manner—something it should have done years ago.
The lack of execution on internal innovative banking was further reinforced when FIS dumped its long-terminal road map around its digital banking platforms for a new partnership with independent developer Zenmonics-branded Digital One. Now, a major portion of the regional and community bank industry must handicap whether FIS can execute on an ambitious strategy with a rapid-fire development road map after believing in a completely different channels story from the company for the past several years. To many clients, it feels like FIS is excessively focused on financial services and deals and missing the gritty product and relationship “soul” that was previously evident in acquired companies like Metavante, Sanchez and Systematics.
Bottom line: Regional CIOs want to see FIS get its client and development focus back and build bulletproof credibility executing Digital One while opening up its core banking platform to the best-of-breed world.
Fiserv executives must be kicking themselves for acquiring dozens of core IBS banking platforms over the past 25 years but still lacking a flagship banking product ready for the growing large regional banking operations. Management seems torn between emphasizing the newer-technology DNA core platform, which lacks the robust commercial functionality needed by larger regional banks, or pushing the more-established Signature platform, which boasts a solid regional bank client base but appears rudderless when it comes to innovative banking products.
Further muddying Fiserv’s core R&D picture are the Premier and Precision cores now seen in regional banks that acquired their way to beyond $10 billion in assets but bought those core banking platforms at much smaller sizes. Fiserv is simply too large to not mobilize a credible regional bank core strategy and bring forth some passionate IBS banking product people to give CIOs more confidence about the future.
Bottom line: Regional CIOs want to see Fiserv clarify its flagship banking product in the regional space and put real teeth into the road map that dictates how Signature or DNA can compete head to head with FIS on new deals. Fiserv also needs to fully execute on its strategy for IBS banking within its own products and third-party solutions.
In an oligopoly serving the regional banks, Jack Henry & Associates (JHA) comes with great desire but needs an enhanced technical strategy and delivery capability to truly line up with the more complex regional bank technology market. CIOs characterize this company as “strong, sincere folks,” but they are anxious about the overall enterprise technology story via proven core, branch/digital channels and integration at scale to be the regional bank platform of the future.
Make no mistake, JHA is seeing more clients over $10 billion now that its former $3 billion clients have grown through serial acquisitions. Helping the JHA cause, long-term efforts to improve its branch and back-office platforms (Xperience and Enterprise Workflow) as well as its retail and commercial digital platforms have finally come to market.
Yet, to win a new regional bank deal, JHA still struggles to make a case regarding its ability to serve a regional bank and key reasons a CIO should take a risk against the “safer” FIS. If FIS fumbles on Digital One, there will be opportunity for players like JHA in the innovating banking sector, but that credible technical path with proven ability to scale into larger shops better be there when the opportunity comes.
Bottom line: Regional CIOs want to see Jack Henry invest in the talent, technical road map and best-of-breed tools to make its IBS banking solutions well positioned for banks wanting a solid core banking software solution that can be integrated with best-in-class third party products.
With the tepid strength of solutions being offered by the big three oligopoly, regional CIOs are hoping that better competition and innovation of IBS software and products will come from global core entrants or new entrepreneurial upstarts. While there are headlines and initial point application installs going on from Temenos, Tata and Infosys, these companies are years out from a proven loan and deposit install at a sizable bank. The outcome of Temenos’ implementation at Commerce Bank is eagerly awaited, but without loans it won’t be a “full” install. Same for Tata at Zions Bancorporation, where only loans are live today. These global IBS software vendors are likely to make inroads first in regional banks with in-house custom code that gets peeled out one application at a time versus taking out the full-suite players like FIS, Fiserv Signature and JHA Silverlake early on.
Energetic folks like Chip Mahan and Frank Sanchez creating a more open core banking solutions platform at Finxact inspire the age-old love of cool new technology from regional CIOs, but in a world of compliance, vendor management and best-of-breed, these executives will maintain a low risk appetite when contemplating a core banking solutions switch. Another upstart, Nymbus, with its SmartCore, will face similar challenges scaling up toward the complexity of regional banks in the near term. Finally, whether merger-created global player Finastra can scale its acquired Phoenix core banking platform past the community bank space where it plays today is very uncertain.
Bottom line: Regional CIOs want to see new global and upstart players focus less on PowerPoint and architecture and more on using their new development efforts to get real installs. Get gritty on the hard issues of IBS software’s product functionality and regulatory compliance and make those early adopters real installs.
IBS Technology has become too important to the future shareholder value equation for regional banks to accept the mediocre ecosystem serving this market segment today. Major core players that have a lot to lose need to fix service and demonstrate a renewed interest in clients and technology as opposed to deals and finance. They need to create pricing and integration strategies that make sense to CIOs where best-of-breed is a non-negotiable reality, and they need to dump any sense of security that this market is safe for them. Without improvement, sooner or later some challenger will start gaining traction, talk among CIO peers will grow, and someone more aligned with IBS banking market needs will take share. There is a big, gonzo opportunity out there for someone to be the new technology partner of the growing regional banking segment.
11 thoughts on “Core Banking Solution Providers Are Failing Regional Banks”
Very interesting “bottom lines”. As a provider of workflow and CRE due diligence software we abut the “best of breed” issue frequently as executives tend to maintain a low risk appetite. And like some of the companies mentioned here there’s a tendency for the legacy companies to be complacent. I appreciate your insightful and candid views.
Nice article, good points! What are your views on the smaller regional providers that are long-standing (not newcomers like Nymbus, Corelation etc) and not acquired by the big four – such as VSoft, CSI, DCI, Nicola Banking System, IBT, FLEX, and so on?
I wrote about a consortium being formed to help banks negotiate with vendors two years ago https://bit.ly/2E0awE4 and more recently I talked with Kony at Money2020 and its CEO Tom Hogan said, “Among banking CEOs, there is almost unanimous disdain for the core providers.” The systems are seen as inflexible, overpriced, difficult and expensive to modify, but banks are locked into long-term contracts, averaging seven years, in an era when the technology change is accelerating.” https://bit.ly/2Sghh7w It does seem to be a problem.
Why no mention of Finastra?
Tanya, thanks for reading and for your question. The solutions that you mention aren’t typically found in (or marketed to) $10+ billion institutions so I didn’t include them in my post. However, a roundup of these providers would be a good idea for a future article!
Quintin what do you think of FIS’s core Horizon for a bank that recently crossed the $10B threshold and will be $16B in 2019 after announced acquisitions?
Jamie, thanks for your question. Size alone doesn’t tend to drive core decisions in regional banks–many factors such as fit with current/future product set, integration, service level, peers on the same solution, desired sourcing model, and more play into how suitable a given core is. Everyone’s unique, so I wouldn’t want to judge based on that info alone.
Larry, thanks for your question. In the U.S. regional bank space Finastra has solutions that augment core (LaserPro for docs, LoanIQ for complex credit servicing, etc.) but wouldn’t try to sell their Phoenix core targeted at community institutions into this market. They haven’t stated they want to bring any of their foreign cores to the U.S. either. So for this article I didn’t mention.
Interesting perspective. Large bueaucracies tend to get in the way of innovation, or at the very least struggle with changing how things have always been done. And while some find comfort in “bigger is better”, there’s a trade-off that often times becomes detrimental to growth. Innovation can only be captured when the organization blends visionary talent with technical talent…something traditionally done much better in the small-to-medium sized technology companies.
No mention of KeyBank replacing their non-real estate lending with Oracle allowing them to migrate off ALS?
Aubrey, thanks for your comment. We haven’t heard a go-live date on that install yet but yes, that was a noteworthy 2018 announcement.