The unicorns of core banking systems have been running wild the past few weeks, and these frothy deals signal a future shift in how executives should view the world of financial technology.
First, Fiserv announced the acquisition of the remaining 80% of new core player Finxact at an eye-raising $800 million plus valuation. Before the dust settled, SoFi announced the acquisition of Technisys for a mongo $1.1 billion. These levels of revenue and EBITDA multiples have never been seen in the history of core banking platforms.
As new cloud-native, API-driven solutions come to market, the term “core” seems to live in the eye of the beholder. While both firms have strong underlying technology and development shops, neither Finxact nor Technisys has the functional requirements to service all consumer and commercial account types for most regional and community banks. And it doesn’t appear that either will have those capabilities anytime soon. Let’s be clear Gonzobankers, these deals are NOT about massive numbers of bank core replacements.
Instead, these deals speak to the value being placed on tech stack players able to rapidly launch niche financial use cases in three weeks instead of taking a bank through a big-bang core conversion in two to three years. These “new core” players are focused on opportunities around: 1) supporting digital challenger banks with a focused product set; 2) servicing the embedded finance arm of an established e-commerce merchant; and 3) marrying up and supporting novel value exchanges that blend automation, analytics, and money movement, i.e., rewards, cryptocurrency, gaming, and even micro-credit capabilities. The valuations of these deals should signal to bank executives just how much the free market views the future of finance as very much unbundled from our traditional industry structure.
Let’s take a closer look at each deal:
Fiserv was already a part owner when in early February it acquired the remaining portion of 2016-founded cloud-based Finxact. Fiserv had previously been recommending Finxact as the occasional digital bank core alternative to its traditional DNA, Premier, and Cleartouch core platforms. Since acquiring the DNA product (via Open Solutions), Fiserv has promoted DNA and its relational database as its most contemporary tech solution. However, this platform was never designed to handle the just-in-time use case delivery in the digital-first and banking-as-a-service (BaaS) worlds.
Enter Finxact. Beyond all the cloud-native and technical buzzwords, the system was functionally designed by core system legends Mike and Frank Sanchez in concert with Live Oak Bank to be “headless” and highly “componentized.” In principle, this structure was designed to deliver faster and simpler mashups between traditional payments, savings, lending, and off-balance sheet products. In turn, many of the partners Finxact used to deliver on its platform (Marqeta for payments issuance, Savana for workflow) aren’t your grandpa’s Oldsmobile of vendors. The concept was to build a banking component ecosystem like Salesforce has done with CRM and business process automation.
At a total valuation of $812M, it’s a staggering value for a player with 18 clients in various forms and stages of implementation. Cornerstone’s best guess is that this deal came off at 20 to 30 times revenue! This is an unusual historic deal for Fiserv. While Fiserv has shown willingness to pay up bigtime for acquisitions, it has typically been for mature companies with long client lists and lots of free cash flow.
With a fast-growing, addressable market of fintechs, challenger banks, and BaaS players, Fiserv took a leap of faith to chase this market with a player it already knew. Moreover, with the direct industry investment from the American Bankers Association and view of Finxact that Fiserv had with client Live Oak Bank, the deal likely seemed less speculative than a garage core startup. Finally, it’s likely Fiserv didn’t view this deal as cannibalization of existing core as much as it widens the company’s market to non-traditional players and may even provide additive opportunities to Fiserv clients seeking to transform by creating a challenger division to innovate around their current bank operations.
Fiserv’s hurried move into the new core market was mirrored by a same-day announcement from rival Jack Henry & Associates (JHA) that it had completed an innovation program to also componentize its services in a cloud-native tech stack, aiming toward an environment that can interoperate with legacy JHA cores like Silverlake (bank) and Episys (credit union). This tech is also aimed to serve as the challenger bank or “sidecar” core offering for the digital subsidiaries of community and regional banks.
The final “big three” player, FIS, had already made earlier announcements about its Modern Banking Platform offering with Fifth Third and BMO Harris. FIS is hoping the progressive evolution pitch works for larger community banks busy with digital transformation and M&A activities that may have less stomach for moving core platforms.
So, while FIS and Jack Henry are promising that internal builds will take clients into new tech, Fiserv stayed true to its roots and took a more acquisitive approach. It’s way too early to tell which of the Big 3 will gain credibility in this new tech arms race.
The mid-February shot over the bow for SoFi to acquire the 1995-founded Technisys for $1.1 billion (~30 times revenue) in stock was part of SoFi’s ambitious vision to become the “AWS of Fintech.” SoFi had familiarity of Technisys through prior use of the system and through SoFi’s prior acquisition of digital payments provider Galileo. Galileo has rapidly grown to serve a huge chunk of the neobank market, and SoFi recently completed the acquisition of California-based commercial bank Golden Pacific Bancorp, now rebranded SoFi Bank, N.A.
Win, lose or draw, SoFi’s battle plan in fintech should wake up all traditional bankers. Cornerstone’s view is that SoFi seeks to be the Amazon and not just the AWS of fintech. SoFi is offering finance directly to both consumers and businesses while offering the platform to power the diverse players in a nascent financial ecosystem.
Technisys is known to be a smart digital development shop, but not really a “core” in the traditional U.S. outsourcer variety. The company has a few niche U.S. installs, a portfolio of international banks, and a long history of doing custom build work tying digital and back-end systems together.
While these new core players can create a parameter-driven code base built with new tech and whip up simple services around interest calculations, principal payments, and transfers, these platforms may struggle like all others with the deep feature functionality requirements of commercial lending, mortgage, treasury management, and card processing businesses.
SoFi does not want to be a traditional bank outsourcer. Rather, it will focus in the near term on the explosion of fintechs looking to embed some basic consumer and micro-business finance capabilities. With SoFi acquiring a commercial bank, however, full commercial could follow in the medium term.
Putting wild valuations aside, these two deals should provide insights to bankers and the technologists who support the industry. These deals are about the rapid adoption of new fintech business models and embedded finance options in the market right now. The action in tech isn’t in the legacy banking industry, but rather in the near infinite use cases across all industries of anything that looks like, sounds like, and smells like banking.
It’s hard to say whether these deals will have a material impact on the traditional core market for community and regional banks anytime soon. Addressing the complex legacy web of systems in these players is a long-haul that may leverage some of these platforms over time. Look at Zions’ TCS core modernization project – 10-plus years and an estimated $500MM investment and it’s still not done. Temenos is still slowly underway at Commerce Bank in Missouri. Fifth Third’s (FIS) and Chase’s (Thought Machine) core modernizations will likely have a similar timeline. So yes, these solutions could be replacement cores in 10 years, but, in the mid-term, the impact of these deals will likely further segment cores and reinforce the value of open APIs.
How soon will Finxact impact Fiserv’s core roadmap for banks on the faster growing DNA and Premier platforms? Who knows? It could mean that other solutions with smaller install bases like Signature and Cleartouch see more significant fading with the new Finxact sibling being touted at Fiserv.
Fiserv’s main focus will be to position Finxact toward the broader “banking as a platform” tech market. For traditional banks, this may mean possibly running a new core to support specialized subsidiaries and BaaS businesses alongside a traditional core holding up the legacy bank.
It’s hard in the near term to imagine SoFi viewing traditional banks as its most attractive growth market.
The industry is now buzzing around the stable of remaining “next gen core” players the likes of Synctera, Treasury Prime, Nymbus, Mambu, Thought Machine, and Q2’s Helix. With the frothy Finxact and Technisys valuations, it’s likely that all of them are being courted by investment bankers with champagne in hand.
Through all the fun of bank techies getting rich and new players throttling old models, bank technology is still a mess of hard work. To quote a historic IBM commercial, “There is no universal business adapter.” So, Gonzobankers, it’s time to be a gritty student of how bank tech is shifting – but don’t expect miracles overnight. Keep your team focused on showing up every day to fight the good fight with shiny new tech integrated with crappy old tech and try to remember the Zen-enlightened view that this journey will never, ever be over.