Banks have needed data processing systems since their inception, initially utilizing hand-written ledger systems to record transaction and customer data. Over the past 70 or so years, however, the digitization of data has created in incredible change within the core processing landscape. Today, the vast majority of banks partner with a third-party vendor for their core processing needs, and that relationship is the foundation for much of how the bank operates.
After 50 years of relative stability, the core processing landscape is shifting again, forced by dramatic changes in consumer expectations which, in turn, are driven by largely ex-industry influences (Amazon, Google, etc.). The pace of change has also accelerated sharply. A system built 10 (or even five) years ago is nearing obsolescence today. In order to continue serving their customers well, bank leadership must continually survey the core landscape for new opportunities and challenges.
Dominating the Landscape
A handful of core providers dominate today's landscape. This small group of vendors—CSI, Finastra, FIS, Fiserv, Jack Henry, and UFS—hold well over 80% of market share nationwide. In Wisconsin, CSI, FIS, Fiserv, and Jack Henry hold over 95% of market share.*
There are many good reasons this oligopolist system exists. The top four core vendors have not only spent decades learning and mastering the business of banking, but they're large enough to form collections of "best-in-breed" technology products, mainly through acquisition of innovators. "Community banks want integrated solutions for their customers, and that's why ICBA has been at the forefront, having constructive and consistent dialogue with the core providers in order to ensure that the community bank perspective is heard loud and clear," said Kevin Tweddle, CPA, chief operating officer at ICBA Services Network. "We must continue to innovate at the core service provider level."
Regulatory pressure is another driver. Community banks often lack the time and resources to efficiently manage the compliance requirements of working with a large number of vendors. "Community banks don't often want to work with 20 different vendors," said Tweddle. "The benefit of these core providers is they offer a wide range of fairly strong solutions for the community bank in a one-stop-shop, but more can be done to ensure community banks' needs are being fully met." The top established cores also help keep their bank clients in compliance with technology requirements. "Banks depend on their core to provide the most compelling technology and compliance with regulations around technology," said Lisa Gold Schier, senior vice president of business innovation and endorsed solutions at ABA.
Finally, these well-established vendors provide stability. "That's comforting for many of the banks who work with those established cores," said Gold Shier. If a bank chooses to partner with a newer vendor and that vendor disappears in a decade, the bank will be force to undergo the grueling task of switching cores.
However, as with any large company, great size often makes for slow change. ABA's Core Platforms Committee, made up of 19 bankers from small and mid-sized institutions, narrowed down a list of concerns related to core services to three key areas of focus: easy access to customer data, more transparent contracts, and open API. "Open API architecture will help banks with technology, allowing them to partner and integrate with companies that offer emerging technologies," explained Gold Schier. "That will allow them to be more nimble in serving their customers."
Directing change in an industry dominated by a few large players is a tall order, and over the past decade the largest players in the core software space have become larger. In June 2017, Misys and D+H combined to create Finastra, making the joint company the third-largest financial services technology company in the world. Fiserv completed its $22B acquisition of First Data Corporation on July 29, making the combined companies the largest merchant service platform in the world. Just a few days later, on July 31, FIS closed its $43B acquisition of Worldpay, Inc., adding to its payment processing services. "The top three core processors are huge and getting larger," said Viveca Ware, group EVP – regulatory policy at ICBA, who manages the core processing efforts. "It's not a matter of turning one ship, but of turning multiple ships to meet the demands of the marketplace."
Established core providers are being pushed to innovate faster by two pressure sources. First is changes within banking as an industry. "Today's core processor is the bank's most important strategic partner and requires ongoing strategic management," Ware explained. "It's no longer in the back room." Instead, the processor is responsible for much of the bank's customer interactions. That means if something is broken or not integrating properly, it's more than a handful of personal bankers or bank technology staff who notice something is wrong… tens of thousands of bank customers will, too. "The industry is changing so quickly based on customer expectations, banks need to quickly adopt technology that allows them to meet their customers' needs," said Gold Schier. "That's what we're looking for from the cores, being able to integrate with technology that allows the banks to compete."
The second source of pressure is fintech, specifically newer firms who are trying to elbow their way into the core vendor space with cutting-edge technology platforms and lightening-speed adaptability. "Some of the fintech companies are forcing the cores to sharpen their pencils," said Tweddle. While ICBA has not invested in or endorsed any core providers, their ThinkTECH Accelerator is entering its second year of operation and has already produced some notable fintech breakouts including MK Decision, which announced a partnership with ICBA's payments services subsidiary, ICBA Bancard, and Invest Sou Sou, winner of a FinovateSpring Best of Show Award. The accelerator, in partnership with The Venture Center in Little Rock, Ark., provides an outlet for community banks to directly engage and partner with early-stage fintech companies focusing exclusively on community bank product development. "As part of that process, we include the core providers because, at some point, they'll need to integrate in some form," Tweddle explained. In addition, the ICBA ThinkTECH Network, launched in 2018, provides member banks with a directory of fintech companies in a variety of areas, including mobile banking, lending, and security.
To turn some of that pressure into action, ABA reached out to core providers Finastra, FIS, Fiserv, and Jack Henry requesting they spell out how they will adapt to address bankers' concerns, specifically around data access, contracts, and open API. "They're all engaging with us, and we're receiving a lot of communication from the industry, including other core processors and bankers," said Gold Schier. "We feel like we've started an industry dialogue about how we can serve the community by fostering relationships between banks and their processors."
ICBA has also reported positive reception to their outreach with established core providers. In January 2018, they released the Core Processor Resource Guide with best practices for community banks and their core processors. "Our goal was to equip our bankers and their core processors with tools to strengthen that relationship," said Ware. "We were thrilled with the reception we received." In addition to receiving thousands of downloads, the guide was also shared by core processors with their current and prospective bank clients.
Another way ABA is working to support the banking industry is by supporting new technologies. The association recently invested directly in emerging core banking provider Finxact. "Finxact has the potential to drive market change, and we'll also learn from how they're coming to market," said Gold Schier. Additionally, ABA has invested in Summit Technology Group, a fintech company which helps banks transition to the cloud, and formed a strategic partnership with Alloy Labs Alliance, a shared innovation lab and accelerator. "They help banks foster a culture of innovation and look at how they can effectively and efficiently utilize bank-driven technology," Gold Schier explained. "It's not looking at a shiny object and implementing it."
On the Horizon
So, what's next in bank core processing? Banks should expect further change as both the established providers and the newcomers adapt to consumers' technology demands. "We hope to see increased ability to access technology from third parties and more transparent and open relationships that are focused on helping banks meet their customers' needs," said Gold Schier. Tweddle predicts a "plug and play" system as the pace of change and increased competition from challenger cores continue to force evolution within the industry. "It's an ecosystem where any given bank can plug and play different solutions that are relevant to their particular niche or strategy," he said.
In Wisconsin, WBA has been working on legislation to help foster better data sharing between banks and their technology vendors, including core processors. FIPCO, a wholly owned subsidiary of the WBA, has been working closely with several core providers over the past few years to develop and implement various integrations with Compliance Concierge, FIPCO's loan and deposit account software. The association will continue to monitor the core landscape and provide member banks with the information and tools they need to serve their customers.
Insight from the Cores: What are you investing in right now when it comes to financial technology and/or integration capabilities?
"CSI currently is investing significant effort toward a variety of technology initiatives, including CSIbridge, which is our open API platform. It allows our internal systems, our NuPoint core, to seamlessly integrate with customer-facing systems like digital banking, and it also allows third parties to easily integrate with financial institution data. CSI's additional strategic technology initiatives include digital deposit acquisition, business process automation technology, faster/real-time payments, and using data analytics for personalization." – Steve DuPerrieu, vice president of product management for Computer Services, Inc. (CSI)
"Community banks are demanding open, flexible core banking platforms that don't act as roadblocks to innovation. Finastra's Fusion Phoenix core presently meets many of the requirements of an open banking platform, but we continue to make incremental investments to more quickly adapt to the constantly evolving demands of the market and our clients, as well as technological advancements and disruption. It's a continuous journey demanding differentiation and flexibility, and Finastra is committed to leading that development. Our current investment is focused on delivering a best-in-class core with increased automation and workflow capabilities, fully digitized end-to-end user journeys with a superior focus on UI/UX. Investment is also targeted at open access to data and analytics, leveraging AI/ML to streamline onboarding and administration, and back office transformation." – Troy Land, vice president of retail, community markets at Finastra
"Fiserv is focused on driving purposeful innovation through the development and delivery of new solutions, strategic partnerships, and investments in innovative technology. This is done with a view toward what will benefit the people that use our services, whether they are working in a financial institution or a business, or are a consumer end user. We are committed to providing technology solutions that enable our bank clients to deliver differentiated services and reap the full benefit of emerging trends, including the move toward open banking and the delivery of open APIs, and the growing demand for real-time interactions. Fiserv today leverages cloud readiness as a foundational principle, and a wide range of Fiserv solutions, including core account processing platforms, are cloud-ready. We are making our robust API layer accessible to both clients and third parties, enabling them to access and share data, and creating a fintech solution ecosystem that will make it possible for financial institutions to roll out innovative products and services more quickly and cost-effectively. This includes a focus on real-time information and making it possible for developers to incorporate real-time event notification into new applications." – David McIninch, SVP of Strategy, Marketing & Product Management, Bank Solutions at Fiserv
"For over 50 years FIS has led the financial technology industry in delivering solutions that support banks while helping them compete effectively in the markets that they serve. FIS is acutely focused on supporting community banks by delivering our clients the most advanced, flexible, and cost-effective technology solutions available. Some recent investments in innovation include Core on Demand, a streamlined direct bank offering for community banks; the continued evolution of Code Connect, our award-winning API gateway delivering unprecedented access via thousands of APIs to FIS and third-party platforms; our Digital United platform, which enables banks to deliver a modern, seamless experience across both consumer self-service and banker-teller operations; and the modernization of our converged infrastructure and private cloud that have allowed us to implement an industry first self-imposed 15-minute SLA on critical applications." – Rob Lee, EVP, Head of Digital and Banking at FIS
"Openness and integration to third-party solutions has always been an important focus for Jack Henry. Community bankers are dealing with increasingly large, complicated technology experiences, and we always want to make it easy for them to use whichever provider they feel is the best to solve their unique business case. This means that we are amenable to exposing technology connectivity and willing to facilitate real-time connectivity that optimizes the user experience. Openness in data is integral to a bank's future successes as well. Applying data brings a competitive edge, and our acquisition of Geezeo supports easy and open data aggregation. Geezeo cleans, normalizes, and auto-categorizes transaction data to make it understandable and actionable. The acquisition is further evidence of our commitment toward continued innovation in this area." – Stacey Zengel, vice president of Jack Henry & Associates and president of Jack Henry Banking
"UFS, which provides technology to 30% of Wisconsin commercial banks and is owned by 20 community banks, has been investing in platforms that empower bank options. Delivering flexibility, freedom, and efficiency enables our customers to execute on their strategies while leveraging services on par with much larger institutions. Our investment strategy is focused on a bank exclusive private cloud platform, open banking integration, and a cloud-based, multi-tiered cybersecurity solution. Leveraging these investments, we partner with our customers and a variety of fintech organizations to deploy flexible, customized solutions. Most recently, UFS customers have deployed innovative cash management and mortgage lending applications that drive revenue and improve operational efficiencies. Our banking community expects that we prioritize next generation solutions that produce revenue and enhance their leadership in serving business and families in their communities." – Mike Tenpas, CEO at UFS
*Listed alphabetically, not by market share.
Seitz is WBA operations manager and senior writer.
By, Amber Seitz