A financial institution's core system is the engine that drives the entire organization forward, dictating how fast and far it will go… and sometimes in order to reach your destination, you need to switch tracks. The core is also one of the largest investments for any bank, both in terms of cost and impact, so any change must be approached strategically. That is, with the bank's strategic goals at the center of the discussion. "The strategic plan has to be first and foremost," said Lynn Roche, executive vice president of the banking division of integrated financial solutions at FIS. That is because the bank's core system is critical to achieving those goals. "A bank should have a clear understanding of their business goals and look for features in a core that best meet those goals or provide customized solutions where they can be introduced," explained Susan Griffin, strategic initiatives analyst, strategic initiatives group at Jack Henry & Associates, Inc.
Core conversions are massive, expensive operations and therefore not done lightly. "Ultimately, because conversions are such an undertaking, it has to start with there being a key need," said Andrew Spillane, an attorney with Godfrey & Kahn, s.c. "There has to be a major motivation." Unsurprisingly, one of the top three motivations for switching cores is to obtain new capabilities or upgraded functionality, according to a 2016 Fiserv survey of over 1,000 financial institutions. (The other two are dissatisfaction with the current vendor relationship and to realize cost savings.) Fiserv's Eric Jones, SVP of product management, Bank Solutions, says that a strategic change or M&A event at the bank typically accompanies the motivation to upgrade. "It comes down to understanding how the tech platform will support the bank's strategy," he said.
What's Your Destination, and Can Your Engine Get You There?
There are three major strategic elements bank leaders must consider related to discussions of core conversions: M&A plans, current and future technology needs, and growth trajectory. Changes in one or more of these areas could be sufficient motivation for a core conversion. During the search for a new provider, if one is required, bank leaders must be sure to communicate their strategy with the provider, according to Roche. "When evaluating a provider, it's important for the bank to be open and share their strategic vision," she said. "Partner with a technology provider who demonstrates the ability to meet the needs of today and tomorrow. In five years, you don't want to change providers again."
The bank's core will always have an impact on mergers and acquisitions. "The core platform has capabilities that inherently determine whether the bank can acquire and convert other banks quickly," said Jones. "The platform of the acquiring bank in many ways determines if they're able to execute an M&A strategy." Spillane explained banks with merger activity in their near-term strategy to avoid signing a long-term deal in order to cut costs, since the long-term impact could be greater overall. "I've never run into a purchase where the core processor contract didn't play a role. Banks should think about the degree to which their core processing term lines up with their M&A timeline," he advised. In addition to timing, the core also impacts how an acquiring bank identifies its targets. "We see that there's a very intentional strategy on the part of acquiring banks to target based on the core platform the acquired bank is on," said Jones. "Banks prefer acquiring other banks who are on the same platform." Not only is the transition smoother for employees, who are already familiar with the system, but also for customers, who will find the switch less jarring in many cases when the two banks share a core. "If they're on similar cores, the transaction is potentially less dramatic for the customer," said Roche, noting that because providers are constantly updating their solutions and systems, even banks on the same core may encounter compatibility challenges. "But it can absolutely simplify the migration path," she said.
When evaluating their core system, bank leadership must review the bank's current and future technology needs. "One of the most common motivations for conversion is a change in the bank's business model to deliver a more innovative and competitive offering," said Griffin. "They want to provide a better customer experience that has been introduced through digital technologies and competitive fintech disruptors in the financial services market." Tech giants like Amazon and Google have transformed the way consumers expect to be served, and banks will need to continually adapt in response. "Solutions are changing so rapidly, a financial institution needs to partner with a provider that can embrace those changes and enhance the systems that will be available," said Roche. "Sometimes it's a matter of wanting to ensure you're not left behind."
However, it's important that decision-makers understand which pieces of the bank's technology network can be improved or expanded without a core conversion. "The most common misstep we see when it comes to banks' decisions around switching cores is that the bank believes the core platform change will drive other elements of their technology platform," Jones explained. "They mistakenly associate the core as the entire technology suite, when the problem could actually be solved without changing the core." For example, by leveraging open API technology, a bank could overhaul its entire digital platform—including mobile—without changing cores.
Finally, bank management must consider their plans for institutional growth—whether it's deposits, loans, or footprint—when evaluating a core conversion. "They need to ensure they're selecting a provider with the ability to scale with the future strategic direction," said Roche. As with any third-party vendor, the bank's core provider must be financially stable and equipped to invest in research and development, as well as support the bank during and after the conversion. "Stability and experience are vital factors to core evaluations," said Griffin. "Bank decision-makers should consider vendors that are reputable and well-established in the market with a proven commitment to R&D. After all, there's a reason they've achieved such success."
Converting from one core system to another is one of the most challenging transformations a bank can undergo, touching every part of the institution. "In general, it's an extremely involved process," said Spillane. "A number of institutions might not pursue a conversion simply because they don't want to go through that process. Excluding M&A, this is probably the most intensive process a bank can go through." In some cases, however, bank leaders may find themselves in a situation of "convert or die." If the gap between the current core's capabilities and the bank's strategic objectives is wide enough, it may be necessary to switch tracks—either moving to a new provider or a new product. "You have to start the process early," said Spillane, recommending at least 18 months before the end of the current agreement. "It'll take that long to do your due diligence on potential providers, negotiate the agreement, and manage the conversion project," he said. "You want to have plenty of time for negotiation so you're not forced to take a deal that isn't advantageous to you. You also want to have ample reaction time for changes during the process." Once the bank selects a new product or provider, it's time to make the switch. Core conversions are complex and time-consuming, but three key ingredients will help yours go more smoothly: a motivated staff transition team, assistance from the provider, and sound vendor management practices.
"The first and most important step towards change is to prepare bank staff," said Griffin. "A core conversion requires support from top bank management to support the efforts of the transition teams and to assure staff members that change brings about a better work experience." To get buy-in across the institution, bank leadership should bring in representatives from all departments to lead internal transition efforts. "The best way to handle it is to form a project team," Spillane advised. "Make sure voices are heard from across the institutions. It's all hands on deck."
No matter how skilled or motivated the staff team is, however, every conversion should have ample support from the provider, whether the bank is switching to a new product or vendor. "As part of the selection process itself we recommend banks consider the provider's experience and capabilities when it comes to system implementation and conversion," said Jones. "Once the decision is made, it comes down to planning and execution."
Finally, the entire selection and conversion process may be less stressful if management keeps in mind that it is an exercise in vendor management—a colossal one with tremendous impact on the bank's primary activities, but still a familiar process. "Compliance, business continuity, and vendor management processes should be top-of-mind, as banks are held accountable to regulators evaluating third-party risk," Griffin explained. "If a vendor does not share their best practices or meet regulatory requirements for managing their vendor relationships, it does not bode well for the bank."
Godfrey & Kahn, s.c. is a WBA Bronze Associate Member.
Fiserv is a WBA Associate Member.
FIS is a WBA Associate Member.
Jack Henry & Associates, Inc. is a WBA Associate Member.