How Innovative Banks Are Reimagining the Core

July 10th, 2019

core-7-10-19.pngNew developments in technology have heightened bank customers’ expectations of speed, service and customization from their financial institutions—and cores are struggling to keep up.

Consumer expectations for banks are so high that it’s difficult—if not impossible—to meet them using existing core banking systems. Luckily, the landscape of core providers is growing rapidly too, and some banks are already taking the plunge.

The “Big Three” core providers as they’re known in the industry—Fiserv, Jack Henry & Associates and Fidelity National Information Services—serve just over 71 percent of U.S. banks according to data company FedFis. They’re criticized for providing poor service and lagging significantly behind smaller, more nimble fintechs when it comes to innovation. And their recent acquisition streaks have bank clients worried that it could erode service levels, reduce choice and increase cost.

James “Chip” Mahan III, chairman and CEO of Live Oak Bancshares, described the situation aptly: “It just seemed like every time we wanted to do something, it's impossible. It’s ‘stand in line and write a big check.’ And it's really, fundamentally, putting lipstick on a pig.”

That’s why the bank, based in Wilmington, North Carolina, invested in an emerging competitor—Finxact—and courted creators and industry veterans Frank and Michael Sanchez out of semi-retirement to take on the challenge of reinventing the core.

Finxact is an inventory management system that’s been architected from scratch on Amazon Web Services. Finxact and other alternative core providers offer three key features that banks should demand from a 21st century core processor.

Open Architecture
Nearly every core has some type of application programming interface (API) that allows its technology to connect to third-party applications, though the availability of those APIs is still tightly controlled in legacy systems.

Most challenger cores embrace open architecture—a quality that stands in stark contrast to the situation with incumbent cores. Deland, Florida based Surety Bank wasn’t able to negotiate with its legacy provider to use a third-party remote deposit capture solution.

CEO Ryan James says that was “a deal killer” because the bank does a large volume of deposits with that provider, had tailored it to their needs and had undergone examinations with it as well.

“It just was absurd that [our legacy core] didn’t even want to take that file, because they were greedy. They wanted to charge the [remote deposit] rates on that even though they couldn't do what we needed,” he says. “That was an eye opener.”

Surety Bank eventually chose to undergo a full core conversion. It only took four months for the bank to launch on a cloud-based system from NYMBUS at the beginning of 2018.

Cloud Native
In addition to featuring open architecture, many challenger cores are cloud native. Although most legacy cores have some ability to run some of their system within a cloud environment, truly cloud-native companies offer banks greater advantages.

“There are different services that the cloud provides that will enable you to scale without drastically increasing your costs,” says Eugene Danilkis, co-founder and CEO of Berlin-based core technology provider Mambu. “That allow [cores] to have the best practices in terms of security, in terms of disaster recovery and also the sort of operations you can support.”

One of the operational advantages a cloud-native system provides is the ability to deploy updates within a day or two, Danilkis says.

Being cloud native is synonymous with scalability; a system can handle one hundred accounts as easily as it can handle one hundred thousand. This significant benefit means core providers don’t need to charge banks for each new account or service they add, and often use software-as-a-service models or other simple, transparent pricing schemes.

Configurable
Perhaps the most important hallmark of a modern core system is configurability. Modern cores give banks the ability to create their own ecosystems, workflows and bespoke financial products that differentiate them from competitors.

Banks on a core like Finxact could build a new type of savings account that automatically raises its interest rate when the balance reaches a certain level. In contrast, legacy cores only offer out-of-the-box products that can be tweaked to meet a bank’s risk appetite or other basic requirements, without changing the product.

Changing the Game
Modern core processors approach banking technology in radically different ways from legacy core providers. They’ve built new systems from scratch, instead of bolting on acquired products. They run in realtime instead of overnight batches. They look and feel like websites instead of flat green screens. They’re open, cloud-native and highly configurable—and they’re finally coming into their own. Innovative banks should explore these options now so that they can leapfrog their peers in the near future.

Potential Technology Partners

Finxact

Currently in limited use at Live Oak Bancshares and engaged in discussions with several other U.S. banks.

NYMBUS

The SmartCore platform is powering at least one community bank, and its SmartLaunch product uses SmartCore to support digital-only brands for additional institutions.

EdgeVerve

The Infosys Finacle core is used in over 100 countries and made waves in the U.S. when Discover Financial Services left Fiserv to use this core for its direct banking business in late 2014.

Smiley Technologies

The SIBanking platform is currently in use in several U.S. banks with assets up to $1.3 billion.

Thought Machine

This London-based company wrote its cloud-native Vault core from scratch. The company states that it has clients in the U.S., but is unable to identify them publicly.

Mambu

Mambu has bank clients in 15 countries. In the U.S., current clients include non-bank lenders, and the company is planning to use its latest funding round, in part, to grow its footprint in the U.S.

Mbanq

The founder of NYMBUS just joined this operation to help the company expand into the U.S. They currently serve 15 banks primarily in Europe and Asia.

Learn more about each of the technology providers in this piece by accessing their profiles in Bank Director's FinXTech Connect platform.

abuker

Amber Buker is the director of FinXTech Connect, a curated online directory of bank-friendly fintech companies. She conducts interviews with senior bank leaders and technology executives, writes profiles on fintech companies and maintains a database of information that helps banks source potential technology partners.