Update, replacement and surrounding core banking system
Large financial services companies – banks, brokerages and insurance companies – were early adopters of computers. One unfortunate aspect is that many are still using legacy mainframe systems that are over 30 years old – expensive, batch rather than real-time, inflexible and built with an architecture around products while the new finance mantra is centered on the customer. It’s difficult when customer account information is held in multiple data silos.
Retail banks are divided into two groups when it comes to basic banking services. Many regional and community banks use systems from a few major vendors – FIS (formerly Fidelity Information Systems which acquired Metavante, among others), Fiserv and Jack Henry.
Banks in currency centers have built their own systems or are running Hogan or Systematics systems, now owned by FIS. In the United States, the big banks are being sued by global foreign providers who want to replace the banks’ huge critical cores – these companies include SAP, Infosys (which set up a deposit system at Discover), Temenos (more level two and tier three) and Accenture’s Alnova which has been adopted by BBVA Compass.
Leading fintech analysts say they have reviewed tenders for new core systems at major banks, but actual installations have been rare. At the regional and community bank level, vendors have seen more activity, in part because many systems are run by service bureaus and vendors are happy to move banks from an older system, usually an acquisition which is being phased out, to a new platform which it is developing as its core offering.
Anthony Jabbour, corporate executive vice president for integrated financial solutions at FIS, said there were a lot of conversations going on around the core.
“I don’t think the actual activities match the amount of talk,” he said. Outside of the big banks, which have mostly done nothing to replace old cores, smaller banks are migrating to new systems at the same rate they always have, around 5% per year.
Core, Jabbour said, is only part of an overall solution that can include 25 or more components such as digital channels, payments, analytics and decision making.
Banks will choose a different vendor based on customer service, how open a system is to third-party programs, pricing or software qualities, he added.
“A lot of times when we talk about technology, we wonder if it’s open. Often people forget to ask if a company’s corporate culture is open. If you have a company with a phenomenal technology platform, but they price it in a way that discourages the use of third-party apps, the technology is irrelevant.
The FIS aims to help banks through transitions rather than imposing its problems or its idea of solutions on its customers, he said. He thinks it pays off because companies build reputations over time.
Bankers move, added Jabbour, and they have a long memory s. Thus, a salesperson who provides poor service at one bank may find his former customer making a purchase decision at another, larger bank a few years later.
“It’s amazing how many bankers I see again and again at different banks, so a vendor’s decisions have to be good for the banks in the long run. Customers unhappy with poor service or restrictions on what they can do can go where they want once the contract is over.
FIS offers flexibility to its banking customers, he said. He may discover that a customer with complex business activities is using a retail banking system that does not properly support his business.
“We would move them to a more trade-focused core regardless of where they are with their contract. They contract with the FIS, not with the specific nucleus.
Small banks can switch to a new system in 6-12 months; in larger banks this is more of a challenge and they will often move component by component.
Rather than replacing core systems entirely, most bankers would prefer to bundle new services around an existing core, he added.
“Along with many of our core businesses, banks are working on improving their digital channels, trying to offer new products and services to their customers. The existing kernel they sit on does the job. The majority of these customers come to us and say the core does the job, my employees love it but I want to offer a stronger digital channel through mobile and internet banking and provide support for Apple Pay.
Banks need a system designed to make it easier to add new functionality, he added.
“As the bankers look to transform the bank, let them spend their money on top of our money. We’ve built and bought a lot of capacity, but there’s always going to be something a bank wants to do differently. When they can spend on top of what we’ve already spent, that’s where they can get the most bang for their buck. A consumer in a bank doesn’t care what programming language he’s interested in, he wants digital channels, payment options and mobile commerce.These are the things that differentiate and help banks to compete.
FIS is no stranger to growth through acquisitions. Jabbour said he wants to be first or second in every banking area, either through internal development or through acquisition. Two years ago, its electronic funds transfer (EFT) capabilities were not at scale, so the company acquired Clear2Pay, “the most powerful payment services company in the market”.
Where banks were split 50-50 between using FIS technology in-house or as a hosted solution, hosting can now reach 90%. he says, even with the big banks.