I spent a few weeks last month examining the love triangle between community banks, fintechs and the companies that provide banks with the core processors they need to make daily loan, deposit and credit transactions.
Be sure to read our articles on fintech including how bank’s core technology and attitudes is limiting fintech companies and how some community banks are thriving with fintech.
The relationship between these three parties is, in Facebook terms, “complicated.”
The fintechs looking to deploy their technology through banks are offering modern, real-time technology, often with artificial intelligence baked into it. Yet banks are still using core processing systems developed in the 1970s or 1980s, making integration of new technology difficult.
While the banks would love to offer the most innovative technology to their customers, any technology they want to integrate into their core requires approval from the core processing company.
Even if a bank was to adopt a new open core processor, giving it the power to integrate new tech on its own terms, a core process conversion is expensive, can take years and may potentially disrupt the bank’s daily operations. And then there’s the data security concerns and regulation to worry about.
Meanwhile, while the core processors know banks want to offer fintech solutions to customers, their systems are complex – there is a separate core system for each banking function from online banking to gathering deposits to making loans, etc.
Each party has valid reasons for why things are the way they are, but I think if we want to see real change that will come in years instead of decades, community banks will have to take charge.
The community banks sit in the middle – they are the customers of the core processors and decision-makers for the fintechs.
The fintechs, while sometimes not fully aware of how the core processors operate, will ultimately be the ticket to innovation for smaller banks strapped for cash, and can help them keep up with the larger banks that have more resources. Meanwhile, while the core processors understand the time for change is coming, they could use a push – or a shove – from the market.
Three core processors – FIS, Fiserv and Jack Henry – have controlled the market for decades and that is not by coincidence.
“Core IT suppliers are essentially hedge funds,” Aaron Silva, president and CEO of the fintech advisory firm Paladin fs, said at the BankWorld Conference earlier this year. Silva added that the main core processors are also not investing enough back into their products.
Does Silva’s statement possibly come with an agenda? Absolutely, granted that he his in the business of helping banks integrate fintech solutions.
However, I also think it comes with a certain amount of candor and credibility.
As I was doing research and speaking to sources for the articles I wrote, all of the fintech companies, experts and bankers I spoke with provided great insight, but you get the sense that everyone was holding back a little bit.
When asked about the challenges of working with the core, there were a lot of initial pauses, “uhs” and “ers.” This makes sense considering the success of each party’s business depends on one another.
(Pro tip: Don’t talk to the press about how much someone frustrates you, especially if that person impacts your bottom line in a meaningful way.)
The banks, the fintechs and the core processing companies are all trying to make the best of a tough situation. But if banks make the leap, the industry will follow.
Banks should also be aware that many fintechs launch as startups with limited resources and cannot always work with every bank right away.
They are going to prioritize the relationships that have the greatest chance for successful implementation of their software, so once fintech becomes more mainstream and these solutions are in demand, the power dynamics might begin to shift.
Ultimately, small banks should know by now that integrating fintech solutions is not impossible.
Look at the $1.25 billion Radius Bank, which has gone essentially entirely digital and formed numerous partnerships with fintech companies, all while using a very common core system used by many typical community banks. Radius has more than doubled in asset size since 2010.
It would be easy to delay change, but there may never be a better or more crucial time. Banks are currently coming off a nice tax break and many have excess capital and have reported record profits.
And competition is coming.
JPMorgan Chase, which has spent $40 billion on fintech, according to Silva, has launched an aggressive retail strategy in Eastern Massachusetts. M&T Bank has repeatedly expressed its interest in getting more involved in the Boston market.
The time to innovate is now.