Bank industry groups and experts have long argued that the small number of core processing companies in the industry have stifled innovation at financial institutions, particularly at smaller banks with limited resources.

Nonetheless, some community banks in Massachusetts have formed partnerships with fintech companies and adopted digitally-focused strategies that have allowed them to differentiate their business models and stand out from their peers.

“It is very much not ‘core processors versus fintech,’” said Donald Westermann, chief information officer at Eastern Bank. “There is an ecosystem at play here.”

Core processors are the back-end system of the bank that interfaces to general ledger systems and reporting tools, and process daily deposit, loan and credit transactions. Despite technological advancements in recent years, a lot of small banks still use core processor systems developed in the 1970s and 1980s.

With standard core processors, the bank does not have access to the system’s proprietary software to make changes and implement new technology and layers. Any time a bank wants to incorporate new technology, they must go through the core processor to make the changes.

“You can’t use the core processor as an excuse to not innovate,” said Chris Tremont, executive vice president of virtual banking at Radius Bank. “You can’t let that be your crutch. It can be done with a core that is not an open API [application programming interface] banking core.”

Chris Tremont

Working with the Core

The $11.2 billion-asset Eastern Bank and the roughly $1.3 billion-asset Radius Bank are both leaders in partnering with fintech companies and implementing a digital strategy. But they have taken very different routes to get to where they are today.

Originally started by the New England Carpenters Union in 1987, Radius Bank was primarily funded by the union’s pension funds until the Dodd-Frank Act introduced regulations in the wake of the 2008 financial crisis that made it difficult for the pension fund to operate the bank.

When private equity funds including Newton-based BayBoston took over Radius in 2015, the bank’s leaders decided it was time to put a strong focus on their digital offerings.

Knowing that they might need to work with over a dozen fintech companies to realize their goal, Radius executives faced a difficult choice. They could build or convert to a new core processor, or they could continue to work with their existing core processor FIS, and layer technology around it to make it easier and faster to implement fintech solutions.

Due to the time it would take to convert to or build out a new processor – anywhere from two to three years – Radius chose the latter course, which meant working with FIS every time they wanted to partner with a fintech company.

The first fintech solutions the bank incorporated were challenging, said Radius COO Phil Peters. “We always look to integration of the core to be the most challenging and time-consuming element of the project management function.”

The process would eventually get easier.

Management continued to interact with executives at FIS, all the way up to its CEO, Peters said. The core processor is now familiar with the bank’s model – and is interested in applying that knowledge to other banks that may want to partner with fintech companies.

“We invite them to the table earlier,” Peters said. “It’s still a challenge, but I think we’ve worked over the last two and a half years to improve the process, reduce time, reduce costs and improve quality. I think they are more willing to listen to us and engage.”

In the last five years, Peters said, Radius has partnered with five or six fintech companies and has brought some of its new products to market in four months or less.

Donald Westermann

Building Custom Solutions

While Radius Bank chose to work with its core processor to implement new fintech, Eastern Bank went in another direction.

It still has a core processor, but it has taken the time built an “abstraction layer” internally at the bank. This layer lets Eastern plug in technology from fintech partners on the front end, while minimizing its reliance on the core processor in that process.

Westermann refers to this layer as “the pipes.”

“We continue to interact with our core processor and work in partnership with our core processor, but we generally don’t need significant assistance to accomplish a full-scale implementation,” he said.

While building out a layer can seem intimidating, Westermann said the bank was able to do it with a small team working in increments.

Westermann cautioned that when following this route, banks should examine the contract with their core processor and understand its cost model. Some contracts might charge on a per-transaction basis, while others will charge a fee for unlimited use, he said.

Despite taking different paths, executives at both Eastern and Radius Banks recommend that banks looking to get into fintech need to have a clear vision, as well as organizational alignment.

Bram Berkowitz

Every department at the bank from marketing to compliance to senior management needs to be on the same page. Then the bank needs to make sure that the fintech solution is compelling for its customer segment and will add value.

“Make sure you understand your strategic and business plan first,” Tremont said. “What goals are we are trying to accomplish? Why are we doing this? If you can put that down and say we can get to where we are trying to go with fintech, then it’s doable.”