A tiny group of core banking software vendors has cornered the U.S. market — FIS, Fiserv, Jack Henry, and D+H (through its recent acquisition of Harland). Together they own about 96% market share. Other players — some small, some niche and some based in other countries — exist, but each holds just a small sliver of that remaining 4%.
Core banking software is the heart of any bank. It's the behind-the-scenes engine that processes all deposits, payments, loans, most bank transactions and customer data. Some banks still use core software purchased 30 or more years ago, and have layered on top of it "ancillary" products such as online banking and mobile banking software, creating a complex IT environment that is hard to manage and upgrade to launch new products and comply with emerging regulations. This means there are many U.S. banks in sore need of a refresh. The U.S. core banking market is worth about $2.9 billion this year, according to Celent. The analyst firm expects that revenue to grow 3.7% per year, reaching $3.3 billion in 2017.
Could any of the second- or third-tier core banking vendors break into that upper echelon of providers?
Consultant Art Gillis, who has been tracking this market for decades, thinks probably not.
"How do you argue with performance and delivery and numbers?" he says. "Numbers, I didn't say quality."
The four large core banking vendors have thoroughly learned their customers' business, Gillis notes. "By now I think they're more bankers than technicians," he says. "They've crossed over. They know the business of banking better than bankers and they just happen to have a tool bag of technology products."
The top four vendors have been compared to the large pharmaceutical companies, points out Celent analyst Stephen Greer. "They're just massive and they wait for others to innovate. When others innovate, they acquire them."
There is a second tier of vendors, a group that is shrinking every year, Gillis says. "Once there were 117 companies in this market, now I'm lucky if I can come up with 20. The problem is that in a herd-like industry where bankers follow the leader, the little guys are in tough shape unless they are a cooperative. No respectable bank is going to put all their eggs in the basket of one tiny company and risk their future success."
Greer agrees that banks run a risk by going with a small core vendor. "If you can't say with certainty they'll be around in 10 years, then who would want to buy a core from one of those vendors?" he says. "If they get acquired, what happens to the development track?"
The large vendors also benefit from a newish trend in which banks are looking to reduce the number of vendors they work with.
This is partly driven by regulation. "There are so many requirements in terms of vendor management programs now that it's easier to have a smaller number," says Scott Hanson, executive vice president at D+H (he held the same role at Harland).
The vendor consolidation trend is also driven by the fact that ancillary technologies that once might have been considered optional or luxuries — like internet and mobile banking — are now considered to be not only table stakes but possibly more mission critical than the core engine itself.
"If your self-service channel goes down, in the past a handful of tellers and back-office people might have known there was a problem," Hanson points out. "Now, millions of consumers potentially know your site or app is down," he says. "People are looking for more reliable and tighter integration with all the other mission critical capabilities that they must deliver to compete as a financial institution. The ability to open and originate new accounts or handle deposits, bill payments, person-to-person payments, consumer loans or mortgage loans in a self-service model were considered novelties a few years ago, but now these tasks need to be so tightly integrated with the core offering that you can't tell the difference when it comes to moving data back and forth." Providers that can deliver all of this without having to rely on third parties have an advantage.
Banks are also seeking out modern architectures that can withstand the test of time.
"Core conversion is a lot of work," Hanson notes. "We've called it open heart surgery with your eyes open with no anesthesia. It is a grueling effort that requires a lot of attention. People don't want to go through it very often." A few core banking products out there are well positioned to last the next 20 to 30 years, he says; the rest "are a rewrite waiting to happen." D+H's (formerly Harland's) Phoenix EFE is Microsoft-centric, which Hanson says gives it a low cost of ownership and support in the industry.
"Banks are looking for ultimate openness," Hanson says. "The days of the core provider holding the data hostage are gone."
Working with one large vendor for a plethora of products can give banks comfort that their software platforms will communicate with each other.