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Foreign Core Vendors See APIs as Way into U.S. Banks

The core systems market in the U.S. has long been dominated by a small group of vendors. But that may be about to change.

Core systems startups are chasing U.S. banks. And now several well-established foreign-based core providers are pursuing U.S. clients.

The opportunity is huge. Half of the tech spending for banks worldwide comes from the U.S., said Jay Mossman, the North American regional chief executive for Temenos Group in Switzerland.

The competition is fierce as the incumbents have a long and often tangled relationship with banks.

Also, banks are typically terrified about the idea of ripping out and replacing the guts of their institution, but many realize that their ability to serve the digital demands of their clients and take advantage of things like application programming interfaces and cloud technology is constrained by legacy technology. The foreign-based firms see that conundrum as their way in.

"In the U.S., banks see core systems as a commodity, and in other countries they see it as a way to power innovation," said Falk Rieker, global head of banking for the German tech giant SAP. "To achieve the digital customer experience everyone wants, you need an agile, open tech platform. Banks should be investing now."

Like SAP, Temenos is also aggressively targeting the U.S.

"Our No. 1 strategic goal right now is in the U.S.," Mossman said. "We have tried on a couple of occasions in the past, but it was just sending over an executive or two and sticking our toe in the water."

The ramped-up effort seems to be paying off; Mossman said Temenos has poached a "large, retail bank" from one of the "Big Three" core vendors, referring to Fiserv, FIS and Jack Henry, to use its T24 core banking software. Mossman said the contract is being finalized and that an announcement would likely come "within 60 days."

As part of its renewed focus on the U.S. market, Temenos turned to acquisitions, buying TriNovus, a compliance software firm, and Akcelerant, a provider of software for loans, collections and risk management. (Mossman founded Akcelerant.)

The deals gave Temenos a valuable entry point to reaching domestic banks. But getting U.S. banks to switch their core providers is still a difficult proposition because of the incumbents and the magnitude of negotiating a core-processing deal, Mossman said.

"We have a good pipeline [of banks Temenos is talking to], but it's such a long, drawn-out process," he said. "Still, we're seeing more banks willing to have this conversation than 12 to 18 months ago."

He said Temenos' infrastructure is based on application programming interfaces. That makes it appealing because banks, particularly larger ones, are looking for "progressive renovation" when it comes to core systems replacement. In other words, Temenos' system allows for a gradual replacement.

"From a tech perspective, you don't have to go through a full, big-bang type of implementation," he said.

SAP is also making a pointed effort to break into the U.S. The firm's financial services unit is a small but growing part of its overall business, counting Standard Bank of South Africa and Sberbank of Russia among its clients.

But the company is looking to 2017 and beyond to make a big push in the U.S., as more banks here embrace cloud technology, APIs and the concept of open banking, Rieker said.

To that end, SAP made upgrades to its most recent core solution, called Banking Services 9.0, to embrace APIs, Rieker said. It features applications that can be layered on top of existing technology to enable real-time digital banking, he said.

"Customers can implement these new features without going through a lengthy release upgrade processes, thereby reducing cost as well as time to market," Rieker said.

Other non-U.S.-based core providers are getting in on the game as well. Goldman Sachs recently announced that it is using software from theIndian technology firm Infosys to power Marcus, the online lending subsidiary it launched two months ago.

One company that straddles both the startup and global core vendor worlds is Leveris, which launched this year after spending three years building a core banking and lending platform. Its chief technology officer and several engineers previously helped build Air Bank, a startup digital bank in the Czech Republic. The Irish company already has a "healthy pipeline in Europe and southeast Asia, but we are speaking with a few banks in the U.S. already," said Aidan Lawlor, Leveris' head of marketing.

Global core vendors in general are making greater efforts to make inroads in the U.S. banking industry, said Brad Smith, managing director with Cornerstone Advisors.

"The sales calling efforts" from non-U.S. core providers "seem to have become more aggressive overall and more aggressive downstream, calling on smaller banks as well as the big ones," he said. "Banks are starting to hear more from companies like Temenos and SAP and others."

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