The core banking market was shaken up dramatically last month when Fidelity National Information Services announced plans to buy Metavante, increasing the likelihood of further vendor consolidation at a time when new core projects are almost universally on hold due to the recession and financial industry woes.

The deal would make Fidelity the second largest player in the core banking market, with a combined total of 2,250 bank core processing clients, still dominated by Fiserv's roughly 3,400 bank core processing clients. And what of the smaller players?

"Clearly FIS and Fiserv are buyers," says Bart Narter, svp in Celent's retail banking practice, adding that he views smaller firms like Jack Henry and Open Solutions as potential merger targets for an international player looking to tap the U.S. market.

The deal comes as the core replacement market for top and mid-tier banks in the U.S. remains moribund with the exception of two red herring replacements: Union Bank and BBVA Compass - both foreign-owned banks looking to unify U.S. acquisitions on their home platform. Union Bank, a $70 billion asset institution now wholly owned by The Bank of Tokyo-Mitsubishi UFJ, is working to implement Infosys' Finacle platform. "It's a great deal for Infosys," says Tom Brogan, research director in TowerGroup's retail banking group. "I think that it's a big effort, but obviously Union Bank felt by making the move at this time they could get ahead of the curve."

The Union Bank implementation will face close scrutiny as the next test of whether a foreign platform can meet the demands of the US banking market - a guinea pig position that likely gave the bank pricing leverage. Ever since People's Bank's aborted implementation of Oracle's iFlex in 2008, banks in the U.S. have demonstrated a reluctance to take the leap with a foreign vendor, even though some perceive the international products as more advanced.

"What they all need is a high-profile success before people are really going to open the doors to them," Brogan says.

Looking down that road, regional banks, half of which currently still operate on internal systems, is the next hot U.S. market segment likely to invest in new cores. "Over the next two-to-four years we expect to see some activity from about 20 percent of the mid-tiers who still have the solutions in house," says Karen Massey, senior analyst at Financial Insights.

In the community bank segment there's some action - but it's mostly contract renegotiations, with smaller banks leveraging the recession to ink better deals and shorter contracts. "We were able to get better pricing than with our legacy partners, and also some flexibility on terms," says J. Randall Waterfield, co-CEO of Indiana-based Waterfield Financial Services, which switched from a Fiserv core to Metavante.

Aite group recently surveyed 750 community banks and found core system replacement is one of their highest priorities, many driven by a move into small business banking, a product set not supported by current core competencies, says Christine Barry, research director at Aite.

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