Alternative core-technology providers catch the eye of venture capital firms

Alternative providers of core-banking technology are still trying hard to convince community banks, regionals and credit unions that it’s time to dump their traditional vendors. But a number of venture capital and other investors are already sold on the idea.

CB Insights noted in an analysis of first-quarter fintech venture capital deals how companies such as Finxact and Nymbus are starting to benefit from smaller banks’ frustration with traditional vendors, who the banks say are not delivering the upgrades necessary for them to compete with the largest banks.

Finxact secured $30 million in Series A funding in January, a sum that included direct financial support from the American Bankers Association. The industry group has criticized the established players for not helping small banks keep up with technology demands.

“It’s something that’s a pain point in the industry,” Lindsay Davis, a senior intelligence analyst with CB Insights, said about aging core technology. “But improving it is something that can’t be pushed off any longer.”

Davis anticipates more small banks will come to that same realization as they seek to upgrade technology stacks to produce new or improved offerings such as mobile banking.

She noted in the analysis that Nymbus, coming off a $5.4 million funding round in 2018, had signed a contract this year with the de novo bank Moxy in Washington.

The bank recently said it had chosen Nymbus because it needed virtual banking and mobile banking options to serve its client base, which consists of low- and moderate-income customers.

Davis predicted more such deals this year as next-generation vendors make inroads with smaller banks.

Up until now, such companies have been able to secure venture capital funding and partner with other fintechs as they wait for community banks, regionals and credit unions to take the leap with next-generation core providers, she said.

“A lot of these legacy systems are reaching their sunsetting point,” Davis said. “And core banking is one of those things that you can’t let reach that point because at the end of the day, it’s going to impact the consumer.”

Finxact in particular attracted the attention of traditional financial institutions in its January funding round, including Live Oak Bank, SunTrust Banks and Woodforest National Bank, as well as First Data.

“When I was in financing for those rounds, you can’t imagine how fast it was for us to raise capital,” Finxact CEO Frank Sanchez said. “In our case, when you look at the investors, each one was strategic. That wasn’t our intent. But the industry itself has moved to stimulating innovation around the introduction of new technology.”

That said, it is no wonder the ABA made the unusual move to invest in a fintech startup.

Rob Nichols, the ABA's president and CEO, has been outspoken about the major core players' shortcomings in dealing with small banks’ technology needs.

“I’m well aware of the frustrations that many bankers have over their relationship with their cores,” Nichols said last year at an ABA conference in New York.

He said after the Finxact announcement that the association invested in the company as an “opportunity to ... push core processing in a new and exciting direction so that banks can quickly incorporate new products and services that customers deeply demand.”

Sanchez said he welcomed the challenge.

“I think Nichols hopes like hell that we succeed, and we will,” Sanchez said. “But it’s also ... another shot across the bow for the other guys.”

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Fintech Venture funding Venture capital Core systems Community banking Credit unions
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