Consolidation among technology vendors that serve banks remains brisk, even as M&A in the banking industry remains sluggish.

As a result, the field for core processing has turned into a virtual oligopoly of five firms. Large vendors are also gobbling up smaller firms that provide ancillary services.

Only time will tell if the latest wave of technology mergers will prove harmful or beneficial to banks. Such consolidation limits selection in an area that makes up a big investment for small banks, but it provides institutions with a single outlet for multiple services.

Free markets tend to favor increased competition, says Aaron Silva, president and chief executive of Paladin. Still, having "360-degree technology experience" can also be "seen as a positive."

Fiserv, Fidelity National Information Services, Jack Henry & Associates, Computer Services and Davis + Henderson control most of the processing market. Any future consolidation among those firms would likely draw attention from the Justice Department, says Trent Fleming of Trent Fleming Consulting.

Acquisitions have become a necessity for vendors as the client pool slowly shrinks. More than two years have passed since the last new bank opened, limiting revenue opportunities and forcing tech firms to pursue deals or aggressively steal market share.

"The larger companies gradually buy all of the ancillary services," says Michael Krall of Krall & Co. "They can offer deep integration and one-stop shopping. That's a natural evolution."

Technology vendor acquisitions are generally divided into three categories, says Terence Roche, a principal at Cornerstone Advisors. The first type — where a company buys another firm to fill out its product offerings — is usually benign to small banks.

Another type of merger involves deals designed to help the acquirer obtain a customer base or cash flow, which can have mixed results for community banks, Roche says. How much the acquirer ultimately invests in research and development, along with the level of customer service, is telling.

The "worst-case scenario" for smaller banks consists of mergers where the acquirer takes out a rival that offered similar products. Roche says those deals result in fewer companies offering a smaller number of products.

"Would community banks rather have eight or 10 core processors to look at rather than four?" Roche says. "Probably, but you have to step back and think about how many of those banks are likely to change core processors anyway."

In fact, banks often have a passive role when processing vendors switch out. At Horicon Bank in Wisconsin, core processing has changed hands several times since 1999 as various providers were bought, says Mark Nelson, the $525 million-asset bank's chief information officer.

So far, Horicon has handled the transitions well. The latest change took place earlier this month when D+H bought Harland Financial Services. But shrinking competition is worrisome, he says.

"Limited choices will lead to more costs for us," Nelson says. "Core processors will know what the other ones are charging, so there will be elevated set pricing."

The pricing impact of reduced competition is a big concern for bankers. Some assume that less competition will translate into higher prices, while others, Silva says, believe that prices could normalize. Community banks could be able to save money by bundling services from a single provider, which could become more attractive as regulators push banks to do a better job of managing vendor relationships.

"You want these systems to talk to each other in real time," Nelson says. "That's where you gain the efficiencies."

Fiserv tries to accommodate banks that want to work with one tech provider and those that select products from a variety of companies, Teri Carstensen, the company's division president of bank solutions, said in an e-mail.

"Fiserv has grown both organically and through strategic acquisitions, adding new and innovative solutions to address our clients' needs and deliver value for them and their customers," Carstensen said. "Financial institutions of every type and size, including community banks, benefit from bringing these strategic solutions to our suite of products."

Consolidation lets bigger companies "invest more capital that brings about the quality of product that we see today," William Neville, president of D+H USA, said in an interview last month. "I don't think banks have suffered because of consolidation. They have ended up with better products at better prices."

Core processors are eager to keep their clients and lure new ones from competitors, so they should be willing to wheel and deal on contracts and renewals, industry observers say. Banks can also secure better pricing by bundling.

While more competitive pricing may help banks in the short term, it may hurt the industry over time, says Christine Barry, research director at Aite Group. Smaller firms and startups have trouble competing with bigger companies that are "practically giving products away," she says.

The technology industry has steep barriers to entry, so it is difficult for startups to make a significant dent. Bank consolidation shrinks the customer base for tech firms, and regulation limits opportunities for new players, Fleming says.

"A bank that chooses to be a beta site for a new core vendor would be under intense regulatory pressure," Fleming says. "Why would they want to defend that decision? Just from that perspective alone it is almost impossible."

Technology providers are making it increasingly expensive and operationally more challenging for banks to use products from other firms, Fleming says. Even startups with "a really big idea" can only "put that big idea out there and hope to get acquired," says Diane Carco, president of Swingtide.

Many bankers fear that reduced competition will to slow down innovation. Bigger companies usually become more standardized as they consolidate.

Consolidators in the technology sector are "trying to have a base set of features that they can deliver efficiently," Carco says. Innovation also is driven by clients' willingness to switch to new services, but banks are often reluctant to search for a new core process, she says.

Contraction among technology providers also has cybersecurity implications, says Tony Plath, a finance professor at the University of North Carolina at Charlotte. If cybercriminals are able to successfully penetrate a single service, they could gain access to a large percentage of banks, Plath says.

Customer service at vendors can also suffer, Nelson says. Technology companies seem to place a greater emphasis on sales, while devoting less time and energy to ensuring that different products work well together.

"These companies need to put more effort into training their staff," Nelson says. "I think they do a good job of identifying what is needed in terms of product offerings but more planning is needed before they sell it to customers."