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.

"Common sense says if I buy three products from the same company, they'll integrate them better," says Teri Carstensen, president of bank solutions at Fiserv. "If I buy them from three different companies, I have to manage that." She also notes that banks' regulators are holding them accountable for vendor management and to make sound vendor decisions, which helps companies like Fiserv that have a solid financial position and cash reserves.

Some smaller vendors are kept alive by bank customers that partially own them, Gillis says. "These banks don't want to bring the whole system in house, that puts a big burden on them to be responsible for that system," Gillis says. "They want to lean on a provider but then they want to have enough clout so that that provider can't keep rising prices or shortening their service."

The remaining vendors, he suggests, are happy to sell themselves to one of the big players, such as FIS or Fiserv. (Indeed, early this year Fiserv bought Open Solutions, which had highly regarded, real-time technology and a mountain of debt.)

Global Vendors Make Inroads

Accenture, Infosys, Temenos, TCS, IBM, SAP, CSC and Oracle are among the large vendors trying to enter the U.S. core banking market. So far, none have gained much traction, but some have put a foot in the door.

Accenture is implementing its Alnova software at BBVA Compass. Silicon Valley Bank is deploying Oracle's Flexcube software.

Non-U.S. software companies have an extra credibility hurdle to overcome here: Can they meet the needs of American consumers? Can they satisfy all U.S. regulations? A few years ago, one foreign company hooked a large regional bank, only to have the project collapse under time and cost issues. This made U.S. banks even warier than they were before.

Yet Temenos (after purchasing U.S. bank software company Trinovus) signed up two community banks in September. Infosys says it has a U.S. bank customer; it won't name the bank. TCS is deploying its core software at Zions Bank. A little over a year ago, the firm partnered with Century Link and Savvis to allow the TCS BaNCS suite of core banking products to be offered on a cloud-enabled hosted environment in the U.S. (The shift toward hosted or outsourced core software is a discussion for another day.)

These wins are significant. The vendor that completes a large installation at a U.S. bank successfully, and gets that bank client to talk up the benefits it's gotten from the technology, will be taken very seriously by that bank's peers.

The horizontal technology vendors like IBM, CSC and SAP have more of an uphill battle. "IBM is a technology company — give us your work and we'll do it for you," Gillis opines. "But IBM is not a banking company, IBM doesn't know what a DDA account is." He puts CSC and SAP in the same category.

D+H Breaks In

One company broke into the core banking inner circle this year — Canadian vendor D+H, through its purchase of Harland Financial Solutions.

"They want to be number three," Gillis says. "They're going to do everything they can to push Jack Henry out of that slot."

Some have wondered why a company that primarily provides mortgage software in the U.S. would buy a core banking software vendor.

Bill Neville, president of D+H USA, says the acquisition of Harland will bring "revenue synergies," through cross-selling between the 1,700 U.S. community bank and credit union clients D+H acquired through its purchases of MortgageBot and Compushare and Harland's 5,400 core banking clients. (The merged U.S. client base is 6,200 because 900 customers overlap, Neville says.)

"Through integration and introducing them to the products of the other companies, we have a great opportunity to grow penetration of our products and revenue," he says.

Harland's newer core product, Phoenix EFE, will be integrated with the mortgage software. A series of product integrations will be announced in 2014, Neville says.

Greer believes U.S. core banking conversions will trend up in 2014.

One driver he sees is the complexity of current core banking systems. Another will be U.S. banks admiring the results of others that have installed modern, real-time core software. Spanish banks like Santander and BBVA have real-time systems and efficient workflows spend about 40 cents out of every dollar on IT, says Greer, who is based in Madrid. "They're about 20% more efficient," than U.S. banks, he says. "If BBVA Compass can produce those kinds of results and show agility in getting the product to market, I see that being a major driver."