Colorado bank joins growing list of cloud-based-core converts
FirstBank in Lakewood, Colo., has become the first customer of Finxact, a startup that has developed a cloud- and API-based core banking system.
In so doing, it is joining a small group of banks that are ditching aged, legacy systems for more modern core systems hosted in a public cloud.
FirstBank, which has $19 billion in assets, will gradually replace its 35-year-old, homegrown core over the next three to five years.
“As is the case with a lot of financial institutions, our system is getting old,” said Jim Reuter, CEO of FirstBank.
The system has not been holding the bank back because its function is limited to core number crunching, "but at the end of the day, it's COBOL-based and it needs to be replaced at some point,” Reuter said.
The bank looked at several core systems. Reuter said he felt Finxact’s was agile and he liked that it was cloud-based.
Also, Finxact has what it calls a “headless” core. This means it handles transactions, positions and balances, but does not provide the customer-facing components. This fits well with the way FirstBank operates, Reuter said. The bank built its own customer-facing technology components, like mobile banking and a payments hub, that interact with the core system but are not tightly integrated with it.
Those components can be plugged into the new core fairly easily, Reuter said. However, the bank will have to modify some of its application programming interfaces to work with the new core.
For banks that have not built their own digital banking software, Finxact’s software works with partners including Backbase and Apiture, according to Frank Sanchez, CEO of Finxact.
The company has six banks piloting the software, he said.
“In every case, we've had to integrate with partners for things like check management, remote deposit capture and mobile web,” Sanchez said. “So in every case we have a list of partners that we've worked with. But in many cases the banks will develop aspects of it themselves because they want to control that experience.”
FirstBank is a bit unusual in developing almost all of its own technology in-house up until now and in being an early adopter of technology like real-time payments and an API-based core. The bank has 3,000 employees at 120 locations. Four hundred of those employees are in information technology.
“Some might hear those numbers and think we're doing something that wouldn't be as efficient as outsourcing or buying,” Reuter said. “But at the end of the day it works. Our efficiency ratio is still in the 54%-55% range.”
Having its own technology allows FirstBank to be an early adopter of technology.
It was the fourth bank in the United States to be part of the Zelle real-time payments system, which was called clearXchange at the time.
“We were able to do that without relying on one of the core providers to get us there because of all the in-house technology,” Reuter said. The bank handled almost 4 million Zelle transactions last year.
“You hear a lot of comments in the industry about we're in an IT arms race against the large banks that are spending north of $10 billion a year each on technology,” Reuter said. “Our attitude is we're going to be a leader and compete with them, but we're going to do it very surgically based on our business model.”
As the head of a retail consumer bank, Reuter could see that customers were using Venmo, Square and other payment services.
“So that was a place we decided to be a leader, because at the end of the day, even though we're not charging for the transactions, people keep more idle funds in a non-interest-bearing checking account if you're providing services out of that account that meet their day-to-day needs,” Reuter said. “And we could see person-to-person payments was one of those needs.”
Several newer core providers, including Nymbus and Mambu, and some of the established ones offer core systems that, like Finxact's, are cloud-based and use APIs. Reuter and his team were drawn to Finxact in part because the founders, including Frank Sanchez, have long experience with this technology and the regulatory requirements tied to it. Several decades ago Sanchez and his brother developed the core system FIS sells today called Profile.
Reuter said he also liked that it is a real-time core; rather than posting transactions overnight, all transactions are accounted for immediately throughout the system.
This is important to the bank because of its involvement with Zelle and its plans to connect to The Clearing House’s RTP network.
“Having a core system that's ready to handle that real-time activity is what a customer would ask for if they were to design the system from the ground up,” Reuter said. “I think someday that will be how everything will work.”
FirstBank is not planning a sweeping conversion to the new core. It will start by launching one new product with the new system. That will run kind of like a pilot with friends and family first, to make sure everything works as it should.
The bank will run the two cores side by side while gradually rolling out new products and migrating customers over to the new system.
This project shows that the regional banks recognize that that they have to change, Sanchez said.
“There's been a lot of concern and dialogue,” he said. “I think this is a demonstration of the fact that banks will change core platforms, that the banks understand that the 30- and 40-year-old legacy platforms are not going to carry them into the future.”