In transitioning from clunky "green screen" interfaces and mainframe hardware to boost efficiency, small and mid-sized banks would appear to be left with little choice when replacing core banking products.
Yet recent vendor consolidation and advancing technology may actually be working to place smaller banks in better positions to demand more flexibility in core banking from vendors. That's largely due to improvements in integration, features and functionality.
When it comes to upgrading a legacy core banking system, service bureaus are the most likely option, since few banks in this size range can afford to tackle core product refurbishment on their own, either via in-house builds or by managing licensing agreements. The need to achieve greater economies of scale force most small and some mid-sized institutions to outsource IT to service providers that can offer them more centralized customer information files, which feed from the back end and talk to Web-based, intuitive interfaces powered by modern servers for a reasonable price.
One of the fallouts from the wave of vendor M&A is to focus on integration based on upgraded or new technology, resulting in more open architectures and plug-and-play functionality, which small banks should be demanding from vendors anyway, sources say.
"It's getting more toward an environment that allows more choice with less cost," says Don W. Free, a banking analyst for Gartner. "You have more of an open selection across these different vendors."
Most banks with $5 billion and under in assets outsource. They also end up depending on one of several vendors-now fewer than 10 because of consolidation-for core banking platforms and many ancillary ones needed to run multiple product lines, such as teller, new accounts, document-imaging, payroll-processing, Internet-banking and bill-pay services. Such core banking providers include Fidelity Information Services, Fiserv CBS, Harland Financial Solutions, i-Flex Solutions, Jack Henry & Associates, Metavante and Open Solutions Inc.
Free says small banks still aren't in position to demand, or afford, best-of-breed options from their vendors and service bureaus, but customers no longer need to confine themselves to green screens or single vendors.
An example of that shift is Great Southern Bank, which neither outsources nor exclusively uses the products of its core banking provider. The $2 billion bank licenses its core banking system, Silverlake, from Monett, MO-based Jack Henry, and runs it on IBM iSeries machines. It made the conversion in 1998 from a core banking system now owned by Fidelity, called Miser, which Great Southern ran on a Unisys A-series mainframe.
The Silverlake system still runs batch, updating itself each morning from data extracted the previous day from core, flat-file databases that run on iSeries servers, all of which are tied together via a central CIF. This is not unusual. It's the CIF's interaction with Silverlake that makes it a "very all-encompassing, very powerful application that gives you the picture of your customer that you need," says Lin Thomason, director of information services at Great Southern. The bank's architecture does not surprise Gartner's Free. "Relational databases are nice, but they also cost more," he says. "You have to consider that, because not only do you have to buy licensing for that database, you also have to have skill sets at the bank to manage it."
The projected migration to a more modern core system based on service-oriented architectures has not yet happened, says Celent analyst Bart Narter. Banks and their vendors are mostly taking interim steps, wrapping existing legacy systems in "SOA-accessible" front-ends, while handling the issues with middleware rather than migrating to a new core.
"Mainframes are secure and, for the most part, dependable," Narter says. "Unless there's a service issue, there's not much drive to change. Only about three [percent] or four percent of small banks are switching their core systems or providers at any given time."
More flexible middleware was what cinched Principal Bank's decision to switch its core outsourced systems last year. The Des Moines, IA-based bank scrapped a platform from Alltel Information Services (acquired by Fidelity in 2003) to convert to Fiserv CBS, which it did in July 2004. Principal decided the CBS's Communicator middleware would better aid the bank in serving the needs of small businesses from the foothold it has in merchant banking.
The $1.2 billion bank is owned by Principal Financial Group, a backer of CardSystems. "We can plug into some corporate systems and plug into systems of our other business," says Dean Brown, CIO at Principal Bank. "Fiserv just had some richer capability on an end-to-end basis than what Alltel did."
Regarding middleware fixes and the "issue of SOAs," Free says all the core banking vendors "either have something in operation or are making varying degrees of progress towards that end."
Glastonbury, CT-based Open Solutions Inc., however, has linked its product to relational databases, such as those from Oracle, and partnered in the last several years with Hewlett Packard and Sun. London-based i-Flex, the global leader in core banking systems, is also making a push into the U.S.
What led WSFS Bank to tap Metavante for a core banking replacement was a match between the Milwaukee-based vendor's business strategy and the Wilmington-based bank's technology goals. WSFS had been running a Cobol-based Systematics platform from Alltel. "It was definitely green screen, definitely looking at just 3270 host emulation," says Barbara Fischer, chief technology officer at WSFS. "There was not a lot of user-friendly front-end."
With aims to become the "premier" institution serving business customers in Delaware, the $2.7 billion bank decided to switch. "There were other systems that were somewhat equal. There was not much variation," Fischer says. "But Metavante's acquisitions tend to be integrated into their core systems. We saw that as a huge benefit."
To boost internal adoption, Fischer asked end-users and business managers to rate the offerings from the beginning of the assessment-selection process. "We asked: 'Does this help you meet your business needs today? Do you see the opportunity in this system to be scalable in the future?' So they were thinking about those questions long before we made the decision."
WSFS' recent choice to install a commercial credit application from a different vendor showcased Metavante's flexibility. "Both organizations have made very positive [initial] moves to get the system integrated," Fischer says.
She wouldn't name the vendor, however, for lack of a finalized contract.
This is similar to Great Southern, which licenses a system from Atlanta-based Harland to power all of its loan platforms and related document preparation, while using Jack Henry for most of its core and related services. "Loans are not one of [Jack Henry's] strong points," Thomason says. "But the Silverlake core is reasonably easy to interface to. We've not had any undue challenges."
Thomason says Great Southern refused to outsource because "we needed the power and flexibility to process in-house." Something's working right: Great Southern grew to 17 percent share of deposits last year in its home territory of Springfield, MO, according to Narter. This tops area rivals including Commerce Bank, Empire Bank, US Bank, Bank of America and Regions.
