Adopting mobile banking put Southern BancShares in Mount Olive, N.C., into an awkward situation.
First, it had to pick a provider. The easier and cheaper option was to go with the mobile banking product offered by its core provider. The other option was to turn to Malauzai, a mobile banking startup. That route would be more expensive, but it was a better product, said Sondra McCorquodale, senior vice president of alternate delivery channels for the $2.1 billion-asset Southern.
Although it picked a third party over its core provider, it still had to work with that company to integrate Malauzai's platform. The core provider wasn't exactly welcoming to the bank's choice of using an outsider, she says.
"They're not as open or receptive to making that easy for their customers," McCorquodale said. "I'm not saying that they won't do it, but it was a much slower timeline than if we had gone with their internal solution."
She declined to identify Southern's core processor but said it's one of the top three of Fiserv, FIS and Jack Henry & Associates.
New market share figures compiled by FIS FedFis show those companies provide core banking systems for 93% of banks with more than $1 billion in assets. For banks with assets of less than $1 billion, the three serve 84% of the market. (FIS FedFis is not associated with the core processing company FIS in Jacksonville, Fla.)
Those three have such a commanding share of the market that they have the pricing leverage to keep their clients from breaking free, said Dave Mayo, chief executive of the data provider FIS FedFis in Austin, Texas. That's because core processors control the interface connection to the bank's main network.
But Southern's story has become common, according to industry consultants and other vendors. Banks are increasingly judged by the quality of their digital services. Community banks are looking to offer the best of each tech product to compete with the largest banks, which have the ability to develop their own products in house and which are usually better than the cores' standard offering.
"We have seen some more modern applications offered by point providers. ... They make their solutions more user-friendly, with an easier, more intuitive look and feel," said Christine Barry, an analyst at Aite Group.
Conversely, Barry says, many of the core providers are hoping to play to bankers' thriftiness in peddling their products.
"I hear that some core processors give certain products away to compete," she said.
The cost of picking an outsider is a real consideration — McCorquodale said that it took a lot of convincing to get its executive team to pick the more expensive option.
That's one of the benefits of working with a large core provider. Many banks prefer to buy everything from FIS, Fiserv or Jack Henry, in part because it's cheaper and shorten their list of vendors, something banks have to consider given increased regulatory scrutiny of vendor risk management.
The big core processors spend millions of dollars per year on research and development, but much like the way fintech criticize big banks for their lack of agility, their size doesn't necessarily work to their benefit. Their attention is spread too thin. That gives singularly focused companies the advantage.
"I don't mind competing with them, but I know that they're not going to be all that competitive," said Robb Gaynor, co-founder and chief product officer at Malauzai.
Others say the largest core processors have little incentive to update their main products or develop cutting-edge new products because of their market dominance.
"You have all these community banks running on platforms that are fairly old," said Stephen Greer, an analyst at Celent. "The big providers haven't made a lot of effort to do much development on it. They'll sit and collect maintenance revenue and you can milk that for quite a while."
Some banks have made changes that allow them to branch out from their core processor. For instance, banks like the $9.6 billion-asset Eastern Bank in Boston have placed middleware on top of their core to make them less dependent on their core providers.
"It enables us to deal with vendors so that our business lines get exactly what they think they need, it gives us a sense of having more control over our destiny as opposed to relying on a vendor," Richard Holbrook, Eastern's chairman and CEO, said in December. Eastern's core provider is FIS.
Representatives from the top three core providers dispute the idea that they abuse their dominant market share position.
"It's hard for me to get around the idea that this is not a competitive market," said Byron Vielehr, president of depository institution services at Fiserv. "We recognize that they all have choice and sometimes they choose to leave and sometimes banks decide they want to buy everything from us."
Vielehr also disagreed that the big core processors make life difficult on clients that want to use outside providers for some services.
"If the idea is that we're stopping banks from cooperating with other businesses, then we're being really ineffective at it," Vielehr said. "There are thousands of providers that exist, and their entire business is based on plugging into" the core systems operated by FIS, Fiserv and Jack Henry.
Jack Henry, of Monett, Mo., doesn't shy away from the fact that upstart tech firms offer competing products, said Stacey Zengel, president of Jack Henry Banking.
When Jack Henry hosts technology fairs, it invites dozens of third-party vendors, sometimes topping more than 100 firms.
"We'd love to sell them our software, but we don't lock them into our solution at all," Zengel said.
FIS could not be reached for comment.
Malauzai's Gaynor agrees that some core processors try to cooperate with outside vendors.
"The cores have a benevolent starting point and it's a model that can really have benefits for some small community financial institutions," Gaynor said. "The reality is, it doesn't always work."
Southern's experience with moving to an outside vendor has prompted management to consider farming out more of its tech functions to third parties, McCorquodale said. While Southern's relationship with its core is a good one, and its core-processing system works well, the bank now believes it's worth the extra expense to find the best product, she said.
"It took several conversations to get everyone on board" to hire Malauzai, "and even then it wasn't a unanimous decision," McCorquodale said. "But I daresay it's a unanimous decision now."