Tired of paying ‘ransom’ to core vendors, two small banks fund new one

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Fed up with traditional core-systems vendors’ costs and services, two small banks are taking a page from venture capitalists and financing an upstart core provider.

The State Bank Group in Wonder Lake, Ill., and The Provident Bank in Amesbury, Mass., are backing Neocova, which promises community banks a core platform that uses artificial intelligence and application programming interfaces to help lenders manage deposit accounts and loan products in real time.

Executives from community banks, regionals and credit unions long have griped for years about the inability of major core providers to assist with technology upgrades they say are necessary to compete with the largest institutions.

But Michelle Toll, CEO and president of the $230 million-asset State Bank, said it's not enough to complain.

“Our industry is under so much pressure, and we have to be nimble and quick to adapt,” Toll said. “If we can’t get our core provider to somehow scale the cost of adapting quicker to their new products, or be able to work with a third party through an API, then our customers are being left behind.”

State Bank and the $1 billion-asset Provident Bank are financial investors in Neocova for undisclosed amounts. (Finxact has received $30 million in equity investments from the American Bankers Association, SunTrust Banks, Live Oak Bank, Woodforest National Bank, First Data and others.)

Toll said State Bank is exploring how best to work with Neocova in the near term with an eye toward eventually transitioning to the new core provider. She declined to reveal the bank’s current provider.

High service prices are one reason the bank is supporting an alternative from its current core. Toll recalled how the bank’s core cited $10,000 as the cost for updating the lender’s new logo in its mobile banking app. “That’s painful,” Toll said.

The core also once asked State Bank to pay $100,000 to upgrade an API that linked a third-party mobile banking provider to the bank’s core system and online banking, she added.

“We have to pay a ransom when we’re in bed with a third party because we found that product to be better,” Toll said.

Toll said she had just returned from the American Bankers Association’s annual convention in Seattle, where her cohorts aired similar grievances with the cores.

“The first response I got the majority of the time is that they’re frustrated; they don’t like their core provider,” she said.

However, she stressed she is not interested in performing a quick overhaul with Neocova.

“I don’t think banks will get a lot of value from doing a rip-and-replace, because they need to completely understand how to dance with a cloud-based core,” she said.

“A lot of banks will look at this and say, ‘Is this even possible?’ ” Toll said. “They can’t think about changing from their current core because it’s a monumental task and a big deal. We can’t minimize that aspect of it.”

Dave Mansfield, CEO of The Provident Bank, said in a news release that his bank was “thrilled to work with a team that has the expertise to understand our needs of serving specialty markets and a genuine interest in helping community financial institutions do more than survive but grow.”

Sultan Meghji, a co-founder of Neocova and its CEO, said he began tinkering with the idea of an alternative core four years ago after meeting with community banks, regulators and industry associations.

“We just listened, more than anything else,” he said.

Meghji said he and his partners identified three issues for community banks that led to him move forward with Neocova: outdated technology from traditional cores, unfair vendor contracts and increased market competition small banks face from the largest lenders and fintechs.

Meghji said he is positioning Neocova, which is based in St. Louis, as a core provider for community banks.

“It’s absolutely clear that the things the big cores are trying to push into the market are things that do not make sense for a big percentage of the market,” he said. “They're selling apples and these banks want oranges, and there's a clear disconnect there.”

The traditional cores have long disputed the idea that they’re not doing enough to help smaller banks.

Bruce Lowthers, president of banking solutions at the core provider FIS, said in an October interview that the company is not ignoring the demands of its banking partners.

"I certainly appreciate the frustrations that everybody has," Lowthers said. "It goes back to that changing expectation of technology and what their clients are looking for."

The ABA has attempted to act as an intermediary to the cores on behalf of the banks. The association recently published a set of principles for cores and the banking industry to follow as it relates to those relationships. Among them: fair and transparent contracts.

Rob Nichols, the ABA's president and CEO, said in a statement to American Banker that he’s not surprised community and midsize banks are taking additional steps to “ensure they can deliver the products and services their customers will want and need in the future.”

“Our Core Platforms Committee is working in that same spirit by engaging directly with core providers to encourage a more nimble and responsive partnership with their bank customers,” Nichols continued. “While those conversations have been candid and productive, we still see opportunities for improvement in the areas of data access, API deployment and contract fairness.”

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