Banks often say they need to replace legacy core systems to better serve customers in a digital world, but most are reluctant to take the plunge due to the cost and potential glitches that can occur when installing new systems.

But for Mechanics Cooperative Bank, a 140-year-old mutual in Taunton, Mass., the investment is well worth the risk in order to preserve its competitiveness.

“This will set us up for — I don’t want to say the next 140 years — but this will benefit the bank in the long run,” said Joseph Baptista Jr., president and CEO of the $580 million-asset bank. “I’ve been here a little over 21 years; at the end of the day when it’s my time to move on I have to ensure we remain relevant in the markets we serve.”

The bank recently announced it will replace its core platform, a process that involves switching from its current vendor to the Fusion Phoenix core banking system from Finastra.

Baptista declined the name the bank’s current core vendor. He also declined to say how much Mechanics is spending on the project.

Generally speaking, a core conversion for a bank Mechanics’ size could run well into the “single millions of dollars” on a standard five-year contract, depending on the exact nature of what was bought, said Brad Smith, managing director at Cornerstone Advisors.

“It’s a big investment; it kind of puts the kibosh on every other project for two years or so,” Smith said.

Tech spending as % of expenses at banks, by asset category

The platform from Finastra — a company that was formed last year from the merger of the core vendors Misys and D+H — “will allow us to not only compete with other community banks, as well as medium and large banks, but the fintechs as well," Baptista said. "This is an investment in our future to provide better service and cutting-edge products that will deliver an overall better banking experience for our customers.”

The platform’s open, application-programming-interface-based architecture will also eliminate many paper processes and automate previously manual workflows, Baptista said.

Such changes are a must, said Mike Dionne, Finastra's managing director for community markets in the Americas. "The most sophisticated digital channel will not be helpful if the underlying data is disjointed and unreliable," Dionne said.

Mechanics has eight branches in Massachusetts and is active in the metro markets of Boston and Providence, R.I., where it competes with banks of all sizes. Its profits rose nearly 3% to $4.3 million in 2017, according to its call report, but bank officials decided during the year that, given where it operates, it has to be ready to compete with bigger banks that have large technology budgets, Baptista said.

With the new platform “we believe we will be at the forefront [of digital] and compete even against the large national banking institutions,” he said.

After evaluating five vendors — including its incumbent core provider — Mechanics chose Finastra. The bank’s existing core contract is winding down, and the new platform is expected to go live in January 2019.

Despite the project's cost and scope, the bank’s board members and other executives were generally supportive, Baptista said.

“I don’t think anybody is excited about the process of going through a conversion — it’s a lot of work," he said. "But everybody recognized the benefits a new core platform can provide us in 2019 and beyond."

Yet it requires a wide range of expenses, not just for the cost of the hardware and software but the ancillary costs as well, such as hiring temp workers to assist during the transition and paying consultants to guide the process. Mechanics hired the NBS Group as its consultant on the project.

“There will be some outlay this year, but it is still going to benefit the bank in the long run,” Baptista said.

Reluctance to upgrade is characteristic among many banks, even — if not especially — larger ones, Cornerstone's Smith said. That is why KeyCorp made waves this month when it announced it was replacing its legacy core lending systems, for example.

“Larger community and regional banks talk all the time about it, but hardly any are doing it,” Smith said. Even among smaller banks, the number of conversions "is a bit more than what it was a few years ago, but the volume is far less than what you see on the credit union side," he said.

Though they have fewer resources, in many ways it is easier for smaller banks — especially those not publicly traded — to undertake a core conversion because their technology setups are less complicated and they do not have to answer shareholder questions about such a project.

“It’s not like trying to turn around a tanker like it is in the bigger banks,” Smith said. “There is not as much second-guessing, and it allows them to take a bit more of a risk, which when executed properly can give them the potential for a tech advantage even over the big banks.”

Bryan Yurcan

Bryan Yurcan

Bryan Yurcan is a senior writer with American Banker, with a focus on financial technology.