The number of cloud-based core banking startups is on the rise.
"They're sprouting up like dandelions in the spring," said James O'Neill, senior analyst at Celent.
There's Berlin-based Mambu, which opened a Miami office in March, and Miami-based Nymbus, which raised $16 million in February. ThoughtMachine in London is building Vault OS, a core banking system based on blockchain technology. Also in London, former Barclays CEO Antony Jenkins is building a new core system at his startup 10x Future Technologies; Virgin Money has signed up for it. The Irish fintech startup Leveris is also building a cloud-based system.
The latest is Finxact, which formally launched Tuesday in Jacksonville, Fla.
For founder and CEO Frank Sanchez, this is a return to his roots.
In the early 1980s, Frank Sanchez and his brother Mike started Sanchez Computer Associates and created a core banking system called Profile. They sold the system to several Eastern European banks, then sold the company to FIS in 2004. Frank Sanchez then ran the Enterprise Banking Division at FIS for eight years. More recently, he was chief technology officer of Zenbanx and ran all its transactions on a modified version of Profile, until the neobank was sold to SoFi in February.
At Zenbanx, Sanchez said he saw a need for a modern alternative to the core banking systems out there, with real-time, 24/7 processing and U.S. regulatory compliance built in. As he surveyed the industry, he said he didn't see anything more modern than what Zenbanx was running.
"There were systems developed after [Profile] in the market, but they didn't scale technically or functionally to meet the requirements of most of the U.S. market," Sanchez said. "This industry has been stagnant for 20 to 30 years. What other technology vertical is that stagnant? That appeared to generate a major opportunity for us to start this initiative."
But the U.S. market for this type of technology, which handles all basic transactions and accounting for a bank and is often considered its "heart," is overwhelmingly dominated by FIS, Fiserv and Jack Henry.
Smaller banks are strongly tied to these three vendors, said Christine Barry, research director at Aite Group.
"They don't care as much about which is the best solution in the market, they want the vendor with a proven track record and a full product portfolio," she said.
Large competitors like Temenos, Oracle, Infosys, SAP, TCS and IBM that have been trying to sell in this market for years have obtained few U.S. customers. Infosys had a notable recent win with Goldman's online retail bank, Marcus. SAP got its first U.S. client last May, when BB&T opted for a lending module of SAP for Banking. TCS signed Zions Bank up in 2013, but the implementation has been slow. Temenos has reportedly sold its T24 system to Ally Financial, but the bank has yet to publicly comment on it.
The really new startup cloud-based competitors, including Mambu, Nymbus, ThoughtMachine, 10x and Leveris, have an even rougher road ahead — they're not as well known and they're unproven. (For its part, Nymbus has signed deals with at least two credit unions.)
For all these vendors, a large hurdle is the fact that for a bank, a core replacement is an expensive, hard and unappealing thing to do. If something goes wrong, people can lose their jobs and the bank can lose a lot of money.
"What does it take to get a bank to be willing to do a core migration?" O'Neill said. "These banks have 20 years of customization work written on top of what was a packaged solution in the 1980s. Sometimes they don't even know what some of this code does, and trying to unpack it all and drag it to the new environment … these bank CIOs just hold their heads."
Another challenge is the complex web of regulations U.S. banks' core software must support.
Yet the newcomers have a chance, in Barry's view.
"Some of the solutions in place right now are dated and are holding banks back," she said. "It's such a competitive market where customers are expecting things to happen quickly — they want new products rolled out fast and they want modern technology. So there is an opportunity for a solution that is very different from what the market is used to, that has a more modern architecture, that is API based, and that has a more modern look and feel."
O'Neill also sees an opening.
"The reason why the mainframe existed all those years was that nothing else in IT could compete on scalability," O'Neill said. "If you have 5 million accounts and you need to process all your accounts every night, nothing other than mainframe made remote sense. Now today, all of a sudden we have something that can scale to that level, and that's cloud. So we're at a point where there's a clear existential threat to the future of these mainframe-based core banking systems."
The incumbents are not sitting still, he noted. FIS is creating a gateway for application programming interfaces, for instance, that its bank clients will be able to use to mix and match new and old technology components the bank offers.
"They're on the road of trying to retool themselves before they start feeling the pressure," O'Neill said.
Built for the cloud
Finxact Core is designed to run on a cloud infrastructure — specifically Amazon Web Services, though it could run on Microsoft Azure and others. The company even refers to the software as "Core-as-a-Service." Sanchez says a cloud infrastructure is the only way to keep costs down while maintaining 24/7 reliability, business continuity, and security.
"Our system in the cloud made a substantial economic difference" at Zenbanx, Sanchez said.
O'Neill backs this idea up with a different example. When Oak North Bank, a challenger bank in the U.K., moved its core banking system from in-house to Amazon, using Mambu's system, it was able to trim its technology costs by 60%, he said.
Finxact core is set up on Amazon with real-time failover to both local backup and a separate geographic grid to survive catastrophic local failure. So if Amazon's cloud were to suffer an outage, clients should be OK.
The software's cloud design should be an advantage, Barry said.
"We're seeing a greater appetite for cloud-based solutions in the market," she said.
The Finxact core is being built as a set of network APIs. The company plans to set up a marketplace wherein fintech suppliers can connect through open APIs to the Finxact core and provide compatible preconfigured solutions, such as mobile banking and business intelligence applications.
Banks could use Finxact's components alongside best-in-class mobile, web and branch applications.
The company is targeting large community to regional banks with assets of $2 billion to $20 billion.
"There's a great deal of dissatisfaction in that segment with the current suppliers," Sanchez said. "I know dissatisfaction doesn't always translate into action, and that was a concern of mine in building the system: If I build the system, will anybody buy it?"
But he says several banks have already approached him with interest in buying it, even though the software isn't available yet. Finxact plans to go live with a customer implementation of its software before the end of this year and make it generally available in early 2018.
Industry observers regard Sanchez's prior experience in this core banking market as mostly an advantage.
"I see it as an asset and a liability," Barry said. "The benefit is he's a known entity. One of the challenges with a lot of solutions coming into the market, especially with a lot of non-U.S. providers, is they're not known. Community banks especially need to know about the company and the person running the company."
Sanchez Computer Associates' lack of success in the U.S. market, however, could be a challenge in that it's something they have to explain. "But it was also something that happened a long time ago," Barry noted.
O'Neill agrees. "I would say the strongest part of his story as he goes to market is the fact that he has pre-existing domain knowledge," he said. "I look at some of the startups in the cloud-based core banking space, and across the board what strikes me is that none of these companies were founded by people with any previous banking experience. They're learning the industry as they're going along. I'd give Frank as good a chance as anybody in this startup environment, because to my knowledge he's the only one to have been down this road before."
All the newcomers are raising the bar for customer expectations, Barry said, which "puts pressure on the other vendors in the space to improve their solutions. It's a win-win for everybody. Customers will get a better experience as a result of it."
Editor at Large Penny Crosman welcomes feedback at firstname.lastname@example.org.