Fiserv-First Data: Why small banks fear big fintech
The news that Fiserv is buying First Data may be unwelcome to community bank and credit union executives, some of whom fear it will create an entity they believe will be slower and more bureaucratic.
The deal makes sense for Fiserv. It brings together two financial industry behemoths: a core banking vendor with 12,000 financial institution customers and a payment processing and technology provider with 4,000 financial institution clients. The merged company will have the scale to dominate the industry.
But some fear the merger will also be a huge distraction for the combined company that could take away from its ability to innovate and to respond to community bank clients’ needs. Though Fiserv and First Data largely offered complementary, not competing, products, the merger is a massive one, fueling concerns that the task of integrating them will take years of efforts and resources.
“Many community banks and credit unions rely on these large banktech firms to compete with fintech and the largest banks,” said Alex Jimenez, vice president and senior strategist at Zions Bancorp. “The merger could impact the pace and their ability to be swift.”
For years, community banks and credit unions have complained they are bogged down by their dependence on aging core systems from an oligopoly of vendors: Fiserv, FIS, Jack Henry, and Finastra.
It's been challenging for many smaller institutions to adopt emerging tech, including virtual assistants, robotics process automation, distributed ledgers and open banking, because their core vendors don’t respond quickly to new innovations. Bankers frequently complain that they’d like to adopt innovative technology but can’t because their core systems don’t support it.
It's become such a problem that the American Bankers Association has created a committee with core service providers in an effort to help small banks meet the technology needs of a competitive market.
A key issue is that when a small institution wants to make a change to its core banking system or integrate it with new software, it has to get in line behind many other small institutions making similar requests. In the wake of the Fiserv-First Data merger, that line is likely to get longer.
One community banker, who spoke on condition of anonymity, also worried about about the competitive response from other core service providers.
“This points to further consolidation by the ‘bigs,’ which I believe does make it more difficult for community banks,” the executive said.
In a written response, a Fiserv spokesperson said banks and credit unions shouldn’t be worried.
“Our teams have a strong track record of successfully integrating companies and, when the time comes, we will apply our collective experience to successfully integrate Fiserv and First Data, as we each maintain a focus on serving clients with excellence,” the spokesperson said. “At the end of the day, our clients are why we exist. As a purpose-driven organization, we are focused on delivering superior value for our clients through leading technology, innovation and excellence in everything we do. With this acquisition, we will be better positioned to offer a broader suite of high-value client solutions with an even more extensive range of end-to-end capabilities.”
Some still worry it will give competing fintechs an even larger advantage over smaller institutions.
“First Data is a back-end partner with other core providers, and it’s too early to tell how this will impact those relationships and potentially the capabilities and speed to market for payments capabilities needed by community banks," the community banker said. "Maybe this helps fintechs as they look to close in on the payments landscape.”
Most small institutions have accepted their dependence on large core vendors for the convenience of having one vendor for all needs.
“At really small banks, the guy who opens the bank in the morning and makes the coffee is also a C-level executive,” said Jacob Jegher, senior vice president of banking at Javelin Strategy & Research. “These are small providers that don’t have the staffing or the luxury to go out and do things like vendor selection and integration of multiple solutions using multiple third parties or fintechs. They are thankful to have the option of going to a single provider."
But that convenience comes with disadvantages, including pricing, long waits for modifications and difficulty integrating with other technology.
For Fiserv, the merger brings clear business advantages.
“There’s an arms race that has been going on for the last few years to become the largest fintech provider in the universe — to be the biggest provider, the one that can scoop up as many clients as possible but also to provide additional services,” Jegher said.
Fiserv is gaining payments and merchant services that in theory it will be able to offer its bank clients that could help them compete with fintech payment providers like Stripe and Square. For instance, First Data's popular Clover POS payment technology could help Fiserv clients work with small businesses, if that technology is integrated with Fiserv’s core products.
Fiserv also said the combined company plans to invest $500 million over the next five years on risk management, merchant solutions and payment technologies.
But in a world in which new fintech challenger banks crop up every day and open banking is becoming more popular, the days of wholesale dependence on one incumbent vendor may be numbered unless that vendor can become far nimbler.
“Those that remain closed will have a harder time competing,” Jegher said. “For banks to add value, their providers need to be able to support integration” with other products. “If it will take forever to integrate, that presents a competitive challenge.”
In short, banks and credit unions need technology choice and openness to stay relevant in coming years. This merger is unlikely to help.
Bankshot is American Banker’s column for real-time news and analysis.