The U.S. market for core banking systems is getting a much-needed injection of competition.
For years, foreign vendors have been trying to break into the U.S. market. But they have had little success until just recently. Zions Bancorp. in July went live with TCS Financial Solutions' core-system platform in the bank’s consumer loans division — marking the Indian multinational vendor’s first core modernization project in the U.S. In 2016, Germany-based SAP announced BB&T will implement its SAP for Banking product in its retail lending division — representing the vendor’s first big U.S. project. The Swiss company Temenos, meanwhile, scored a deal with Commerce Bank to power its deposit banking system.
The outcome of these early engagements will make or break the future of these vendors in the U.S. market. If the foreign companies can gain high praise from their first customers — and the blessing of state and federal regulators — these new entrants will continue to win more bank clients. Already, the added core vendor competition is a refreshing development for a market that has been locked up by a very select group of traditional vendors for far too long.
The big four U.S. core vendors — FIS, Fiserv, Jack Henry and D+H (now Finastra) — have had little incentive to innovate in recent years because their clients typically risk paying exorbitant fees if they exit their vendor contracts. Additionally, small and midsize banks have come to rely on their core vendors for solutions that go beyond core systems, making the institutions feel like they are even more captive to their core providers.
The threat of new competition from foreign companies that embrace newer technologies has prompted old-line vendors, which have long dominated the market, to take action to expand their capabilities. Much of the efforts by the big four vendors have been focused on enabling faster payments by getting their clients access to The Clearing House’s same-day ACH system. They also have been working to upgrade their digital banking offerings. Fiserv, for instance, purchased Monitise to leverage a cloud-based platform in an attempt to help speed digital product development. Fiserv also acquired ACI Worldwide’s architect banking suite of online, mobile and tablet banking tools. These additions may be useful, but only if Fiserv is committed to keeping these acquired solutions up-to-date and doesn’t let them wither over time like its legacy systems have.
The bigger problem with these kinds of moves, however, is that they are a distraction. Instead of upgrading their outdated core infrastructures, the big four are spending their considerable resources on patching additional solutions and capabilities on top of them because their legacy systems continue to be a major revenue driver. Over time, though, these systems will stray further and further from banks’ actual needs in today’s digital world — including faster data processing, fewer redundancies, lower maintenance costs, smoother systems integrations and better support of digital banking channels.
At some point, this trend will become unsustainable and it will force banks to look for more modern alternatives to support their quest to become digital-first, data-driven organizations. The key question is: What’s the tipping point? Temenos executives have said that they expect cloud adoption will be a trigger, and they believe the cloud model for core banking systems will gain regulatory approval within five years. That may be slightly optimistic timeline, but it will happen eventually.
Once regulators have blessed the public cloud for core systems, more banks will take the plunge and adopt modern core systems. Cheaper infrastructure and improved flexibility will be a strong draw for most banks to embrace the public cloud. International vendors, unlike the big four, are well-positioned for this shift — SAP is a leader in enterprise cloud services, and Temenos already has agreements with both Microsoft Azure and Amazon Web Services, for instance.
Bottom line: The clock is ticking for old-line vendors to change course and offer something truly new for their client banks.