The Truth About Core
Other than the words "financial meltdown," the two words that strike the most fear in bankers are "core conversion." Yes, I'm talking about the multi-year, multimillion-dollar projects that most bank technology professionals won't touch with a 10-foot pole.
It's not just the project length and cost that bankers fear. It's also the perception that a conversion to another core vendor would put the bank in the regulatory spotlight. For instance, the OCC requires bankers to outline the strategic purpose, legal and compliance aspects, and inherent risks associated with using third parties and be able to discuss how the arrangement aligns with the bank's overall strategic goals, objectives, and risk appetite.
Bankers reason that regulators want them to remain (stay hostage?) with one of the big three core processing vendors. It seems like an easier decision, but is it?
Fear of conversion is actually putting your bank at risk, because the legacy infrastructure of older core systems makes it difficult to be nimble. At the very least, operating on the exact same infrastructure as every other bank in your peer group means you can't stand out.
One banker told me that his bank would remain with the same core vendor as the bank down the street, so that it would be easier for his bank to copycat new products the competitor offered. This banker clearly wasn't seeing the advantages of differentiation as a strategy.
Here are two truths about the current state of core processing systems that will hopefully get you at least to consider why the path of least resistance may be bad for your bank.
Truth 1: Innovation stalled in 1986
What were you doing in 1986? Chances are you weren't surfing the Internet, unless you were in academia or worked for the government and had access to ARPANET, the predecessor of our modern-day Internet.
You certainly weren't performing a Google search. In 1986, Larry Page and Sergey Brin were 13 years old.
In 1986, we saw the last major innovation in core systems by a vanguard domestic core vendor, when Jack Henry & Associates released SilverLake, a core processing system designed to run on IBM's System 38, a then-revolutionary midrange computer.
Since 1986, there have been numerous enhancements, but the majority of US banks are still running on batch processing systems designed nearly 30 years ago.
These core systems were designed in a different era -- one of dumb terminals and green screens. It was an era in which women wore "power suits" with padded shoulders. Top Gun was the top-grossing film of the year.
Sure, you can layer ancillary systems on top of the core, but what's the cost to do so? Of course, core vendors are more than happy to sell or "bundle" ancillary systems on to the core, and banks seem willing to pay.
Truth 2: Innovation is happening, but you have to look hard to find it
I call out the big three domestic core system vendors for their lack of innovation in the core space after 1986, but the international stage is different. Several vendors with modern-architecture core systems are making inroads into the US market.
International vendors stayed away from the US due to the hassles of making their systems compliant with US regulations. However, a trend toward global standards such as Basel III means that, from a regulatory perspective, the US market won't look so very different from the international market in the future. Core vendors will still need to retool their systems significantly to comply with US-centric standards, but it is lot closer.
International core vendors are gaining traction. Tata Consultancy Services recently signed a $200 million deal with Zions Bancorp in Salt Lake City. Temenos, which basically rewrote its core system in 2004 to make it database independent, purchased TriNovus of Birmingham, Ala., and has announced that it is expanding its US operations.
So if innovation by the big three domestic core vendors stopped in 1986, and international core vendors are designing systems using new platforms and technology, what does that mean for the core banking market? Do the vanguard domestic technology vendors have the foundation to support the future direction of core, or will one of the new or global vendors take the business away with more modern systems?
You may want to reconsider your core banking options. Staying complacent might not be your best strategy.
Paul Schaus is the president, CEO and founder of CCG Catalyst, a bank consulting firm providing strategic direction for banks. He leads a team of banking subject matter experts across North America. In addition to maintaining the firm's traditional consulting of business and ... View Full Bio
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