Making the Core Switch

There are 814 good reasons for a bank to switch to a new core system. One is usually enough. First, I should warn you that my opinions and consulting experiences are based on 321 client projects which today would represent only 2 percent of the population. I also do not solicit business, so the reasons these bankers approached me was one sided. They knew they had IT problems and they wanted help. If I were a good salesman and had an unlimited prospecting budget, I could find hundreds of financial institutions today that could justify switching to a better core system. Following is a summary record of why my clients switched.1. In the mid-seventies, a major event took place in the evolution of computing. DEC, Data General, Prime, SEL and other engineering companies developed mini computers (aka mid-range) for engineers to use in solving problems, and to drive all manner of scientific instruments. As the proliferation took off, IBM, NCR and Burroughs (now Unisys) followed suit with their own mini computers designed for business applications. Two bankers and a salesman noticed this development and created companies (ITI [now part of Fiserv], Jack Henry and Florida Software [now part of Metavante]) to develop core banking software. As soon as their first products were released, hundreds of community bankers rushed in and bought turnkey systems that they would run as in-house systems. Bankers hired me to help them make the crossover from service bureau to in-house. To give you an idea of the energy level during this extraordinary period, each year, 8.2 percent of the FI population was converting to a better core system. Today, it is 2.7 percent.

2. In 1987, there were 113 core vendors. They were NOT all good. So as bankers realized their vendor was missing the mark and other vendors were hitting bulls eyes consistently, they moved towards the winners. Today there are 30 core vendors, and although they are not all great, most of them are good enough to keep their customers.

3. A shift in strategy results in the need for a different core system. As a result of the 1994 deregulation bill, the distinction of what is a commercial bank, thrift and credit union became less significant. As thrifts and credit unions acted more like commercial banks, they discovered the need for broader IT capabilities. They went shopping for new systems.

4. There are fussy bankers and then there are those who subscribe to "good enough for government work." The fussy ones made their moves. The "good enough" will stay where they are until a vendor salesman, the likes of a hybrid made up of a Warren Buffett (for his sincere, plain talk skills) and Bill Gates (for his understanding of technology), steps in and wakes up the good enough guys. Make no mistake-highly effective salesmen can make a huge difference during a leveling off period such as we're in now. To prove the difference between a plain vanilla system and a high-octane system, I had developed a chart called "Seven Degrees of Core System Capabilities." One picture tells the whole story, step by step. If the good enough guys took a look at it, and they haven't, I believe they would be in the market shopping. In one way or another, even though the chart was developed 10 years ago, it addresses nine nagging concerns that 16,000 bank CEOs are biting their nails about these days.

5. As long as the de novo movement continues, there will be new core sales. Last year, 39 percent of new core sales were to de novo banks.

In my opinion, there are 1,280 FIs that are ripe for a better core system and the only way they'll get it is if vendors commission Buffett/Gates sales types to make it happen. Waiting for a brand new core system to make it happen, the likes of which the eight offshore companies sell everywhere else but the U.S., will only result in disappointment. Bankers buy functionality, not architecture, and today's top U.S. systems have more functionality than the economy has bad news. In fact, some of that functionality (for example, Risk Management) helps to skirt the reasons for economic bad news. And remember, I'm not a salesman. I show up after the bank CEO bites the bullet to replace the core. With so many other bullets that bankers are dodging these days, I don't expect I'll get many calls.