The Real Reasons Banks Switch to New Core Systems

I've written my share of articles for the trade journals about why bankers switch to new core systems, and I'm probably guilty of presenting, in part, the theoretical (or conventional wisdom) reasons. Now in this era of blogging, where spilling your guts is an OK thing to do, I decided to look back at the 321 projects I worked on to present the REAL reasons as expressed to me by REAL bankers while reclined on the VIRTUAL "consultant's couch" in private and behind closed doors. That's right, folks, there's a lot of emotion and Kleenex involved in this decision process. Some of the statements I heard are as clear to me today as they were decades ago.Here's what some bankers told me: "Our mother (bank CEO) cares more about her girls in bookkeeping than she does about moving the bank into the era of technology." "Our CEO said we could get an in-house system as long as it's after he retires." "My brother is my biggest problem because he owns half the bank and he's totally anti technology." "My first priority as the new CEO is to take this bank forward in the use of technology, and the system I had before I came here is the answer for this bank." "My cousin uses the system he chose and he swears by it. So I signed up as well." "We're always asking our provider for new things. We'd rather hear about the new things he has to sell." "Six banks signed up with a new vendor based on the demo, but we didn't realize we were buying vaporware until it was time for the conversion." "I want to have a loan machine in every branch and every 7-Eleven in our market." (That was long before the cavalier attitude of subprimes). "We're tired of complaining to our service bureau, even though they mean well. It's time for us to do our own work because we'll always be #1 on the priority list."

To best understand this gut-spilling story, the reader should keep in mind that the 321 projects occurred during the past 35 years. The turf was a lot different in the earlier years than it is in the current environment. So I divided my experiences into the first two-thirds and the current third. I should also point out that I apparently possess a significant amount of threat to my clients because during the orientation briefing of each project's first day, I open with this remark: "This will be the last conversion you will ever have to deal with at this bank even if you live to be a hundred."

Every client is still using one of the recommended systems (11 of them in all), and those recommended systems are still viewed by many as the right places to be-vibrant, up to date, supported by experts a phone call away, owned by reliable companies, and delivering strong and relevant capabilities no matter what comes down the pike. Please understand, I'm not a handicapper. I picked Big Brown to win the Triple Crown, I gave up on the Red Sox before they made their comeback, and I hire experts to manage my retirement fund and all my accounting and tax work. So I'm not good at many things, but I wouldn't trust anyone to make a better core system decision than my 36 tools. Bragging is also OK when it appears in a blog.

1974 to 1997 • Almost all large banks provided data processing services to their down-line correspondent banks. During the early '80s they discovered two things-they sucked at it, and they lost money doing it. M&I Bank was the only large bank that made a go of it, and a handsome one at that. • In-house systems were "born" in 1976, and they had a lot of appeal because community bankers embraced the idea of independence-freedom from their service bureau. Large banks got their wish-"Are they gone yet?" Independent companies like Fiserv realized a near epiphany and wasted no time seizing the opportunity. • This period marked the beginning of the awareness that record keeping systems were becoming more than just posting machines. Bankers called it "Management Information," and they were hooked. • The PC played a big part in releasing bankers from their bondage to the mainframe. So even outsource customers downloaded and didn't have to ask permission from the "czar." • With the PC came the greatest invention of all for the thinking (analytical) banker. Spreadsheets were a fantastic cure for lazy. Instead of one iteration of a forecast, bankers could do a hundred by playing what-if games and letting the system do all the grunt work. Good-bye Ticonderoga, Eberhard, Standard Register and HP calculator. • Consolidation of vendors created several millionaires, but it also stabilized the industry. In 1987 there were 113 core vendors. Today, there are 30. Most of the good guys got acquired; the bad guys vaporized; the half-hearted gave it away to any bidder. What's left is pretty good. Now bankers are more thoughtful about switching because they are no longer hemorrhaging. • Vendors with names that were synonymous with banking finally caved in to the realities of technology-ya gotta keep on delivering. So NCR and Burroughs threw in the towel as core providers. IBM stuck their big toe in only by "rubber stamping" selected vendors. The plunge didn't occur because they were picking the losers.

1998 to 2008 • Technology is getting more complex and bankers are turning the task over to experts. Outsourcing is becoming the method of choice. Let the other guy do it. Maybe lending is next. • The good tech companies in today's market are looking more like the safe bets. If a bank is in the safety net, why switch? • Even though the new technologies are appealing, every top vendor has them. One more reason to stay put. • For the first time in over four decades, the banking industry is without a dramatic new silver bullet technology. What a relief for bank CIOs. What a disaster for bank tech vendors. • You won't hear this from any bank tech provider, but bankers are up against far more critical business issues now than to pay attention to technology. That's a bad thing for vendors. But if you need some good news, bank tech vendors had nothing to do with subprimes, the credit crunch or the weak economy. Most tech companies are admired these days for doing their job with excellence. Not being in the limelight is like last year's academy award actor who can't get a job this year. Bit parts may be the answer until the next big break comes along. For vendors, that may mean a paltry 4 or 5 percent internal revenue growth rate for the next few years. • Today's core system buyers will include three types of financial institutions: 1) de novos, 2) credit unions that are finally realizing they are more like a bank than a club, and 3) banks that procrastinated the inevitable move and are now biting the bullet. • There's a fourth group that I call the perfectionists. They are never satisfied. They're in the group of my 11 top solutions, but when a banker looks at the other 10, he realizes there's not enough upside benefit in a switch to justify the pain of a conversion. So they temper their perfectionism. • If you're looking for the big banks to make the move, you better have a Plan B because they are as dug in as a 300-year-old oak tree. And the average age of a big bank CIO is about 10 years from retirement. He also knows the science and art of risk management better than any lender in the bank. Interesting that what a community banker in Iowa once told me is the same thing that a sophisticated million-dollar-a-year CIO in a large bank is thinking-It's OK to do it after I retire. • Technology has been very popular for four decades. Now, cruising in calm waters is not all bad, and in fact may be a good thing in order to rest up before the next tech boom.

I never claimed to be a visionary, but I listen to my instincts. Somewhere in a garage, loft, coffee house, basement, Bangalore office, or Beijing factory, someone is creating a new idea for banking that will make every DDA system obsolete. If that happens, 16,375 (net of the Countrywides, IndyMacs and maybe 88 more) financial institutions might be buying new core systems. Is that a dream you don't want to wake up from