The Two Different Worlds of Bank Tech -- U.S. and the Other 194 Countries

The rate of core conversions in the U.S. is slowing down, but it's increasing in other markets -- due largely to growing demand for mobile banking services.

First, a 50-cent lesson in geography. Mexico and Canada are not the 51st and 52nd states of the U.S. I say that because some bank tech vendors, who like to inflate their customer numbers, always include Canada when I ask for U.S. activity. Canada has thousands of credit unions so it can make a difference. Also our affection for Canada is understandable when you consider that Canada is the #1 country we trade with. Canadians also play a good game of hockey. And Canadians speak our language unless you're in Montreal, which is also a good way to con your wife into a substitute trip to Paris when you're already in Boston. The drive is beautiful, the people are cordial, the restaurants are true French, and it's a great escape from the problems that pollute the nightly news. Canadians don't have a care in the world. Canada knows how to manage Canada.

Now that we hopefully understand there are differences between the U.S. and our adjacent friendly neighbor, I'd like to deliver some differences regarding the bank core business in far-off lands as their activities rolled out in 2010.

Remember, the U.S. is the only country that apparently believes in free enterprise whereby any group of fat-cat-businessmen who can put together $8 million in capital (maybe more now after the reform) can apply for a bank charter. That relatively easy process has meant lots of banks over the years.

There are 15,215 banks and credit unions in the U.S. right now, diminishing at a rate of 3 percent per year. That's not a mystery; It has been every Fed Chairman's hidden agenda to have fewer banks. And it'll happen now at a greater rate of decline because not even an optimist like Donald Trump would ever think of starting a bank in today's "new normal."

U.S. FIs have been growing their technology since 1958, when coincidentally the first semiconductor computer entered the fray. Small banks first leaned on their upline correspondent banks, and then broke away to hire entrepreneurial companies (Jack Henry, ITI, Florida Software, Computer Services, Inc., and Fiserv) who offered better solutions. Switching core systems has been a high-volume business until 10 years ago.

In 2010, 307 U.S. FIs switched to a new core system. Everywhere else (mainly developing countries), the number of new core switches was 125. In a movie of another kind, the catchphrase would be, "Show me the numbers, Jerry." The U.S. has more FIs than 194 other countries combined.

There's an important message in the previous metrics comparison however. The U.S. number (307) is diminishing or leveling off because technology is maturing, and bankers are reasonably happy with the technology they have. The international number is increasing because of what I call "new awarenesses." The new affluents in India and China won't be too happy with their old lifestyles now that they have "tasted" Hermes, Ferrari, condo-mania, fuse-it-all-dining, fun-before-work, and something called "freedom to live." And the village people took to a mobile phone quicker than the rice wagon is coming.

So while new cultures are realizing they too can have a bank account by simply using a phone, U.S. bank customers are now rather ho-hum about having their bank in their ear. And core vendors offer mobile banking as easily as auto manufacturers provide cigarette lighters. Mobile is just one easy-to-add piece of a vendor's Internet Banking module. Take it or leave it.

The net effect of this whole new awareness of mobile banking is pretty much a net zero for core vendors. This phenomenon of a new piece of technology has happened before. In 2000 there were 33 Internet Banking vendors displayed in Automation in Banking. Today there are only two independents remaining (and both are looking for a home). The paradigm for entrepreneurs is, "Build it and a core vendor will buy it." There are now 80 brands of core systems readily available in the global market. These brands are owned by 35 companies. Many of the 35 are wannabes. There are clearly five companies winning this battle of who's got the power -- not just the products but the know-how. Winners in this context are defined by how many customers they have and include, Fiserv, Jack Henry, FIS, Oracle Financial Services Software and TEMENOS. Surprisingly, there are six huge (average $20 billion) systems integration companies in the list of wannabes, and I'm not talking about the most obvious one, IBM. I view the six as acquirers, not providers.