Upstarts Covet Your Core

Upstarts Covet Your Core

THEY CLAIM SWITCHING IS DIFFICULT, BUT NOT IMPOSSIBLE

BY GEORGE YACIK, SPECIAL TO BANKING NEW YORK

For years, community banks have complained that their core banking technology is being held hostage by the oligopoly held by the Big Four providers – FIS, Fiserv, Jack Henry and Finastra – which they say have failed to update their platforms despite charging high fees and exorbitant contract breakup fees. Now a group of financial technology startups is trying to gain what small market share is left to them by the Big Four, which many in the industry say hold a market share of well over 90% between them.

This small group of upstarts includes St. Louisbased Neocova, which has raised about $3 million in capital from community banks, including The Provident Bank in Amesbury, Mass., and Finxact, which last year raised $30 million in funding from the American Bankers Association and a group of banks.

But the leader of this small pack of fintechs may be five-year-old NYMBUS, which according to president David Mitchell has helped 12 banks go live with its core banking solution over the past two years – 10 of them in 2019 – with another 15 scheduled for this year.

According to its website, “financial institutions are having a hard time meeting customer demand due to their dependency on legacy technology solutions that were built to serve a brick and mortar banking model.” NYMBUS’s SmartCore “is a digital-first technology platform that enables financial institutions to offer a customercentric banking experience. The platform unifies all the required banking functions into one system, enabling an omnichannel customer experience with automation and simplification of back-end processes and workflows.”

“The core is one of the biggest problems that this industry has,” Mitchell says, echoing comments from many others in the community banking industry. “If a banking customer needs support, it will take six months and cost $50,000 to get it, because it’s all legacy code and it touches everything else – it’s not cordoned off. With the old cores, if you download a new feature or function, you have to touch everything to make it all talk to each other. Consumers want an Amazon and Google experience when they go to a bank website but these older technologies don’t allow that.”

David Mitchell

Aaron Silva, president and CEO of Paladin fs in Austin, Texas, which helps community banks find technology providers, says the big legacy core providers, as they are known,“have stopped innovating because they don’t have to.” He says they only spend about 4% to 6% of their free cash flow on innovation each year, with most of that money being used to buy fintechs that are innovating.

Mitchell – who was executive vice president and chief product officer at Open Solutions, which was acquired by Fiserv in 2013, before joining NYMBUS in 2016 – says his company’s core banking offering “was originally built for media companies for digital marketing. Most of the legacy cores were built for banking, and then they tried to put CRM and artificial intelligence, all the buzzwords for marketing and automation, on top of their banking platform.

“NYMBUS was built for marketing first, and then we put all the banking workflows on top of it. It’s a big differentiator, because our secret sauce is our push marketing capabilities and our robotic automation.”

“In addition,” he says, “all the legacy cores were built with middleware, while all the new cores, especially ours, include the API layer, which solves a lot of problems. API, which stands for application programming interface, acts as a bridge between the existing core and new ancillary fintech apps, such as mobile and internet banking.

“You can do new releases much faster” as a result, Mitchell says.

“Typically, when the legacy cores upgrade, it inevitably breaks something, because their underlying technology is old. We don’t have to touch our core code. Having an API layer that allows for seamless and quick upgrades of features and functions is unique. If you want to offer CRM or bill pay or remote deposit capture, it’s all in a portfolio of apps that you can turn on or turn off.”

While many banks would gladly switch to a more nimble core provider with newer technology, they often are locked into long-term contracts that are expensive to get out of unless there is a material breach of contract terms, both Mitchell and Silva said.

“The problem the new core fintechs have is three-fold,” Silva said. “One, they don’t have the resources to convert banks to their systems as fast as banks would sign up. Two, they lack ‘takeaway’ capital to help the banks pay off the multi-million-dollar termination fees from the legacy providers. The fintechs don’t have that kind of money. Third, the banks are risk-averse. They’re reluctant to sign up with the fintechs. They don’t want to be first.”

Aaron Silva

NYMBUS, which was financed with $400 million of startup capital, is willing to help banks painlessly switch.

“If they have two years left on their contract, we will help them buy out their contract,” Mitchell says. “Instead of signing a five-year contract, we’ll sign a seven-year deal and give them the first two years for free, so they are paying their existing vendor but not using them. We can’t buy out every agreement, but we are happy to do it if we can, but they have to understand it’s going to be a long-term partnership.”

“We think there is such an opportunity to help community banks,” he adds. “It’s a perfect storm of bad legacy technology, a shrinking number of financial institutions, and the additional threat of non-traditional challenger banks popping up every day and gaining market share. Banks are having a hard time fighting for deposits and getting new customers because their technology is so outdated.”