OBSERVATIONS FROM THE FINTECH SNARK TANK
The “Big 3” in bank technology—FIS, Fiserv, and Jack Henry—dominate the market for core banking systems and provide many of the ancillary and functional systems that banks and credit unions run.
Talking to bankers about their technology provider relationships elicits a range of emotions. In Cornerstone Advisors’ What’s Going On in Banking 2021 report, half of bankers said that getting more value from their technology vendor relationships is a top technology priority.
American Banker quoted one bank CEO who said:
“The biggest threat to banking innovation is the legacy cores. I want the bank to be here another a hundred years, and it just was not happening under any legacy core.”
What’s the problem? According to Cornerstone, bankers are most frustrated with the core providers’ speed to market and pace of new innovations, followed by difficulties integrating third-party systems to the core applications.
In addition, bankers are split on whether or not their core provider contributes to their organization’s digital transformation efforts.
Don’t cry for the vendors, Argentina.
A comparison of the five-year stock performance of the Big 3 to the KBW and QABA indices (both benchmark stock indices of the banking sector) shows that the tech providers have delivered higher and more stable stock price growth than banks.
The View From The Big 3’s C-Suite
What do the core providers think about all of this and the challenges facing banks and credit unions—and their own businesses?
To get their perspective, I spoke to David Foss, CEO of Jack Henry & Associates, Bruce Lowthers, President of FIS, and Byron Vielehr, Fiserv’s Chief Digital and Data Officer.
1) How Can Banks Stay Relevant?
I asked each of the execs about their perspective on what banks and credit unions need to do to remain relevant in the market today—and what their companies are doing to help financial institutions do those things.
Bruce Lowthers, FIS: “Financial institutions need to do three things: 1) improve the customer experience; 2) modernize their infrastructure; and 3) innovate to make it better for the next generation of customers.
To help them do this, FIS invested six years ago in a private cloud, converted apps to take advantage of the cloud, and modernized our infrastructure and network capabilities. In addition, we’ll bring close to 100 products to market this year, and will double our revenue from new products.”
Byron Vielehr, Fiserv: “The key to banks and credit unions staying relevant is helping people solve problems in their financial lives. For example, payments is becoming a bigger part of people’s financial lives. It’s more than just account balances.
P2P (person-to-person) payments are important, interactions need to be more intuitive with less friction. We’ve turned Zelle on for 500 financial institutions, and will have more running on Zelle than the rest of the industry. We’re also offering a new digital card hub that abstracts features and functionality around the core.”
David Foss, JHA: “Financial institutions’ challenge is creating experiences for customers that are different—but that requires them to think differently. They need to create partnerships to engage customers in new ways and create connectivity between partners. The problem is that bankers aren’t thinking that way.
Jack Henry is building out that middleware/API layer and providing a digital layer on top to create that ecosystem. The key part is built around Banno—it’s not just a digital banking layer, but a way to translate service differentiation to the digital channels.”
2) How are Core Vendors Addressing Speed to Market?
A common criticism from banks is that the major vendors move too slow. I asked the execs how they feel about that and what they’re doing to address speed to market.
Lowthers, FIS: “Innovation is a funny thing—if we don\’t create what you’re looking for, then we’re not viewed as an innovator. But we’ve been recognized by Fast Company as a top innovator and we’re playing at a speed at which we\’ve never moved before. We’ve changed our infrastructure and our platform in order to focus on speed. We’re releasing 50 new products per year. And we’re driving toward becoming a world-class collaborator—few companies do that.”
Vielehr, Fiserv: “We focus on speed all the time—but sometimes clients aren\’t ready to run. We pre-build as much as possible. Our API ecosystem enables clients to cut out the tight link to the core port data to the cloud to provide more flexibility.”
Foss, JHA: “It’s popular to say that the big core providers are slow and monolithic, but sometimes fast is the enemy of right. We focus on areas where we need to be quick, e.g., Zelle integration. Our competition did point-to-point integration, when the right thing to was integrate with other RTP rails. We created a more robust PayCenter, eliminating multiple integration efforts.”
3) What are the Threats to the Core Providers’ Business?
Banks may face existential questions about their future relevance to their customer base, but what about the core vendors? What threats do they see to their business?
Lowthers, FIS: “The technology provider landscape is always highly competitive. The big dynamic in the market is that startup funding has fundamentally changed. A startup used to get excited with a $30 million raise—now they’re raising $500 to $600 million. There’s a benefit from this to us, however, because it expands our total addressable market as many startups become clients and partners along the way.”
Vielehr, Fiserv: “The two biggest threats to our business are a non-healthy banking ecosystem and small-to-medium businesses and merchants pivoting to digital. We need to focus on making sure they have all tools needed to make this move. We don\’t see anyone coming in to provide a full suite of solutions, however.”
Foss, JHA: “Well, what we’re not worried about is FIS and Fiserv—they’re not doing anything more innovative than we are. The threat we worry about is: Who will really disintermediate banks?”
Downplaying the Threats?
While the Big 3 are rightfully concerned about the health of the banking system, they may be downplaying other potential threats on the horizon.
Googles’ recent pullback out of the checking account market might diminish that Big Tech’s firm threat as a bank tech provider, but I’ve long believed that Google wants to be a tech vendor to banks.
In addition to Google, at some point Amazon could get into the picture and create a marketplace for checking accounts. Why would it do that? Because it could make a lot of money charging banks for account opening processing taking advantage of its ability to do identity verification, and then potentially offer account processing services via an acquisition or two.
And none of the execs mentioned Square, Shopify, or Stripe as potential threats. Square, in particular, should be seen as a threat to both banks and the core providers as their payment processing and small business banking and lending businesses grow.
The execs’ defense—”we don\’t see anyone coming in to provide a full suite of solutions”—overlooks two points:
- The same thing that is happening to banks—i.e., fintechs like Square and challengers banks are cherry-picking customers away—could happen to the core providers, thanks to new integration platforms.
- Not all financial institutions don’t want a provider with a”full suite of solutions”—they want a balance between best-of-breed and not having to manage a thousand vendors.
Bridging the Perception Gaps
There’s a clear divergence of perceptions: Financial institutions are frustrated with the core providers’ pace of innovation, but the technology providers counter that with examples of their innovative progress.
Why the divergence? According to Steve Williams, President of Cornerstone Advisors:
“The differing perceptions stem from the fact that institutions below $50 billion in assets aren’t really positioned to ‘go it alone’ and merely consume technology from big players. As the core providers have grown, it feels like there is less ‘roll up the sleeves’ time between banks and vendors dealing with thorny issues of execution.”
Williams points out, however, that these efforts aren’t as profitable for the providers as rolling up a new tech acquisition with leverage and cutting costs.
Banks aren’t off the hook here, however. The three execs have a point when they call out banks for “not always being ready to run,” discounting the innovations delivered, and not “thinking differently.”
The root of the problem and frustrations is misaligned interests. Williams suggests:
“The core providers should create a ‘service/execution ecosystem’ that can grow profitably around their solutions when they don’t have the financial flexibility to invest in the transformation and executive assistance needed by smaller institutions.”
JHAs’ Foss and I spoke about opportunities for the cores to provide consultative type services, but he pointed to the financial institutions’ reluctance to get these kind of services from them.
The strategic positioning of FIS, Fiserv, and Jack Henry reads like a business school case study—they enjoy strong barriers to entry from competitors and benefit from huge (and painful) switching costs. Congrats to them for achieving that.
To be fair, not all banks and credit unions are dissatisfied with their core provider. But many are, and it isn’t desirable to have strained relationships with your client base.
Both parties in the equation—the core providers and financial institutions—need to make changes to improve these relationships.
Banks have had to learn that consumers are less and less likely to consolidate all of their accounts with one bank. The cores may need to learn to thrive in an environment where they don’t provide all of a bank’s systems.
Speaking of bank technology providers, the industry lost a giant last week with the passing of MX c0-founder and Chief Technology Officer Brandon Dewitt, who lost his five-year battle with cancer. That the battle was only expected to last three months is testament to Brandon’s strength, perseverance, and ingenuity during his treatment.
Jason Henrichs, President of Alloy Labs, tweeted about the “hole in the moral fabric of fintech” that Brandon’s passing created and that now needs to be filled.
Brandon personified “purpose-driven.” In a recent episode of the Breaking Banks podcast, Brandon commented:
“With this new layer of technology you bring in this idea that technology has been optimizing and automating everything out there. There’s now a new layer of stewardship. Like how does that play into our communities? How do we set the right priorities and have the right types of purposes behind that? You have to decide: Are you going to be a builder and executor, or will you be a handshake entrepreneur?”
RIP, Brandon Dewitt.