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Core Banking Systems Winners And Losers

Don Free, research director at Gartner, shares his views on how the core vendor market is changing, and what banks and vendors must do to stay competitive, with BS&T associate editor Jonathan Camhi.

What are the vendors in the core banking systems market focusing on, and what's behind their strategies?

Free: The simple answer is retention, retention and retention. The U.S. core banking market is a war zone among U.S.-based vendors to keep their revenues stable. The primary fronts are core banking surround technologies, an expansion of core systems sourcing, the reconciliation of past acquisitions and, to quote Sir Winston Churchill, "… the end of the beginning ..." for the pursuit of Tier 1 and 2 banks for core banking renewal in the U.S. market.

The core banking surround systems such as mobility, business analytics, fraud, anti-money laundering and payments are a gold mine to core banking vendors, contributing up to 50% of bank client annual revenues. This also provides insulation for vendors from banks thinking about changing due to lack of functionality breadth -- most banks would rather deal with a single vendor and avoid integration complexities and higher expense.

An unexpected expansion of vendors sourcing for banks with assets ranging $3 to $20 billion is fueling competition among them to pad their recurring revenue -- a welcome source of longer-term contract revenue during financial downturns. Many banks with the mind-set to outsource within this asset range are hoping to level the peaks and valleys and technology risk associated with their growth ambitions.

U.S. core banking vendors that actively acquired core banking platforms in the past decade are facing a day of reckoning to rationalize these products. The sales pitch used to be, "We've got the core banking platform you want whatever your database, operating system or hardware preference." As more vendors move to platform-agnostic solutions -- offering core banking systems that can run on Microsoft SQL Server, Unix or mainframe -- the past value proposition is dissipating, with splintered investment providing limited returns.

[Global Core Banking Market Growing ]

How are some of the hot technology trends, such as mobile and cloud, shaping core systems strategies?

Free: Mobility is a hot button issue with banks, but it's only part of a confluence of forces that Gartner defines as the Nexus of Forces -- the convergence of information (big data), mobile communications, the cloud and social commons. Information provides the context for delivering value-driven social and mobile consumer experiences, while the cloud is the delivery conduit.

As for cloud in core banking, this is a story of banks in a holding pattern. Although Gartner has been tracking this emerging technology trend for several years and determined that this infrastructure is fundamentally feasible, most of the true cloud activity has been among financial institutions that fall below the radar of central banks' regulatory scope.

These "too-small-to-care-about-failing" -- versus too-big-to-fail banks -- are experiencing 50% cost savings compared with their larger counterparts. However, most banks aren't holding their breath until this becomes an available option. Central banks have much more pressing issues to resolve than searching for new ways to introduce perceived volatility within the banking market.

Gartner expects regulators to eventually view this model as just another variation of outsourcing. Penetration of this model will progress beyond current microfinance organizations in a three- to five-year time frame.

What kinds of vendors are best positioned to succeed in banking core systems now, and why? What common threads do you see among those providers?

Free: The core banking vendors that properly position their products with Tier 1 and 2 banks will be the big winners of significant new revenue sources and large margin growth. These banks are hoping to capitalize on advanced levels of business agility derived from systems that deliver component-based architecture. U.S. vendors have limited offerings in this space, and their internationally-based competitors seemingly have the inside track to serve this market.

Do you anticipate more consolidation among core systems vendors?

Free: Definitely. With bank customer segmentation shifting from about 50% of pre-World War II customer populations in 2000 to a forecasted 10% in 2020, banks are facing a very different world in the near term. U.S. vendors have been slow to realize the impact on banks of having tech-savvy -- Gen X, Gen Y, i-generation -- customer segmentation dominating banks' customer distribution channels.

As core banking functionality has leveled off and become a commodity, the fundamental focus for banks is change. That is, how can the bank's business agility map to these shifting market conditions -- this is all about the architecture and design concepts of a core banking system. Vendors that aren't ready with component-based architected core systems face irrelevance and acquisition.

Do you expect to see more banks take on the risks and costs involved in replacing their core systems in the near future?

Free: Just as the ERP software market worked through the same cycle, signs show that the core banking market is reaching the maturation phase within the near-term planning horizon. Familiar phases of a crowded vendor market, vendor consolidation, heavy cross-selling of bell-and-whistle technologies for differentiation and, finally, dramatic market right-sizing are imminent signs of this maturation.

Banks are standing up and voting with their currency. Legacy systems clearly aren't selling anymore; banks want a core banking system that mirrors their challenges and are stepping up their demands for change.

Jonathan Camhi has been an associate editor with Bank Systems & Technology since 2012. He previously worked as a freelance journalist in New York City covering politics, health and immigration, and has a master's degree from the City University of New York's Graduate School ... View Full Bio

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