A handful of startup core systems providers are promising cutting-edge technology and an innovative approach to banking. But can they make a dent in a market dominated by a few entrenched firms?
The latest player to enter the fray is Thought Machine. The London company came out of stealth mode last week to announce Vault OS, a cloud-based core banking software that uses blockchain-like technology and machine learning capabilities to offer banks greater efficiency and digital capabilities.
A newcomer to the core banking market like Thought Machine in some ways faces less of a barrier to entry: New technology like cloud computing means there's a lot less infrastructure to invest in, such as mainframes. Also, observers say there is a
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Corezoid is courting the U.S. banking industry with a cloud-based solution its founder developed while working at a Ukraine bank.
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For years, U.S. financial institutions have taken the position that it was riskier to replace legacy core systems than to leave well enough alone. Here's why that's beginning to change.
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"The market is longing for new entrants to shake things up, so there's plenty of reasons to hope these new firms make it," said Brad Smith, a managing director with Cornerstone Advisors. "But they're competing against vendors with 40 years of product-development lead time. On the one hand, that means they can make the case [that existing vendors] are archaic, but on the other hand it means [existing vendors] still have got 40 years of listening to client feedback and conducting user groups and really understanding their customers."
The
Banks' core systems "are typically built on decades-old technology," Taylor said. "We're coming from an agile development world."
In fact, Taylor and his team, made up of several former Google engineers, did not set out to get into the core banking space. They originally focused on developing products to improve digital user experience, but kept finding antiquated core systems that wouldn't support new technology.
"We'd show banks what we were working on, but we'd continually hit the same problem," said Taylor, who joined Google in 2010 after it bought Phonetic Arts, a speech synthesis technology company he co-founded. "They'd say, 'Your idea is cool, but there's no way it will work with our current core banking engine.' "
Thought Machine is initially targeting U.K. and European banks but eventually wants to sell technology to banks all over the world, including the U.S.
Taylor said the company understands it will be difficult to break into the market. As such, it is starting small, focusing on retail banks, especially small-to-midsize ones.
"We're aware that there are incumbents happy with the way the market is, but that's a challenge we need to face," Taylor said.
An American company also staring down that challenge is Nymbus in Miami Beach, Fla. Though many bank executives are hesitant to undertake core conversions — especially with newer providers — enough are realizing the benefit of a modern core that breaking in is a bit easier, said Nymbus' founder, Alexander Lopatine.
"Of course, there are many bank CEOs that are more conservative when it comes to replacing a core, especially those that may be a couple of years before retirement and don't want the hassle," Lopatine said. "At the same time, there are enough that understand a modern bank must be digital, and a bank can't be digital with a core built in the last century."
Nymbus, which launched 18 months ago, offers a cloud-based platform that
"What we're offering is bank-in-a-box," he said.
The company is set to unveil its first three bank customers later this year, Lopatine said. It has specifically been targeting banks with assets of less than $10 billion since they tend to be more nimble, Lopatine added.
Other new entrants in the core banking space include Corezoid, in Redwood City, Calif., which was spun out of a Ukrainian Bank. Corezoid,
Targeting small-to-midsize retail banks, as Nymbus and Thought Machine are doing, is a smart move, Smith said.
"They tend to be easier conversions, and less complex," he said.
Although industry observers believe the core vendor market could use more competition, conversations often return to how hard it will be for them to gain traction. Besides the incumbency issues, core conversions are
"There's a lot of bank CEOs dissatisfied with their core vendor, but, at the end of the day, they are just unwilling to pull the trigger to go through what will be a time-consuming and costly process," Smith said.
Further, he said, there are only a small number of banks each year whose contracts are up. It also takes about 18 months from when a bank makes a decision to actually implementing a new core system, he said.
"This is just not an easy business to scale," Smith said. "It's not Uber."
To be sure, the well-established core vendors are not resting on their laurels. Several core providers have innovation labs around the world and are
Whether it comes from new providers or legacy ones, banks will start to realize it costs less to replace a core system than to try to compete in a digital world with legacy technology, said Mark Schwanhausser, director of omnichannel financial services at Javelin Strategy & Research.
"If you want to win long term, and be a truly digital bank creating the highly personalized service that leads to longstanding customer relationships, you need to have better, real-time systems," he said.
