5 things to keep in mind when choosing a core banking system

August 28, 2023 2:32 PM

Banks of all sizes are considering which features they value most when changing core systems. Clockwise from left: Locality Bank co-founders; Kim Kirk of Queensborough National Bank & Trust; Allan Rayson of Encore Bank.

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Changing core systems is sometimes compared to replacing the engine on a car while it's streaking down a highway.

These massive conversions touch all aspects of the bank and can take many years, if not a decade, to complete. That may explain why, despite a general feeling of discontent about their core systems, many banks are reluctant to make a change. A core platforms survey published by the American Bankers Association in February 2023 found that 47% of banks were satisfied (to varying degrees) with their core providers in 2022, down from 59% in 2020. Yet only one in five are gearing up to switch.

The survey also found that overall, satisfaction was higher outside of the Big Three, or FIS, Fiserv and Jack Henry.

"When most people refer to core, they're thinking of the 'traditional' core solutions that come from the Big Three," said Brad Smith, who leads Cornerstone Advisors' transformation service line. Those vendors bundle together customer recordkeeping, consumer and commercial deposit and loan account servicing, a general ledger and more, along with some level of integration with third-party vendors. But a slew of "unbundled" and "next-gen" cores, many of which come from overseas, are competing for market share in the U.S., promising cloud-native, digital-first and application programming interface-friendly environments.

When banks do change cores, it often boils down to three reasons, said Smith: They want better support, they've outgrown their current system because they have more complex needs, or they want easy integrations to fintechs and other third parties. Some banks will adopt a second, or "sidecar," core to underpin a new digital brand or banking-as-a-service endeavor — testing its potential for the larger institution at the same time.

Cornerstone Advisors groups the factors that go into such decisions into five categories: functionality and capabilities; architecture, where questions about open systems, API integrations and cloud-native arise; vendor maturity, track record and financial stability; customer service and support, which can even vary between core products under a single vendor; and price. Bank executives have echoed these sentiments in interviews over the past several years. Here are the most common considerations that banks prioritize when evaluating a core migration.

Corey LeBlanc, Keith Costello, and Drew Saito - co-founders of Locality Bank.jpg

Locality Bank cofounders Corey LeBlanc (left), Keith Costello (middle), Drew Saito (right).

Does it offer flexibility, API connectivity and open banking capabilities?

This is probably the top reason banks switch cores today, said Smith.

Previously, "the general rule of thumb was that small banks preferred to have one throat to choke, or a 'best of suite' model," said Smith. "With the explosion of digital transformation, pre-COVID and certainly during and post-COVID, being first to market and creating new products has advantages. Now a lot of CEOs will say, my core is my back office system and I'm tired of my back office system limiting what I can sell and who I can partner with. They don't want their destiny to be controlled by a 40-year-old core vendor."

Locality Bank, which launched in January 2022, serves businesses in south Florida. The Fort Lauderdale bank chose Nymbus as its core, largely because of its open API system.

"It was foundationally key for what we were trying to do," said Locality's chief technology officer Corey LeBlanc. "We get to pick the partnerships and contracts we want to work with."

So far, that has included integrating capabilities from Hurdlr, a business expense, invoicing and accounting API for entrepreneurs, and recruiting third-party vendors for data warehousing. Locality, which has $122 million of assets, has collaborated with Nymbus to extract data from the core system and develop APIs and data streams.

"At my previous organization, we struggled to get a conversation with our core provider about some of these topics," said LeBlanc.

Arvest Bank in Bentonville, Arkansas, is gradually migrating its loans and deposits to Thought Machine, a London-based company the bank chose in 2021.

"We wanted something thin and lightweight where we could build an ecosystem of applications to have best-in-class service," said Laura Merling, chief transformation and operations officer at the $27 billion-asset Arvest. The bank was also drawn to Thought Machine's smart contracts feature, which lets it design products more nimbly. For instance, in Arvest's legacy environment, a banker would have to visit four or five different screens to change a loan payment date. The smart contracts feature lets Arvest turn it into one transaction.

Bank of Burlington had a novel way of ensuring its core system played nicely with its desired technology partners. The $115 million-asset community bank, which launched in South Burlington, Vermont, in August 2022, specializes in commercial lending. It asked nCino, its pick for loan origination, and Q2, its choice for customer-facing online banking and treasury management, which core they preferred. Both touted Jack Henry, because of its open APIs and ease of integration.

"Overall, when banks are thinking about making a change, I stress flexibility," said Brooke Ybarra, senior vice president, innovation and strategy at the American Bankers Association. "We don't know what we don't know, or what technology will be available in five to 10 years."

Will it give the speed you need?

A modern core that can handle real-time payments is increasingly important as banks attempt to integrate with The Clearing House's RTP network and the Federal Reserve's real-time-payment processing system FedNow. But many U.S. banks rely on legacy core systems that conduct transactions in overnight batches. Both JPMorgan and Bank of America experienced outages in 2023 that disrupted Zelle transactions — glitches that often occur when digital payments flow through older core banking platforms.

The need to support real-time transactions is one of the reasons that JPMorgan Chase is transitioning to the cloud-based Thought Machine core for its retail bank, a decision it announced in September 2021.

"Everything is moving to real-time," said Rohan Amin, the chief product officer at Chase, in a 2021 interview. "Customer expectation is around real time, meaning if I make a transaction, I see my balances updated immediately, or if I cash out some rewards, I see that change immediately."

Merling also mentioned real-time capabilities as a top reason that Arvest selected Thought Machine.

Zions Bancorp's yearslong core replacement paid off during the Paycheck Protection Program. By the time the pandemic hit in 2020, Zions, which is based in Salt Lake City, had transitioned much of its lending operations onto TCS Bancs, a product of Tata Consulting Services in Mumbai, India. Zions subsequently stood up its automated PPP lending product in three days.

The $89 billion-asset bank chose TCS back in 2013 because it felt that none of the major U.S. providers were sufficiently modern. It completed its consumer and commercial loan conversions in 2017 and 2019 respectively. It is now replacing its deposit banking system through multiple affiliate bank conversions, which it expects to wrap up in 2024.

Do you want ‘one throat to choke’?

There is some comfort in turning to one vendor instead of cobbling together multiple partners.

Kim Kirk weighed the advantages of a one-stop-shop heavily when considering her options for Queensborough National Bank and Trust Co.'s next core system. Her shortlist of options for when the Louisville, Georgia, bank's existing contract expires in 2024 included the Big Three and Smiley Technologies, a lesser-known company based in Little Rock, Arkansas.

"Particularly for a community bank, if the product fit is right, a smaller company will be more focused on you as a client," she said in a 2022 interview.

Kirk, the chief operations officer for the $2 billion-asset Queensborough, has since eliminated Smiley from contention. She was drawn to the company's willingness to collaborate and can-do attitude. But her current vendor provides all aspects of managed IT, from circuitry to file storage to telephone infrastructure. The third-party managed IT vendors she explored were not a fit.

"The challenge you wind up with when you are working with multiple vendors is that when you have a problem, they will point at one another saying, 'we're functioning fine,'" she said in a recent interview. Kirk has since narrowed her choices down to two of the Big Three core vendors.

Integrity Bank for Business in Virginia Beach, Virginia, had a similar line of thinking when it chose Fiserv for its core before launching in May 2021. Fiserv's Sentry even acts as the $101 million-asset Integrity's information technology department, managing its network and workstations and taking care of virus and malware protection.

"If something breaks, we don't have to crawl on the ground and figure out what's broken," said Nancy McManuels, then the BSA/OFAC officer, information security officer and compliance officer at Integrity, in 2022. She has since retired. "We knew we didn't have the expertise on hand to be the PC guys.

How valuable is personal attention?

Community banks in particular value the direct access they get to small core providers.

Encore Bank in Little Rock, Arkansas, uses Smiley Technologies.

"If I am trying to implement a new piece of technology or spin up a new partnership, they can allocate development resources within weeks," said Allan Rayson, chief technology officer and chief innovation officer of the $4 billion-asset bank, in a 2022 interview. "We talk with [Smiley co-founder and CEO] Elizabeth [Glasbrenner] every week."

Smiley has 11 clients and targets community banks with under $5 billion of assets.

Lauren Sparks, founder and CEO of Agility Bank in Houston, felt similarly about her choice of DCI, or Data Center Inc., a core system that is owned by 30 community banks. When researching core providers for her de novo, which launched in 2022, she found DCI to be collaborative and open to her vision. She asked DCI to work on application programming interface connectivity to some of the partners Agility had settled on, such as Virtual StrongBox for digital storage and Numerated for digital lending.

"I realized 'small' doesn't mean 'not able,' " said Sparks in a 2022 interview. "When you are smaller like we are as a de novo and they are as a boutique shop, you have an ability to listen more."

Can’t find anything you like? Build your own core

Some neobanks have taken the step of crafting proprietary cores.

"The advantage in building your own core is that you have a lot more control, so you can more easily support the launch of new products or features that may fall outside of what a standard core system can support," said Alex Johnson, author of the Fintech Takes newsletter, in a 2022 interview. "While it costs more upfront to build your own core, you realize cost savings on the back end because you're not paying a third party to provide the system."

Stash, a banking and investing app, launched Stash Core in 2022. The company created new roles for site reliability engineers and network operations center technicians to focus on reliability and form remediation policies in the case of outages.

A blog post at the time of launch stated that Stash now owns the real-time money movement infrastructure. "For example: We read and write actual NACHA files in-house for ACH; we make real-time decisions for debit card authorizations and ATM withdrawals; we actually manage the ledgering of every customer account and general ledger in-house across dozens of processes and files everyday; and we are always the final say for a specific customer's balance and available balance," read the post.

Current, another neobank, built a proprietary core system that was compatible with both traditional and decentralized back ends. Its vision back in 2015 was to provide "hybrid finance," which combines the benefits of decentralized finance with the familiarity of traditional banking.

HMBradley didn't build its own core, but it took the unusual step for a neobank of purchasing a core system when it transitioned to its new banking-as-a-service partner, New York Community Bank, in early 2022. Previously, it had integrated directly into its prior sponsor bank's core. HMBradley chose Thought Machine. Like Merling at Arvest, CEO Zach Bruhnke was impressed by Thought Machine's smart contracts feature that lets banks write their own code to build their own financial products.