On the Louisville, Georgia, community bank's shortlist are the three legacy providers that have owned the core market for years — FIS, Fiserv and Jack Henry — as well as a lesser-known company based in Little Rock, Arkansas: Smiley Technologies.
"One reason we chose to include them was to see what a smaller core would offer," said Kim Kirk, chief operations officer at Queensborough.
Queensborough's contract with its current provider expires at the end of 2024. The limitations of the $2 billion-asset bank's current system and lack of application programming interface availability meant, for example, that it could not implement an online account opening process it wanted.
"The challenge with the legacy cores," Kirk said, "is that so many are written in ancient language that makes them hard to change and lengthens the timelines to innovate."
As vice chair of the American Bankers Association's core platforms committee, Kirk has met with 26 providers, including cloud-based companies and some that have yet to sign their first client in the U.S.
"These new cores don't have that problem," she said. "They have new stacks and are cloud-based and ready to go."
The advent of smaller or "next generation" providers, many of which are based in the cloud, are broadening the options for banks beyond the legacy providers. But movement to adopt these cores is still slow. Kirk notes that some community banks are in a quandary: They may be drawn to a small company for the partnership potential, but if the core provider does not offer much beyond a system of record, they need the expertise on staff to piece together a teller platform, new accounts and loan platforms, and more elsewhere. Rather than transitioning to a lesser-known company, some banks are testing the waters by launching standalone digital banks with a separate "sidecar" core to assess whether they want to make the move later on.
"It's an awkward time for the industry because the core systems that exist are getting outdated," said Vik Sohoni, the digital and analytics leader for the banking and securities practice at McKinsey in North America. "The truly next-gen players are not fully there yet from a compliance or product standpoint. They are gaining ground quickly. But you don't know who will survive or be acquired."
There are pros and cons to going with less-tested core technology. A
Kristiane Koontz at Zions and Neal Shah at Regions explained how they are coping with the many challenges of rebuilding the technology foundations of their banks at American Banker's Digital Banking Conference.
Next-gen cores make their case
There have been a few high-profile movements in the next-gen core space.
In September 2021, JPMorgan Chase announced it would
Live Oak Bank in Wilmington, North Carolina,
Other providers are better known overseas and are not yet widely used in the U.S. Mambu, a cloud-native banking platform headquartered in Germany, has more than 230 financial institutions as customers, 40% of which are banks. It counts N26 in Germany, BancoEstado in Chile and TBC Bank in Georgia among its customers.
Robin Smith, vice president of North America at Mambu, says one area of concern from banks is uncertainty over the level of security offered by a cloud environment.
"Financial institutions need to be willing to trust a third-party provider to manage massive amounts of customer data," he said. "Some aren't there yet."
Another non-U.S. core provider, SAP Fioneer in Walldorf, Germany, provides cloud-native core banking for several hundred global banks. Its first U.S. customer is Vast.Bank in Tulsa, Oklahoma. The company says it collaborates with its clients on product roadmaps and strategy and solicits input for its research and development investments.
When smaller companies mean bigger relationships
At the $1.8 billion-asset Encore Bank in Little Rock, Arkansas, using a smaller core provider, Smiley Technologies, has led to strong communication between the bank and its vendor.
"We talk with Elizabeth every week," said
Speed and nimbleness is another advantage.
"If I am trying to implement a new piece of technology or spin up a new partnership, they can allocate development resources within weeks," Rayson said.
Glasbrenner, whose father, Walter Smiley, started the data processing company Systematics in the 1960s, says Smiley targets community banks typically under $5 billion of assets. It has attracted eight financial institutions as clients since it began building its software 19 years ago. Glasbrenner's approach is to "put more people into the problem," she said. "If a bank wants to integrate with a cool fintech, that is not a commodity transaction in my opinion. That is a process in which you sit down with the fintech, bank and a smart data processor and map out expectations and timeline and figure out who will do what."
Glasbrenner considers Smiley a hybrid between legacy and next-gen. She says the company's newest technology, which will roll out next quarter, is a cloud-native online banking system with an API-first infrastructure.
When Lauren Sparks was piecing together her technology stack for Agility Bank, a de novo she
She turned to DCI, or Data Center Inc., in Hutchinson, Kansas. "When I said 'I think we want to do this' and 'I think we want to do that,' they said, OK, we'll figure that out," said Sparks. "We knew we were making a choice that wasn't mainstream, but it was a fit for us because we didn't want to be defined by what people had done before."
That meant asking DCI to work on application programming interface connectivity to some of the partners Agility had settled on, such as Glia for secure communications, Virtual StrongBox for digital storage and Numerated for digital lending.
"I realized 'small' doesn't mean 'not able,' " said Sparks. "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."
She was also drawn to the company's background and experience: it is owned by 30 community banks.
DCI has about 150 financial institutions as customers that use the whole package and another 150 or so that buy certain components, such as internet banking.
"One thing I talk about to prospects is I'm not going to apologize for our size," said Sarah Fankhauser, DCI's president and chief executive. "Our differentiator is the way we take care of customers and our ownership." DCI sends relationship managers to its banks on a quarterly basis for face-to-face conversations. The call center is staffed by bankers.
Kirk is still evaluating her options, prioritizing what she calls the "three Ps" in her search: partnership, product and price, in that order. For her, "partnership" is where a smaller core can shine.
"Is this company engaged with us? Can we do interesting things together? Are they making sure we are knowledgeable on their products?" are questions Kirk asks herself to evaluate the potential of a core provider.
"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.
When in discussions with Glasbrenner, Kirk noted a willingness to collaborate. "If there were things she couldn't offer, there was no ego about it — she said 'OK, we'll figure it out,' " Kirk recalls. "That kind of flexibility and can-do attitude is a big deal that would be appealing to institutions that want to have a little more voice in what they are doing."
At the same time, there are factors that tilt in favor of legacy providers.
Queensborough relies on its current provider for managed IT, including circuitry, telephone infrastructure, the security operations center, firewall management and more. That all-in-one product could make the value proposition of going with a big shop higher. It also means that there is only one vendor to hold accountable when there is a technical problem.
"The core marketplace is in an interesting flux," Kirk said.
