First Horizon in Memphis, Tenn., has chosen to run VirtualBank — a digital-only unit it added in the Iberiabank merger last year — on a cloud-based core system developed by Finxact and hosted on Amazon Web Services.
The $84 billion-asset First Horizon aims to go live with the new system in June. If all goes well, it could use the system in other parts of the company.
Banks are feeling increased competitive pressure to up their technology game with the help of core-systems software that can easily connect to fintech partners. But conversions are costly and complicated, and the use of new cloud technology raises security and other concerns.
So large and midsize banking companies are testing out cloud-based core systems in smaller projects and working out the kinks before deploying them more broadly.
“It is becoming more common that financial institutions are avoiding big-bang migrations, and they have realized that their technology implementations must be agile, efficient and cloud-based,” said David Albertazzi, research director at Aite Group.
Some banks are modernizing their core systems on a product-by-product or region-by-region basis, he said.
“Standing up a second core system on a developmental, pilot and partial basis is more common,” said Craig Focardi, senior analyst at Celent. “It's a great way to keep innovating more quickly with the latest technology, which is why we're seeing more of it happen.”
The Finxact software is designed to connect to other software programs through application programming interfaces, which should make linking up with new partners easier.
Running VirtualBank on a new core and partnering with fintechs “offers us the ability to put a toe in the water and start to really think through the new set of products and product partners that we could work with to drive a better experience,” said Anthony Restel, First Horizon's chief operating officer.
If Restel's team finds fintech offerings that provide a better customer experience that’s widely accepted by VirtualBank users, then it could build that feature into the legacy First Horizon core. Conversely, if a new product isn't well received, his team could go another direction.
Restel declined to name any of First Horizon's fintech partners but said the company seeks partners that specialize in artificial-intelligence-based personalization, credit score improvement, budgeting tools and other potential enhancements.
Gradually taking to the cloud
This isn’t First Horizon’s first public cloud project. It migrated its mobile banking app to NCR D3, which is hosted on Amazon Web Services, last summer. Employees use Microsoft 365 in the cloud.
Before putting the mobile app on AWS, First Horizon encrypted all the data to reduce risk. The company has not had any issues in scaling up the technology or suffered any service disruptions or security breaches, Restel said.
Though some bank technologists were rattled by the Capital One-AWS breach of 2019, which compromised the data of 106 million customers, Restel said he was not.
“I think when you read about breaches in the cloud, more times than not, it has to do with configuration settings or people have given up passwords,” he said. “I think the cloud is a safe environment when constructed and configured correctly.”
Internal work on the Finxact deployment started last summer. The entire process of converting VirtualBank to the new core is expected to take a year.
The existing and new systems will run in parallel for some time as all the customer data is moved over to the Finxact core.
Banks are still hesitant to move their core systems to the cloud. In a survey Celent conducted in December 2019, 67% of financial institutions said they had no plans to move their core systems to a public cloud in the next two years.
Banks have three key considerations when they’re thinking of moving a mission-critical, core banking system to the cloud, Focardi said: security and trust, risk management and compliance, and ecosystem partner management.
Some vendors, like IBM, have created versions of their cloud infrastructure designed for financial institutions, according to Focardi. Others are providing access and visibility to their applications in the cloud.
“That helps address the security and trust issue,” Focardi said.
Large banks are still putting more applications on private clouds — internal networks that share some of the properties of public cloud computing, Focardi said.
“The benefits of the cloud are there, even if some of the scalability or openness of public cloud are not,” Focardi said.
The pandemic has accelerated some areas of digital transformation in banking, including a shift toward the cloud, he said.
Finding fintech partners
VirtualBank had operated under the Iberiabank brand for several years. Iberiabank picked it up in its acquisition of Sabadell United Bank in 2017. At its peak, Virtual Bank held about $1 billion of deposits; it is now down to $500 million, Restel said. It primarily offers certificates of deposit and money market accounts; it has "thousands of customers," according to Restel, who declined to give the exact number.
Like many online-only brands, VirtualBank was designed to draw in deposits with appealing interest rates to help support loan growth. Deposit-gathering is less of concern in the current economic environment of weak spending and loan demand.
“As you can imagine, we're flush with liquidity,” Restel said.
Restel wants to step up the range of things customers can do at VirtualBank and “use it as a low-risk opportunity to learn and partner with somebody where we can learn about and grow relative to the possibilities for a new core system.”
The key goal is to work with fintech partners and test new services in a smaller, lower-risk environment.
“Most banks, including First Horizon, view fintechs as partner opportunities versus threats,” Restel said. “The pool of available services and products getting created is huge. So having VirtualBank established on an open core framework gives us the ability to leverage all of those fintechs and drive an experience that quite frankly would take us years to try to do if we were using the monolithic, old core servers that we use within the larger franchise.”
As First Horizon becomes confident with new partners and products in VirtualBank, those could later get deployed across the company, as could the Finxact core itself.
For now, VirtualBank will remain independent.
Some banking companies that created digital-only brands found that the new brand cannibalized the existing one. One of those was JPMorgan Chase, which closed Finn in 2019.
Restel acknowledged that this is a risk for First Horizon, too.
“But if they're willing to move, there's nothing that says they just wouldn't move to another competitor anyway,” Restel said. “Our customers have choices every day, all day long. If I don't have the current experience that they want, I run the risk that they’ll move to a different provider.”
