Thinking Like a Tech Startup in a Distinctly Establishment Business

Core-banking vendors find themselves in interesting territory these days.

They are fintech companies, but they are decidedly different from the startups looking to disrupt banking with tremendous change. With their size and breadth, they are a natural leader in new innovation, but as the vendors that provide older core systems, they are decidedly old guard.

Gary Norcross, the president and chief executive of FIS, recently sat down with American Banker to discuss the changing landscape of banking, the role his firm plays in the industry's digital transformation and the company's recent acquisition of SunGard.

The following is an edited transcript of that conversation.

You closed the SunGard deal. Why did that deal make sense?

GARY NORCROSS: FIS is a leader in core-bank processing and payment processing and a natural extension for us to move into capital markets, asset management and wealth management. We see it as a great opportunity as you look across our client base; all of these customers are looking for more efficient ways to offer complex services. So the extension of our product portfolio and our ability to leverage our talent around outsourcing and services wrapped around intellectual property, it is really going to benefit our customers. As regulatory scrutiny continues to increase, the ability for financial institutions to leverage through large-scale providers is going to be key.

What investments are you planning to make in 2016 based on your clients' needs?

FIS looks at innovation across three channels. We drive 5% to 6% of revenues back into investing in existing products, because a happy client buys more products and services from you. So keeping products current is a great way to keep them happy. We also drive an early-stage think tank that looks five to 10 years out that looks at the art of the possible. The third piece is our continued investment in early-stage startups, typically around the “B” or “C” rounds of a [funding] raise. They have to have a product, and they have to have a customer. We made investments in mobile banking back in 2007, for instance. We now have 35 million users on our mobile capabilities, and it continues to grow.

We are seeing a lot of requests around digital transformation. People are looking for all of their systems to be digitized in some way. We are making tremendous investments around the area of mobile enablement. We are going to continue to see that trend.

Due to the regulatory burden and the increased security oversight that is coming globally, our customers are continuing to increase our ability to outsource all of those products and delivery and operating those environments on their behalf. It lowers their costs substantially, and it leverages our regulatory and security investments. Those are the two areas where we seeing consistent demands.

What are your thoughts on cloud deployment?

I think the cloud, as a term, has become a bit overused. The reality is whether it is launched in a public or private cloud is open for debate. I think there will be combination of both. The way the products are going to be enabled through the cloud is what is going to make a difference. The cloud itself is not the answer; it is a vehicle software and solutions are deployed through.

Banks are conservative by nature and they're heavily regulated, but is there a trend of them embracing the public cloud?

We haven't seen it, specifically. But you're hearing a lot of conversations around it and frankly, the things you just mentioned tend to be the negative comments.

What's the future of the core systems?

One core system doesn't fit all institutions. We've subsegmented the retail banking market around the globe. The requirements of the core-processing system at a Bank of America are going to be different from those of a community institution. It is important to understand that just one core system isn't going to survive. But I do think there needs to be some modernization of the cores. We've been making investments in core components that are universal for a number of years so that our various core systems can consume those components as the markets need it.

Over time, you'll see greater than 50% of the components will become common across the core banking products we offer.

At some point does it become necessary for you to sunset some of your oldest systems? Do you need to show some of your customers some tough love and push them to upgrade?

We've taken a number of cores out of the market, but we didn't approach it from a sunsetting standpoint. We upgraded our clients to the future core-technology stack, and that has worked well for us. We'll continue down that path. Whether that is tough love or giving them a clear upgrade path, we prefer to show them the benefits of the new technology. I've found that institutions will embrace it that way. Some of our competitors have approached it from a sunset standpoint, and we were the net benefactors of that. If you force someone over a short period of time to go through a massive conversion project they're obviously going to look around.

How many banks go through a conversion a year? Will it accelerate?

I don't know the exact number, but true core changes have slowed since 2008. The elimination of de novo banks was a major part of the core systems work and that whole environment is now out. But at any given point and time, I would say that roughly 20% of the financial institutions have the opportunity to evaluate a core change, mostly because of contract renewals.

As more and more things become digitized, as we push more and more to integrate various application suites, we are going to see the need to modernize the core engine.

Some in the fintech world say that banks' reliance on decades-old cores is stifling the innovation. What are your thoughts on that?

I'd say the opposite is true. FIS has 55,000 employees. Who do you think can develop more software? Us or the eight-person startup?

For instance, people ask us all the time how are you going to compete with the number of non-U.S. companies that are looking to enter the market? I always say they are a valid competitor. But then they run into problems with regulators. Regulation is the easy piece. We regulatory-enable our products all the time for foreign countries. You can solve the regulatory problem.

The real problem is the deep, deep functionality that has occurred in those core engines in the last five, 10 or 20 years. Just because some new product is written in Java doesn't mean it's functionally rich. So what if it is written in a more modern language? If it doesn't have the functionality you can't meet the basic needs of a financial institution. We write in all the modern technologies, but our time is spent building out functionality. You can go to a bank and say, “I have a modern, service-oriented architecture, it is all written in Java, [and] all of my APIs are totally open,” but if you can't run a syndicated loan or run a complex deposit relationship, it doesn't matter what language it is written in.

There are a lot of competitors making those investments, but that is where our scale has to come into play. That's why we keep pushing our company to be larger — it is not to be big for big sake. We need the scale so we can continue to make the investments to stay current. Our clients are no longer looking to buy a single product any longer. It is way too expensive to have 200 vendors. They are really looking to narrow in a dramatic way.

What is the think tank focused on currently?

We've done interesting engagements with some very large clients both in and out of the U.S. where we next-generation mobile banking applications that shift away from the traditional user interface and go more into a lifestyle approach. You're not looking for a car loan, you're looking to buy a car, for example.

We've also done some pilots around artificial-intelligence capabilities. We will like build those out over time. Why do you need a user interface? There is no reason why you can't have a Siri-like experience on the handset.

In the discussion about the battle between banks and fintechs, where does FIS fit in? By nature, you're a fintech company, but you're considered part of the legacy system and not a startup. Are you on either side or are you like Switzerland in this?

We view ourselves as empowering the financial world, frankly. We want to empower our existing clients. While you say we're not a startup, there are many examples where we acted like one. We are a leader in mobile banking which didn't exist in 2007 and we were ahead of the curve. And if we don't continue to change, we will be the older company.

Now, if we talk about financial institution enablement and nonfinancials that are offering financial services, we do start to play a neutral role. The vast majority of our clients are financial institutions, and with the addition of SunGard we've picked a lot of asset managers, private-equity firms and insurance companies, we do believe that our technology can empower the deployment of financial services. We have a lot of examples of empowering nonfinancial institutions.

Bryan Yurcan contributed to this report.