The core-banking provider Finxact — which is challenging traditional core-banking vendors with an open system that runs on Amazon’s cloud — says it has received $30 million in equity investments from the American Bankers Association, SunTrust Banks, Live Oak Bank, Woodforest National Bank, First Data and others.
The news, announced Friday, was significant for a few reasons. First, no vendor has yet broken the hold that the big four in core-banking (Fiserv, FIS, Jack Henry and Finastra) has on the U.S. banking market. Outside companies have had wins here and there, such as Infosys’ deal with Goldman Sachs to run Marcus on its Finacle core, but none have gained sizable market share. This strong endorsement from respected players gives Finxact a chance to break in.
Second, customer demand, fintech competition and other external forces are driving banks toward open banking, in which they allow third parties to use their data to provide better banking services to their customers. Finxact is designed to work with third-party applications this way.
“Finxact is the iPhone to what will become the App Store,” said Chip Mahan, Live Oak's chairman and CEO. “They have created a headless core processor that the world can develop to, to provide functional parity to the oligopoly. We strongly believe that open wins.”
Third, Finxact is the first core system to not only run in the cloud (specifically, Amazon Web Services), but to be sold as software-as-a-service — in other words, paid for with a per-user monthly subscription fee and little capital outlay and hardware maintenance. This could be particularly appealing to community banks that do not have hundreds of millions of dollars to spend on a new core system.
Seeking openness
When Mahan felt the need for a new core-processing system for the bank that would work with some of the interesting new fintechs Live Oak Ventures was investing in, he did not want to go to the traditional vendors.
“Those companies are not technology companies — they’re distribution companies,” Mahan said. “They’ve acquired hundreds of businesses over the years. When they find a new technology, they buy the business, eliminate the R&D department and sell that product down their channel.” He acknowledged that the companies are successful and their stock prices have fared well.
But they’re not open.
“There are really interesting applications out there,” Mahan said. “We’re an investor in a lot of these companies. But until you actually fix the problem at the core, no pun intended, you haven’t fixed anything. You still have to go right back through the door of the oligopoly.”
Mahan first met Frank Sanchez, Finxact's CEO, decades ago in then-Chairman and CEO John Reed’s office at Citibank, when the bank chose Mahan’s S1 Corp. (which had created the first internet bank, in 1995) to provide Citibank’s front-end software and Sanchez Computer Associates to provide core-processing software that Mahan says was the first real-time core processor.
Sanchez and his brother sold their company to FIS in 2004, and their software was renamed Profile. Frank Sanchez became chief technology officer of FIS until 2011, when he went to work for Arkadi Kuhlmann at ING Direct.
Mahan meanwhile started Live Oak Bank in Wilmington, N.C., and created a technology division that built banking software using Salesforce’s Force.com platform that it spun off as nCino.
Mahan asked Sanchez to build an open, fintech-friendly, real-time core system that Live Oak Bank could use. Two years ago, Sanchez launched Finxact with $12 million in capital from Live Oak Ventures and other investors.
“He has created a headless core processor that the world can develop to, to provide functional parity to the oligopoly,” Mahan said. “We strongly believe that open wins.”
The idea of an open core system that can easily work with other applications is not brand new. Fiserv’s DNA software, for one, was originally intended to work this way.
But API standards have evolved greatly in recent years, Sanchez noted. Open source tools and cross-industry standards make APIs more plug-and-play than they were when systems like DNA were developed.
“Ours are published and open, so anybody, even competitors, can use our APIs to connect to core banking,” Sanchez said. “We’re Switzerland.”
Finxact’s transaction processing system has a connector to Salesforce’s financial services cloud, so that banks can use the company’s customer relations software and financial applications. It has also been integrated with the Cedar reporting software and the Apiture digital banking software and as well as legacy providers like Fiserv and FIS.
To protect data while it is shared with others, Finxact provides role-based, attribute-based and policy-based security and field-level database encryption. Banks define their data-sharing policies with third parties.
Core as a service
According to Sanchez, Finxact is the first company to offer core banking as a service the way Salesforce provides CRM as a service.
Cloud delivery appeals strongly to Mahan. The cost savings can be dramatic: Live Oak’s online banking and bill-pay joint venture with First Data, Apiture, for instance, has a data center in Austin, Texas, that costs $6.5 million a year. When the software is ported to AWS, the cost will drop to a couple of hundred thousand dollars annually, Mahan said.
Sanchez said Finxact’s cloud delivery can give banks faster time to market for innovative products and services.
“Community or regional banks can compete on a level playing field from a technology perspective with the Tier 1 banks,” Sanchez said.
Mahan also believes Amazon is simply better at running data centers than most companies.
Bankers historically have worried about putting sensitive data out in the cloud, feeling that customer data needs to be on their premises and under their control. Mahan said this should not be a worry.
“We’ve been fighting this for 10 years,” he said. “This all came up when we chose force.com to put all the data in one place for Live Oak Bank.” He points out that the National Security Agency and the Department of Defense use AWS.
“If the Department of Defense and the Joint Chiefs of Staff have faith in the confidentiality and security of AWS, then why shouldn’t I?“
ABA’s blessing
It is unusual for the ABA to invest in a fintech startup. The association has endorsed vendors in the past, but it has made only one prior equity investment, in Summit Technologies.
Rob Nichols, the ABA's president and CEO, said that since he took over the group in 2016, he has been traveling around the country talking to members about their top business and operational challenges, among other issues.
“I’ve heard time and again the desire to have a nimble and agile core so they can provide a customer experience served with efficiency and effectiveness,” Nichols said. “That was the rationale for why we invested in a fintech. We saw it as an opportunity to invest in innovation that could push core processing in a new and exciting direction so that banks can quickly incorporate new products and services that customers deeply demand.”
Many vendors are desperate to make headway in this market. Nichols said that after evaluating all the core vendors, ABA members chose Finxact on the strength of its leaders, who “have a great track record of success of innovation,” and its technology approach.
“The idea of having an open ecosystem that allows banks to bring into their core a piece of technology or service that can be birthed from any place” is appealing, Nichols said.
A venture investment committee performed due diligence on Finxact. The ABA’s board also weighed in.
“It was a rigorous, multi-months-long process that had a lot of components to it,” Nichols said. “It was something we entered into with a lot of thought and deliberation.”
Nichols says banks, even the smallest ones, are ready for cloud-based solutions and open core banking.
“I’ve discussed it with hundreds of bank CEOs,” he said. “This will be a path forward. A great portion of them are very excited about a future core dialogue that moves in this direction.”
