Watch out for the core crash
It was less than a year ago that I wrote in my article “The evolution of core banking: build or buy?” about the huge amounts of funding being pumped into new core banking players.
In that article, I discussed the business case for the £2 billion worth of funding that went into six companies that collectively generated less than £100 million in revenue.
Beyond these new players there were many others vying for core banking supremacy which were also bringing in reasonably large amounts of funding for pre-revenue companies.
On the flip side, we saw the continued dominance of incumbent players like FIS, Finastra and Temenos. In the same article, I questioned whether these companies could redevelop their core quick enough to compete with the new players.
Incumbent banks increasingly want to realise the benefits of moving to a more cost-efficient cloud solution, while there is a growing market from non-financial brands striving to increase customer engagement and loyalty through embedded banking.
Everything was looking rosy, although I question whether the market opportunity really was big enough for the number of players in it given the changing dynamics driven by Banking-as-a-Service (BaaS).
Less than a year later, how that picture has changed. In November last year, we saw reports that Railsr is looking to sell up while also laying off staff. More recently, concern has been raised about a subsidiary of Railsr, PayRNet, being accused of failing AML regulations by the Bank of Lithuania. Elsewhere, Solaris and N26 in Europe have reportedly seen customer onboarding restrictions placed on them by the German regulator, BaFin. Closer to home, 11:FS’s Foundry has also seen high profile departures like co-founder Simon Taylor.
But it’s not just the new kids on the block that have found times tough. There is clearly a stirring among incumbent core vendors too. Late last year, minority shareholder Petrus Advisers called for senior heads to roll at Temenos after the firm cut its 2022 guidance. CEO Max Chuard stepped down in January this year. Chairman Andrea Andreades announced he would take on the CEO role until a successor was found but would not be standing for re-election as chairman. More recently, reports have surfaced that Finastra’s private equity owners, Vista, are considering the sale of its banking and payments business.
Of course, founders, executives and investors could point to a recession, an energy crisis and war as the reasons for any failings or slowing growth. However, for incumbents, the need to be truly cloud native will become more evident as they host more clients and costs creep up. I don’t know of a single incumbent core vendor that has developed a fully cloud-native core banking platform. Outside of the core, the move from many countries to central bank digital currencies (CBDCs) will pose a similar challenge for incumbent payment platforms.
Personally, I believe the market for BaaS is there, however growth of that space will be slower than predicted and currently there are too many players vying for customers. As I have written before, BaaS represents an opportunity and a threat for vendors. The opportunity is understood, albeit I feel the pace of growth is overstated. However, what is not discussed much is the threat. The threat is not from new tech vendors versus incumbents, and it’s not from big tech companies either. The threat is from Tier 1 banks providing BaaS. Of course, with vendors like 10x and Thought Machine out there, these banks should not be writing their own core. As we’ve already seen, a smarter move is adopting a proven platform, like NatWest has done with Vodeno for its BaaS foray.
It will be difficult for smaller banks to provide BaaS profitably as they scale, so it will be interesting to see how the likes of Starling and Monese fair in the future, although the latter seems to be doing well (have a listen to my recent podcast with Norris Koppel and Atul Choudrie of Monese when you get a chance).
This week, I’m just saying, as I’ve said before, that there is more turmoil to come in the core banking space. There are no clear winners either. Incumbents have large recurring revenue streams but similar to banks, they also have legacy platforms that are ageing faster as technology improvements and innovations outpace their ability to change. On the flip side, new tech vendors (and some smaller banks entering the BaaS space) will need continued investment to scale. It could be the banks with the biggest balance sheets that win out in the longer term. They will certainly have the opportunity to buy up a few bargains along the way.
About the author
Dharmesh Mistry has been in banking for more than 30 years and has been at the forefront of banking technology and innovation. From the very first internet and mobile banking apps to artificial intelligence (AI) and virtual reality (VR).
He has been on both sides of the fence and he’s not afraid to share his opinions.
He is CEO of AskHomey, which focuses on the experience for households, and an investor and mentor in proptech and fintech.
Follow Dharmesh on Twitter @dharmeshmistry and LinkedIn.
Read all his “I’m just saying” musings here.