The irony of incumbent core banking vendors
My good friend Leda Glyptis has a strong dislike for mainframes because they run old banking systems that should have been retired or replaced by now.
I’ve previously covered the evolution of banking technology and why almost every bank has multiple cores. So, analogies of “changing a plane’s engine whilst in flight” or “heart surgery with the patient watching” don’t really get across the full complexity of changing core banking systems.
However, not every bank has developed their own core banking system, mainly because previously only the largest banks could really afford to do so. Smaller banks and mutuals either “rented” a system or they bought a packaged solution from a core banking solution provider. Either option was deemed cheaper, faster and easier.
Many of these vendor solutions would have initially been developed for a single bank and then “packaged” for other customers. Therefore, as more clients were acquired, vendors accumulated broader requirements and in turn increased the flexibility of their solutions.
Essentially, this enabled them to meet today’s requirements as well as some future ones. Along the way, some vendors have been able to migrate their solutions to newer technologies – for example, moving from Leda’s dreaded mainframes to a client-server model where hardware and operating costs are much lower.
This has been the journey for most of the incumbent core banking vendors to date, and many have grown substantially over the last three decades, accumulating banks and annual support and maintenance contracts.
Generally, support/maintenance revenue far outweighs actual new licence sales because banks rarely change supplier. Like in any market, there has been some consolidation as vendors buy into new markets like corporate or wealth management or look to expand into new countries. Sales pitches also evolved as banks moved from simply needing a core banking system to desperately seeking vendors to replace their old, inflexible and expensive monolithic solutions.
But then things changed. A lot.
With a MACH (Microservices, API-first, Cloud, Headless) architecture, banking has become much more like Lego bricks. Each brick has a specific purpose (for example, the ledger, product catalogue or credit scoring). Each has standard interfaces (for example, BIAN APIs). Each brick can be maintained, deployed and run autonomously and scaled almost infinitely.
APIs not only allow you to mix and match specific components from different vendors, but they also allow you to have your own designed user interfaces – be it for the branch, call centre or mobile banking. The software is agnostic of banking history so has been designed for any banking product, not just accounts/loans or mortgages or credit cards. For a new bank, this is one core to rule them all, and for existing banks, it’s Nirvana.
But we are not fully there with this from vendors. Some are close, but others will realise the complexity of this later. The key point that I’m making though, is that core banking technology is no longer an evolution of the banks’ journey, nor is it a migration of code from one technology to the next.
Fundamentally, it is about reinventing core banking solutions. Start with a blank sheet of paper. Turn the lights out and shut the factory till we’re ready to test a new pilot approach. The challenge for incumbents is the classic “Innovator’s Dilemma”, as well documented by Clayton Christensen.
We have seen some incumbents try to build their own new platform and fail. We see some still pursuing a migration to new technology, but they will fail too. Part of the reason for their failure is the problem/opportunity for banks is now different and another part is legacy thinking. I describe this as reinventing the past with new technology, rather than building for today’s needs and future demands.
We know banking has changed. We know the customer has changed. We know the number of regulations and cyberattacks have increased. Banks have a huge new opportunity too in Banking-as-a-Service (BaaS). BaaS today is where the internet was in 1997 – more hype than usage – but it will grow massively just as internet adoption did with smartphones.
Banking is very different to what it was 20 years ago, and the next 10 years will see bigger changes arrive faster than before, driven by more technology like AI.
The irony of the incumbent core vendors is that they have become the very thing they have been selling banks to replace. In fact, there is growing momentum not to replace cores and take huge risks and incur huge costs at all and instead simply look to modernise by focusing on the areas that cause banks the most pain: launching new products faster, improving customer experience, enhancing security, keeping up with regulations and so on. Today, there is less need to replace everything. Banks can now simply swap out individual components rather than swapping the whole core. My post last week highlighted this.
We’ve seen this movie before with ERP and CRM vendors. The first movers captured market share and as technology shifted, the smart players acquired while the laggards faded.
This week, I’m just saying, as I have said before, that this is a race from two ends. On one side, the incumbent core vendors need to address the Innovator’s Dilemma, effectively cannibalising their current cash cow. On the other side, the new modern players need to scale to profitability and ensure they stay well-funded until then.
Some incumbents have already placed their bets by acquiring modern technology providers. Only time will tell whether they jumped too soon or found the perfect new platform to steer their future into the sunset.
There will be no ‘winner takes all’ in this market, but there will be some new winners and many losers. In parallel, we will see some banks ride the technology storm while many will be swallowed up or wrecked. It certainly promises to be an interesting next few years in the core banking space.
About the author
Dharmesh Mistry has been in banking for more than 30 years both in senior positions at Tier 1 banks and as a serial entrepreneur. He 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 founded proptech start-up AskHomey (sold to a private investor in spring 2023) and is an investor and mentor in proptech and fintech. He also co-hosts the Demystify Podcast.
Read all his “I’m just saying” musings here.