Fewer than half of bankers are “extremely” or “very satisfied” with their core provider, according to a 2022 American Bankers Association survey.
Although 42 percent reported dissatisfaction with their current core provider, however, only 21 percent expect to switch to a new company once the existing contract expires. Conversions carry security risks, and bankers worry whether the benefits of a modernized core are worth the expense.
Experts say updating or converting cores still provide numerous benefits for banks operating on outdated systems. Successful core conversions are achievable through extensive preparation and ensuring the goals of the bank and service provider align.
Take Annandale, Minn.-based Lake Central Bank, which outsourced its core to SHAZAM from Fiserv in March 2013. The core aligns with Lake Central Bank’s conservative, time-tested approach, said CEO Bryan Bruns.
“I don’t think our core necessarily is going to either hinder or help with our growth,” Bruns noted. “I say that with a little bit of hesitancy, because we’re a bank that is not on the bleeding edge. We try to be on the leading edge of technology, but we’re not on the bleeding edge of technology.”
Lake Central Bank had around $125 million in assets and a workforce of approximately 35 employees at the time of conversion. The executive team was heavily involved throughout the process, and identified a need for best-of-breed products.
“Now with all the tech that shows up, we can start to pick and choose who we want for other vendors, whether that’s teller software, working with car dealerships, or it’s some of those other products,” Bruns told the American Bankers Association in June 2023. “That has really helped us.”
Bruns’ own experience with core conversions was pivotal. While at Marquette National Bank (now part of U.S. Bank) in the early 1990s, Bruns helped update the core after the bank acquired more than a half-dozen branches from a failed bank.
“When you are a small bank like we are now, that came in pretty handy, because there were a couple of things in the conversion that I didn’t have to rely on somebody else,” Bruns said.
Preparing for conversion
Patience is crucial during a core conversion, as the process often lasts at least two years. Banks must first establish a strategic plan and clean data to account for potential irregularities, Bruns noted.
“You should be constantly trying to figure out if you have anomalies in your core system, but certainly before you do a core conversion you should scrub your data and make sure it is what you think it is,” he added.
Leadership must ensure all employees are on board with the conversion, Bruns added. There must be someone at the top who is willing to set the tone for the entire bank, both to boost morale and make quick decisions when necessary.
“There is a motivational tone that needs to be set, that, ‘Look, this is where we are heading,’” Bruns added. “You can get on the bus and ride with us, or you need to get out of the way, because we have made the decision. We’re not going to complain whether it’s the right or wrong decision anymore. We’re all on board with this.”
At Lake Central Bank, Bruns asked several experienced employees who at first wanted to retire rather than undertake a core conversion to stay through the process. Two agreed to man the phones until the core was converted, allowing younger staff who planned to stay the chance to train on the new system.
Banks should evaluate what peers are doing in the core conversion space, said Lance Noggle, senior vice president at the Independent Community Bankers of America. Banks are advised to select the core which properly accounts for the recent rise in real-time payments and anti-fraud capabilities while addressing existing product gaps. Cores should also be flexible enough to address new overdraft and re-presentment regulations without requiring substantial programming from a service provider.
“There’s not so many providers that you can’t talk to them all and do your due diligence, but I think you want to talk to some of the other banks around that are doing the same thing, find other peers, see what they are using and if they are satisfied with that company,” Noggle said.
Banks should conduct an internal maturity assessment, rethink delivery models and products, and find a partner to execute those plans, said Jeff Ostheimer, director of fintech advisory services at Strategic Resource Management. A project manager can help analyze, clean and scrub in-house data dating back decades.
A modern core must “future-proof” the bank for 20-25 years, Ostheimer said. Some banks still operate from older cores with a ‘sidecar core’ — a modern system alongside the traditional core platform — to enable mobile accessing and online banking. Legacy core platforms have traditionally calculated interest, stored loan payments and processed transactions at scale.
By wrapping an application programming interface around a legacy core, banks can find the best technology for additional services while increasing leverage during core conversion contract negotiations, Ostheimer noted.
“Unbundling the core and going and finding the right integration models and partners to do all of that other work is what I mean by future-proofing the business,” he added. “You limit the number of connections to the core. You are not so beholden, because you are not bundled into everything you do through the core provider.”
Banks should have a risk mitigation plan to prepare for severe weather or any other potential stressor during conversion weekend, Ostheimer noted. Lake Central Bank converted its core on a Thursday night, with the new system launching the following morning. SHAZAM staff were on-site throughout the day to assist with technical glitches, before the core was first updated Friday night. That allowed Lake Central Bank to fix unexpected problems over the weekend. Bruns, a member of the ABA Core Committee, said most banks undertake core conversions over the weekend.
“The problem with that is, you haven’t run a live update over the weekend,” he noted, “now if there is a live update on Monday, now you’ve got a problem.”
Growing competition
Forty-seven percent of bankers cited digital transformation as the No. 1 reason to pursue modernization, according to technology research firm Gartner. Forty-five percent modernized cores to increase operational efficiency.
Lake Central Bank’s former core required manual staff updates, taking employees away from other important tasks. Bruns also sees the new core as enabling the automation of more processes. “[The previous core] got harder and harder as more technology and updates came out,” Bruns told the ABA.
The core banking market has historically been dominated by three providers — Fiserv, FIS and Jack Henry — but there were more U.S. core banking providers in 2023 than than in previous years, according to Strategic Resource Management:
- Fiserv: 40.9 percent
- Jack Henry: 19.3 percent
- FIS: 15.2 percent
- CSI: 8.2 percent
- Finastra: 3.2 percent
- Other core providers: 25 percent
Core banking relationships are still “very sticky,” noted ABA Senior Vice President of Innovation and Strategy Brooke Ybarra. Core contracts can be hard to unwind, and the conversion process can be challenging. Ybarra said banks can reduce those risks by having a trial run or incrementally converting core platforms. During contract negotiations, banks can ask prospective providers for best practices along with lessons from previous mistakes.
Core providers are making it more difficult to exit contracts by instituting substantial deconversion fees, said Ron Suhr, regional account manager at Modern Banking Systems. Banks that don’t modernize cores risk falling behind on compliance, Suhr said. Banks under contract with a core provider are recommended to consistently evaluate other options to keep the current company honest, spot exorbitant rates or learn of a more attractive offer.
Lake Central Bank had partnered with Fiserv for 31 years at the time of conversion. Though Bruns initially thought the bank would continue partnering with Fiserv, he learned SHAZAM had lower pricing.
“My intent was to go to a data center, to not be in-house anymore, but to go to a data center for security and all of those kinds of things,” Bruns noted. “And I was expecting I was going to go to our current provider’s data center, and all of a sudden I did a couple of comparisons and found out there were other vendors out there for prices that were completely different.”
‘A dog-eat-dog world’
The majority of community banks still operate on 30- to 50-year-old legacy cores designed for branch banking models, Ostheimer noted. “There are still a lot of community banks running core systems in-house today, too,” he noted. “They still haven’t even made the jump to cloud technology. A lot of data and security concerns, things like that, are keeping them from doing that.”
Modern cores offer several benefits, Ostheimer said. They are cloud-based, allowing banks to leverage AI and workflow automation offerings at scale. Modern cores have API architecture, are less expensive and easier to maintain than dated cores and can be implemented faster than older platforms.
Modern platforms also enable community banks without a strong team of IT workers to integrate with third-party fintech applications while adding digital customer interfaces, Ostheimer noted.
“Core is a commodity, and in some sense the products necessarily are commodities,” Bruns said. “But the pricing, and the access to APIs, the access to your data, the deconversion fees should you want to move something, all of those are the ancillary things you’ve gotta pay attention to and figure out how that core is going to treat you.”
Moving to a modern platform from a legacy platform requires new procedures, training materials and guidance. Core conversion contracts sometimes don’t include a minimum viable product agreement, and banks without a functional project management office rely too heavily on vendors, Ostheimer said.
Those challenges are in addition to already-high core conversion costs. Getting a conversion running with a vendor typically costs six figures, though some expenses can be offset over a term. Costs easily rise into the seven-figure range when accounting for staff time and material costs.
Banks can mitigate those challenges by modernizing older cores to enable a digital strategy while converting at a later date, Ostheimer said. “It’s a dog-eat-dog world if you are not modern, if you are not scaling,” he added. “It’s all about scale for community banks, so they’ve gotta modernize, they’ve gotta drive efficiency ratios down by investing in technology and automation and talent. If they don’t do that, they’re going to be left behind.”