From large corporate banks to small community banks, there isn’t a banking institution around that doesn’t depend on a robust software program to keep business running. These systems that we refer to as our core software process all of the bank’s transactions from deposits and withdrawals, general ledgers to loans and payments. And it may not surprise you to know that most of the banks in our country use one of four legacy banking systems.
Four main companies have a 96% market share in the United States’ banking software business. Those companies are (in order of size) FIS, Fiserv, Jack Henry, and D+H and they continue to grow every year through their acquisition of small companies that create new, innovative banking products. With decades of experience in the banking software business, these companies have made themselves practically unbeatable. However, that doesn’t make them the best solution for every bank.
Despite being the biggest in the business, these companies don’t always offer all of the services that banks are looking for. So on top of the investment of this critical core software product, banks can purchase dozens of ancillary products from the same companies which provide the additional services that the banks need and their customers expect. The big four offer these services like online banking and mobile banking yet customization and integration are limited if you want to go outside of what a big software company offers. So, in other words, you are locked into fewer options.
Well, it’s not as easy as it seems. Changing core software is an extremely difficult and grueling process. And even with all of the benefits, some banks simply aren’t able or willing to make it work. Some banks are still using the software that the purchased a generation ago, and transferring all of that data to a new system is risky and complicated.
But switching core banking software is difficult beyond the initial transition. Banks are obligated by regulators to meet vendor management requirements that make using more than one vendor too cumbersome for many operations. Why go through the extra paperwork when you can use one large company that offers all the resources you need even if they’re not part of your base banking software?
In short, the regulators want banks to choose one of the big four software companies. When your vendor provides services to such a large segment of American banks and financial institutions, it’s unlikely that they’ll be at risk of collapsing. So while the largest software providers offer less robust services for banking clients the smaller, more agile software companies, regulators believe they are safer because of their sheer size. Also, the big four use this as a crutch to not be as nimble and get away without providing better customer service since there is not much competition. Innovation suffers.
It’s important that you know and understand the risks of using a smaller software company. It certainly isn’t for everyone, and the transition alone may turn you off from the idea. However, you must weigh those risks against the needs of your customers. For example, a concern from regulators is that smaller software companies may go out of business leaving your bank in the lurch. Of course, that is a huge risk, though not all that common. On the other hand, what do you risk in providing your customers with less optimal services and unintentionally driving them to another bank where they can get exactly what they’re looking for. For our situation, it is riskier to stay the status quo. The big four have outdated architecture and pricing models that have handicapped the banking industry. Today’s banking customers want it all, and for us at Surety Bank, the ability to provide it to them is well worth the cost of investing in a new, nimble core software system.
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