<p>COLUMBIA, S.C. – While Net banking was once dominated by firms specializing in the product, credit unions looking to get into the Net banking game today likely have another choice – their core processor. So which is better? That's the subject of a growing debate. "Despite its growing prominence in the overall delivery channel mix, Internet banking still represents the great unknown to thousands of community banks and credit unions across the United States," says analyst Virginia H. Philipp of TowerGroup, the Needham, Mass., consultancy and research firm. More than 65% of financial institutions with assets of less than $1 billion don't offer Internet banking, says Philipp, who alludes to what she sees as the next big story in Internet banking in the title she gave her recently released research report: "Internet Banking Offerings by Core Processing Vendors: Scoring Points with Single-Vendor Economics." Philipp says while the Internet banking specialists have certainly been capturing clients and attention, the core processors have been busily creating their own solutions that could well dominate the marketplace, if they aren't already in some sectors. "There is an unrelenting market dynamic in favor of the core processors," she argues. "Indeed, considering the sheer number of customers in the middle- and small-bank markets, the real story for Internet banking resides not with the high-profile vendors such as Corillian, S1 and Financial Fusion, but rather with the well-established providers of core banking technology – the processors." Whether they're bringing Internet banking to small credit unions that don't yet offer it, or implementing next-generation solutions at those whose first contracts are expiring, the processors have some natural advantages in the developing competition with Internet banking specialists, Philipp says. Because of their size and limited technology acumen and resources, smaller institutions "typically turn to their core processing providers first" and that this relationship creates a built-in market that makes it easy for processors to justify the investment to buy or develop a system to offer them. Philipp cites the following as specific advantages that core processors have in competing with Internet banking specialists: Tight integration with the core system that allow quick ramp-up and cost efficiencies; long records of financial and operational stability, and intimate knowledge of the whole range of an institution's technology issues. Meanwhile, she argues that Internet banking specialists, including such market forces as Digital Insight and Online Resources, have some advantages of their own, such as not facing functionality and customization limitations and the ability to offer a "generally wider" range of solutions in the area of individualized marketing, account aggregation, bill presentment and cross-selling. Philipp based her conclusions on studies on detailed reviews of the offerings from major banking-industry players ALLTEL, Aurum Technology, EDS, Fiserv, Metavante and Sanchez Computer Associates. To give her conclusions a bit of a test in the credit union arena, Credit Union Times gathered reactions from a list of core processors and Internet banking specialists which serve several thousand credit unions among them. On the Internet banking specialists' side, we ran Philipp's conclusions by the following well-known names in the credit union space. Perhaps not surprisingly, the core processors generally agreed that they had the advantage in the marketplace due to long, deep relationships and were seeing increasing commitment to their solutions both from new sign-ups and from current core-processing clients going with them for their second-generation contracts. They also argued that they offer plenty of functionality and MRM capabilities. For their part, the Internet banking specialists generally agreed that they have an advantage in range of solutions, were plenty fast in ramp-up and that as survivors of the dot-com collapse, they were quite financially viable and in it for the long run, thank you very much. And both sides generally agreed that there aren't necessarily two sides. Steve Ely, senior vice president of marketing at S1 Corp., had this to say about that: "About 10 years ago someone thought up the term `co-opetition', and that's really what's come about in this very dynamic world of increasingly open systems." Indeed, Internet banking is part of the core function of serving members, of course, so integration of systems has required working ever since the first click. Meanwhile, the lines of who offers what are not clearly drawn and are getting more blurred as vendors offer increasingly varied and robust solutions. This comment by Dick McConnell, vice president of marketing at AFTECH, typified answers to the question: Do you consider Internet vendors to be competition? "That's not a yes-no question," he says. "Clearly we would prefer that our clients use our products. On the other hand, we recognize that any client may have a specialized need, and that we should support them in finding a solution. "At this time, I would have to say that we do not consider Internet product/service providers as competitors." Of course, that state of `co-opetition' could become more and more uneasy as core processors work to keep the Internet banking business at home, and perhaps even, in the case of some, take their Internet banking solution to the market as a whole. Here's some of what these core processors and Internet banking vendors had to say: CORE PROCESSORS AFTECH: AFTECH, a Fiserv unit based in Malvern, Pa., serves 90 credit unions, 81 of them with Internet banking. Of that number, 69 use AFTECH's in-house solution while the other 12 are on "various third-party products, all of whom you've heard of," says Dick McConnell, AFTECH's vice president of marketing. McConnell calls Philipp's assertion that core processors' in-house Internet banking solutions tend to be limiting "an outdated statement." "I would put aftech@net up against any product in terms of functionality," he says. He also says "our cost advantage is enormous." For one thing, McConnell says, AFTECH doesn't charge per-click or transaction charges, "so our product doesn't become more expensive the more members use it." "A non-AFTECH client, who's at a $600 million credit union in Southern California, just told me that he could buy our entire package forever for what it costs him for two months on his third-party provider," McConnell says. "I asked him to consider switching to us as his core processor, since we're only selling to our installed base." Will that change? Joe Antellocy, AFTECH president, says, "Given the success of the product, and its investment value to credit unions compared with other clients on the market, we would consider making this application available to non-AFTECH clients should the opportunity arise." Aurum Technology: Kept out of the credit union marketing for a year after its spinoff from EDS, Aurum Technology, Plano, Texas counts only eight credit unions among its 650 clients. But negotiations are ongoing with 15 more, spokesman Matt Bowen says, and the company thinks its strength as a "one-stop shop" will serve it well as it aggressively goes after business among the nation's larger credit unions. "Our primary business is core systems, but we strongly believe that the people most successful in the market today and in the future will be those who can provide the complete solution to their customers," says Dick Wilding vice president of product strategy and e-business for Aurum. Aurum uses a Financial Fusion platform it customized for its own needs for its Internet banking product, a solution that Philipp cites in her report as particularly effective, and is in the process of integrating that for its first credit union client. CUSA Technologies: CUSA Technologies is the core processor for 900 credit unions, 320 of whom also use it for Internet banking. The Salt Lake City-based Fiserv unit offers its solution as both an ASP and in-house model and is about to launch a "major new version of our product" that will emphasize easy customization and expanded functionality, says Dave Wadman, CUSA's executive vice president. As specialists in serving the "lower half of the credit union industry in asset size," Wadman says his company benefits from the advantages Philipp cites in her report. Besides cost-consciousness, "we have an obvious advantage when it comes to extracting data from our clients' databases. . Additionally, we cannot overlook the existing relationships we have with the client, their confidence in us and our understanding of what is important to both the credit union and their members," he says. As for Internet specialists' advantages in functionality, Wadman says, "I would say that where there are functionality differences, it is quite often due to the willingness of our clients to pay for those services." As for the open market, Wadman says, "We are working with other Fiserv credit union solution providers, but beyond that we are currently only focusing on our client base." EDS: Only about 3,000 of the 10,000-plus credit unions offer Internet banking, and that's a growing market that EDS, Plano, Texas plans to go after in a big way. With more than 1,200 core-processing clients already on its client list, the electronic services giant has just inked a deal with CUNA Network Services to offer the offline its Internet banking solutions regardless of core processor. One way EDS plans to compete is on cost, using its size to make the technology affordable for even small CUs. "Before we had 1,200 or so relationships with which to leverage the costs of offering Internet banking. Now we think we have the potential of about 8,000 more," says Dave Selina, a client executive in EDS' Credit Union Division, which already has about 300 of its own core clients on its Virtual Branch system. And as for Philipp's assertion that the core vendors may not be able to offer the same features and functions as the standalone Internet specialists? "I take issue with that," Selina says. "The only limitations we have are what the credit union's host system can accommodate. Put it on your enhancement list, and we can provide it." Philipp says EDS' ability to provide big-bank solutions also could be an advantage in the evolving marketplace. Selina agrees with that, and points to one example, the recent rolling out of CheckFree Web Pay 3.2 billpay settlement service to its Internet banking clients. "A lot of our competitors simply can't do that because they can't bring providers like CheckFree enough volume," Selina says. EDS has about 140,000 employees and 9,000 customers, including business relationships of various kinds with 2,400 credit unions. "We have a pretty deep pool of resources to draw from," Selina says. Fiserv: "In my opinion, home banking is the classic `overnight success,' " says Oscar Mireles, senior vice president of technology and business development for Fiserv's Credit Union Group, which provides core IT services to more than 2,400 credit unions. Mireles says more than one third of those clients now rely on Fiserv for home banking technology, a number he expects to grow to one half by the end of this year. He also says that the evolution has been for Fiserv to grow its own technology while supporting third-party solutions of its clients' choice, something he thinks may well continue. As for analyst Philipp's take on core processors' advantages, Mireles says: " The facts speak for themselves. Whatever their characteristics, proprietary solutions are seen as having a greater net value to a client credit union. In my opinion, this is primarily driven by cost, focused functionality, tighter and real-time integration, cohesive support levels and a uniform look and feel." He concedes that third-party specialists "generally, but not always and not in all cases" are first to introduce "leading-edge features and capabilities, especially in cosmetic and esoteric areas" but that he thinks that gap is closing quickly as demand increases. As for taking Fiserv's Internet banking solutions beyond its installed base, Mireles says, "I can say that we are generally not moving in that direction. What I think you will see, however, is the increased sharing of solutions" among the various Fiserv units' core platforms, private-labeled or otherwise. Harland: Harland Financial Solutions is the core IT provider for more than 420 credit unions through ULTRADATA, and 92% of them use the company's Internet banking solutions, according to Stephanie Shah, director of marketing and product management. In fact, only two clients have gone to a third party for their home banking, Shah says. As for functionality advantages that Philipp cites as an advantage for third parties, Shah notes that Harland has been a leader in that field and adds confidently: "Even at initial launch, the features of our Internet banking solution surpassed those of any other provider." Scott Bleak, product manager for electronic solutions, adds that while "competing standalone Internet banking vendors also often our are partners, because of the extremely high penetration of Ultra-Access within our customer base, this is not an issue. Customers that utilize other vendors' products are typically using components of Internet banking that are not our core competency, such as bill payment." Another 300 or so credit unions, mostly $10 million in assets and less, rely on Harland's CU Serve for their core processing needs, although Internet banking adoption naturally is slower in that realm. "We do consider Internet banking to be a focus for the smaller CU Serve customers as they grow and become more tech savvy," Bleak says. "The competition will likely not be less, just different players." Meanwhile, don't look for Harland to market Ultra-Access elsewhere. "We focus on the back end, and since Internet banking is a presentation layer, it wouldn't have the same integration, features and functionality," Bleak says. "It just doesn't make sense for us and I personally feel it could downgrade our name and reputation." Symitar: San Diego-based Symitar Systems provides Internet banking services to about 200 of its 360 core data processing clients. And while its work has been in-house, innovation has not been a problem, says Bruce Cormode, president of the Jack Henry unit. Enhancements over the past year include wireless access and coming up soon will be such operational enhancements as paging capabilities that will notify remote operators of any system problems. Such improvements reflect the inherent advantage processors have over Internet specialists, Cormode argues. "If a pure-play Internet banking provider makes an enhancement, it enhances only the credit union's Internet banking services," he says. "On the other hand, when a core processor makes an enhancement, it can enhance core processing, Internet banking, IVR, ATM's, etc., etc. This is key." He also says he agrees with Philipp that repeat sales will be a growing factor. "When you think about it, 100% of our core sales come from so-called replacement sales," Cormode says. "At some point, that also will be true for Internet banking." Symitar, too, won't be marketing outside its installed base anytime soon, in part because "that would make us just another Internet banking provider," Cormode says. "Our clients use our products first because they're great products, but also because they integrate seamlessly with our core system and we have an intimate understanding of their entire technology operation," he says. "We couldn't bring these same advantages to non-Symitar credit unions." USERS USERS Inc. of Valley Forge, Pa., has more than 350 core processing clients, and more than 150 of them use the Fiserv unit's Internet banking solution. Randy Riesenberg, vice president of development, says he, too, sees the natural inclination of credit unions to go to their core processor for Internet banking and that he now is seeing that play out as contracts are being renewed. "The financial institutions were waiting, and they clearly wanted to go with us," he says. Meanwhile, USERS, which trades heavily on its reputation for having an open system, has been able to help its clients connect easily with products from Corillian, Digital Insight and others, Riesenberg says. As for functionality, USERS is aggressively expanding its in-house product, with plans to offer e-mail notification and the ability to open sub-accounts such as IRA's soon, and account aggregation and bill presentment using OFX standard technology as it continues to evolve. The company already offers such things as Internet loan applications and bill paying via an arrangement with Online Resources. And like his Fiserv colleagues, Riesenberg doesn't see USERS going to the greater market with its online solutions. "We have lots of things in our product plans to work with right now," he says. XP Systems: XP Systems, a Fiserv subsidiary in Moorpark, Calif., has 295 core processing clients, with 192 relying on it for Internet banking, which it provides through a number of third-party relationships. To John Edwards, the reasons for going to the core processor first are obvious. "The dynamics have always favored centralization," says XP Systems' senior vice president of business development. "No one wants to shop piecemeal for a data-processing solution and hope the pieces all fit together properly." But he also tips his hat to the Internet specialists. "The high-profile vendors have played a key role in bringing, or dragging, the core processors up to speed on what customers want." Of course, Digital Insight originated inside the walls of XP Systems and Edwards says the company still has a "unique relationship" with the Internet banking specialist while it "maintains alliances with all the major home banking solutions, and we plan to continue that strategy." Liberty: Mike Evans minces no words about why his core-processing company, Liberty FiTECH, uses partners to provide Internet banking to its clients. "Through the years, we have discussed developing our own Internet banking system," says the Liberty FiTECH president. "But we just didn't have the knowledge and expertise to provide service up to our standards. "You need specialized knowledge when it comes to wireless communication, account aggregation and other features of Internet banking," he said. "We feel you need a team focused full-time on that, and that isn't our core competency; data processing is." Liberty FiTECH, which serves 100 credit unions as a direct core processor and another 80 as a provider of processing software, instead offers interfaces with a variety of online banking partners, including its sister division Liberty Cavion. Fourteen of those credit unions use that service, with two more coming on line soon. Another 35 are using other providers, Evans says. Meanwhile, Liberty Cavion provides Internet banking to 115 CU clients, according to Mike Provenzano, executive vice president of Liberty Internet Applications. Provenzano says Liberty is now seeing the trend toward replacement sales cited in the TowerGroup report, and that about 35% of its sales are new customers switching from their current provider. He and Evans both emphasize the tight integration between their core processing and Internet banking platforms, and said that new functionalities are always being added. "We have the specialists and the expertise to do it," Provenzano says. INTERNET BANKING VENDORS Corillian: Corillian, the Portland, Ore., Internet banking specialist waging a high-profile battle for market share with Digital Insight, has 56 customers, but they include four of the ten largest banks, 20 of the 100 largest and six of the 10 largest credit unions. Matt Cone, senior vice president of marketing for Corillian, doesn't see the logic in much of Philipp's assertions of core processor advantage in delivering online services. The larger banks serve as their own core processors, he says, "while companies like Fiserv and Jack Henry have worked very closely in partnership with us and other s to extend their offerings." "They all have standard specs that allow us to integrate with their systems very well, so that's like saying a hardware manufacturing company like Compaq can make a better operating system than Microsoft because they know the hardware better. That just doesn't hold water," he says. On the contrary, Cone says, "It's been an advantage for us to be a focused company building the best in Internet banking. It's not the lowest-common-denominator approach, building a generic solution." As for working with core processors, Cone says, "We don't see them as competitors. We view them as potential customers and if not that, partners. If we aren't able to sell them solutions, we can work with them instead." S1: Atlanta-based S1 Corp. has about 3,700 clients, about 15 of them credit unions. That number could change, however, as S1 brings to market products it has spent the past year to be "aggressively targeted squarely at the credit union marketplace and its price sensitivity," says Steve Ely, senior vice president of marketing. He says that S1, like other successful survivors of the technology fallout, are financially healthy, negating one of Philipp's arguments in favor of core processors. And as far as understanding a credit union's technology needs from top to bottom, he says this: "The people that work at S1 come from the banking industry. We're not just a bunch of technical gear heads who started out writing web pages and now are trying to connect to back-end systems. "Because of our experience and background in credit union banking operations, we know how to take traditional systems and innovate and add value in ways that core processors probably just aren't very motivated to do." Digital Insight: Digital Insight now has about 1,600 clients, with more than 775 of them credit unions, according to John Dorman, DI's CEO and chairman. His take on the TowerGroup report includes this observation: "I agree that Philipp has accurately captured the main sales point of the core processors, but I strongly disagree that these advantages are as strong as they appear on the surface." For instance, Dorman says, core processors stress their tight integration, but in reality many built their business through multiple acquisitions, each with different platforms. "Their Internet banking solution is usually built and optimized for a single one of these platforms, and is often less, or at least no more, integrated . as the solution of a `best-of-breed' provider such as Digital Insight," he says. Dorman also says that while he agrees with Philipp that the market will continue to rapidly evolve and that leading-edge providers like his organization have an advantage in forming new functionalities, he disagrees with her on a related point. "She is incorrect (in saying) that the importance of this is primarily a function of the size of the organization. We find that it has less to do with size and more to do with the strategic focus of the management of the organization." And, Dorman says, he thinks Digital Insight will fare just fine in the second wave of Internet-banking contract signing. "Generally, financial institutions buying a replacement system are looking for a more sophisticated solution after having learned the basics from their first installation," he says. "This tends to favor the `best-of-breed' provider with the broadest product offering and the most rapid product evolution. "We believe that this trend is quite favorable for Digital Insight." Online Resources: Online Resources serves about 200 credit unions, about a third of its client list, according to the president and CEO of the McLean, Va., firm, Matt Lawlor. His take on the TowerGroup report? "There's a lack of understanding on what it takes to have a successful Internet-based offering. Consultants continue to think all it takes is a Web server," he says. "It takes far more than that, including fully integrated middleware, an integrated call center, bill payment and presentment and more." He says that while core processors do their mission-critical work "very well and very cost effectively, that's hardly what Internet banking is all about. We're as much a database-management company as we are a communications company." On another point of the Philipp report, he says the startup advantage she cites for core processors' solutions "is pure baloney. I know that's true for Online Resources and I've got to believe it is as well for our standalone competitors. We have such tight integration with 64 different core processors and ATM networks that we can get any CU, bank or thrift in this country up as fast or faster than the core processors." He also says that while Internet banking may be moving "into the mass market stage, it's hardly a commodity. The front-end banking screen is a commodity, but that's the easy part. The biggest part is infrastructure development." And as for the relationship with core processors, he says, "Like so much in technology, it's a very blurred battlefield line. "But as long as the core processors and the Internet banking service provider understand who's the boss – that it's the credit union itself – than it's a winning situation for everybody." -</p> <p>[email protected]</p>