The traditional core processing model is alive and well despite the buffeting winds of change and challenge, and in fact, could be a bit of a growth industry.
That's the takeaway from a pair of reports by two veteran analysts, Christine Barry of Aite Group and Bill Bradway of Bradway Research LLC, both in the Boston area.
Bradway has produced a five-year analysis of market share for credit union core processors while Barry authored a 56-page report on core vendors that serve both banks and credit unions.
They both said that despite the falling numbers of banks and credit unions, the competition for customers remains keen, and as for who's ahead, it depends on how you slice the pie.
For instance, Bradway said Jack Henry & Associates has done particularly well in nabbing the business of billion-dollar credit unions from other core processors, with its Episys platform moving from 23% to 33% of that market from 2004 to 2009, even as the raw number of billion-dollar credit unions grew.
Barry, meanwhile, said Open Solutions Inc. is now signing new core customers at more than twice the rate of many of its competitors. And both analysts point to Fiserv Inc. as retaining its long-held status as the company with the most customers, although the FIS-Metavante merger last year created an enterprise nearly as large by many measures.
Because of failures and mergers, there are fewer credit unions and banks, but core conversions are still expected to rise over the next few years as the economy recovers amid pent-up demand to replace outdated legacy systems, Barry said.
"Many financial institutions continue to run core systems that were built 20 or 30 years ago," she said. New middleware tools have allowed these systems to live on by hooking up new layers of functionality and services, "but that can only go on for so long," Barry said.
She argued that complicated legacy systems, in fact, exacerbated the recent financial services meltdown by making it difficult for institutions to quickly provide transparent data, whether for external use by regulators and investors or internally for cross-selling and target marketing, or for fast-to-market new products and services. And demands also are growing on the core system's core functions of handling deposits and processing payments.
She also said that based on her research, fully 20% of U.S. financial institutions have reached a "high level of urgency" in replacing their core systems and that an additional 56% "could benefit from a core system replacement or transformation."
"Running a core system that is built on an open, flexible architecture is vital to improving operational efficiencies, enabling tight integration and real-time information, having a 360-degree view of customer relationships, remaining competitive and more easily providing the level of transparency and access to information required by customers, regulators and bank examiners," Barry said.
Despite the expense of such conversions, the market seems to be responding, she added, predicting the number of core system replacements to grow from 391 in 2009 to 575 in 2012. Credit unions accounted for about 40% of conversions in 2008-2009, she said, compared with 55% among community banks.
Hosted solutions, she added, have made up the great majority of new deployments in the past 18 months, although most existing deployments are still in-house licensed solutions, Barry said.
She also found that small and mid-size institutions are particularly focused on having their core processor handle ancillary products, both for operational and regulatory transparency reasons.
Barry said the average core processing arrangement includes eight to 10 services and that three new product areas that credit unions seem to be demanding most right now are imaging, online channel solutions and business intelligence.
New Tools From Old Names
Along with bolstering services from long-standing brand names, new platforms are emerging to meet those needs, Barry and Bradway said. Barry cited Fiserv's Acumen solution, created in the Canadian market and now being marketed to large U.S. credit unions, and the KeyStone platform from Corelation, a San Diego startup by a co-creator of the Symitar platform that already has signed a couple small California credit unions.
Bradway, meanwhile, took note of Acumen and the credit union version of Harland Financial Service's Phoenix solution for banks as examples of modern, service-oriented architecture (SOA) platforms.
A scalable open system such as Acumen could help Fiserv in particular, Bradway said. "They now have a modern architecture solution that they can go to their existing customers on XP, USERS, Spectrum ... all those other platforms that have given them such a huge presence in the market, and cannibalize on their own business and keep it in house as well as go after competitors' customers," he said.
Bradway and Barry also both noted that Open Solutions has helped itself along not only with winning business from competitors but with selling its new flagship solutions to existing customers it acquired through acquisitions. As for the crowded space, especially the focus on growing institutions, Bradway said of the vendor market, "They'll be competing for these larger credit unions going forward and in effect, the competition for everyone is just going to get tougher. But more choices for a credit union are not a bad thing."
And Barry said the time for many has arrived.
"The U.S. financial industry has ignored the need to replace its core systems for too long and is beginning to feel the repercussions," the Aite Group analyst said. "As opposed to the front-end solutions that address the needs of some customers, a core system touches all financial institution employees and customers in some way, making it the most vital solution a bank or credit union has in place.
"Moreover, an institution would cease to exist without a core system, as it would not be able to carry on its daily operations. Institutions cannot afford to continue to ignore such a vital system."