The brain of every credit union is its core computer system–the tabulation of every transaction and thus the essential record. But voices increasingly are heard that it is time for a substantial re-evaluation of those core systems.
That is true for two reasons. They are very old and, in many instances, they no longer have the intelligent flexibility required to keep pace with a 24/7 world that demands answers right now.
As Peter Olynick, a consultant with Charlotte, N.C.-based Carlisle & Gallagher, tersely put matters, “Most financial institution cores need to be updated to align with 21st century–many processing systems were architected in the 1970s. They are not nimble.” He added that “upgraded cores will provide a competitive advantage to financial institutions that do it.”
Core systems were designed to do end of day batch processing. And banking in 2012 is all about immediacy: often without checks (think P2P payments, mobile banking and moving money across borders in multiple currencies.) “A 40-year-old core–and some of those systems are that old–just won’t let you compete today,” said Lizette Nigro, a vice president at Glastonbury, Conn. core provider Open Solutions.
Why don’t financial institutions just kill their cores? Paul Schaus, president of consulting firm CCG Catalyst in Phoenix, said, “They don’t want to write off their sizable investments.”
Cores, in many institutions, represent many millions of dollars in computer hardware assets and possibly as much in software.
The other reason is that shifting off a core is “open heart surgery with your eyes open,” said Fiserv executive Mark Sievewright in an interview. His point is that lots can and sometimes does go wrong in a core conversion, and institutions typically are in no hurry to rush into this. Even when a core is no longer providing all the services it needs to deliver, there is an inclination to delay because conversion horror stories (and sometimes careers derailed) are legendary.
“The road to conversion is littered with the careers of CEOs who no longer work for their credit union,” sighed John Fenton, CEO of Basking Ridge, N.J.-based Affinity Credit Union, a $2.27 billion institution that is currently in a core conversion that, stressed Fenton, is going as planned.
And yet more credit unions are facing up to the need to consider upgrading cores, mainly because they just cannot get the services they need out of their existing system.
That was so at Affinity, which had used the same core for 27 years. Incorporating new, desired services, such as mobile remote deposit capture, seemed problematic with the old core. That core also resisted providing Affinity with the detailed, customer-centric reporting Fenton wanted. Old cores are rigorously focused on transactions not on customer relationship management.
“We realized we had to change cores to get the services we wanted,” said Fenton.
At the $421 million First Credit Union in Chandler, Ariz., Chief Operating Officer Lori Gallegos wrote in an email that the institution decided to convert cores because the system it had been on was scheduled to sunset, that is, the provider indicated it would cease supporting it. She added that the institution, which converted a year ago, is still harnessing the power of the new core.
“We have more tightly integrated our online banking and iTalk channels into the core. We have also added fraud detection, MCIF, logging member service events and tracking sales incentive, pulling data directly from the core to assist us in providing a more concise member experience,” she said.
In contemplating new cores, two trends characterize that universe, said the experts. And First Credit Union’s conversion illustrates them. “Today’s cores are all about an 11 letter word, integration," said Sievewright. “The ability of a core today is to be a platform from which all other services are delivered,” he added
Cores, said CCG Catalyst’s Schaus are essentially “big, flat databases. What we need are parallel systems where the core is one of several systems.” Thus Sievewright’s integration mantra, where mobile banking, online, P2P and other transaction formats, never envisioned when most cores were designed, need to be linked to the core.
Getting disparate systems talking together in real time may not be easy, but it is, said the experts, crucial to the smooth functioning of any credit union.
The second trend, said Sievewright, is that an increasing number of credit unions are choosing to shift their cores from in house to outsourced. “It usually is more cost effective to outsource,” said Sievewright.
And credit unions are far behind community banks in outsourcing cores, said Ted Bilke, president of core system provider Symitar. He said that at his sister company Jack Henry Banking, which focuses on banks, 90% of new core contracts are for outsourced deals. At Symitar, the number is nearer 50%, a number that has him scratching his head because in most cases, especially for mid-sized and smaller credit unions, outsourcing is a clearer solution.
Bilke’s bright news, though, is that “three years ago, we saw only 20% of new cores outsourced,” meaning the trend for putting systems in the hands of service bureaus or similar off-premises outsourced providers is accelerating.
“From an economics perspective it makes no sense for a small institution to maintain a core in house,” said Jeff Irby, a vice president with Unisys, a systems developer. He added that the good news with outsourcing for small institutions is that “they have a chance to jump ahead of big guys.”
That is because many large banks will admit, usually not on the record, that their patchwork quilt cores, amassed in a series of mergers, are impediments to innovation. A small institution, with a share of a state of the art outsourced core, might find itself able to do more than much bigger institutions.
That is the story at California Bear, a $108 million credit union in Los Angeles. CEO Robert York said the institution recently decided to convert from an in-house Symitar system. “The computers were 12 years old, at the end of their life,” said York. And York chose a service bureau arrangement with Symitar. “This will save us money. It will free up IT staff time to do other things. I am not worried about losing control. We can run any reports we want, when we want.”
“Outsourcing makes so much sense,” agreed Tom Berdan, a vice president with core developer Harland Financial. “It allows the credit union to focus on its core businesses,” member-facing interactions rather than technology maintenance.
A third trend is that despite the age of the industry’s cores and a growing recognition that doing more will necessitate new cores, there is very little upgrading or shifting to new providers. “Perhaps 4% to 6% of cores are in play in any year,” said Sievewright. But not all of those will opt for change. Many will attempt to negotiate better terms with the present provider and end matters there.
“There are so many antiquated systems still out there,” said Nigro. “In lots of ways this is an industry that just doesn’t get it.”