Contraction Action

The benefits, opportunities and challenges from core vendor consolidation

By Katie Kuehner-Hebert

The potential impact of continued consolidation of core processing software providers is a mixed bag for community banks, independent technology experts say.

The latest big core software vendor transaction—one of an ongoing series of technology vendor mergers that have paralleled consolidation in the banking industry and other industries—took place this summer with Davis + Henderson’s purchasing Harland Financial Solutions Inc. While the D+H-Harland acquisition doesn’t combine two existing core software vendors, it underscores the current dominance of a few U.S. core software providers serving a majority of the community banking market share.

Community banks continue to have slimmer choices of vendors that have full suites of software products, says Aaron Silva, president and chief executive of Paladin fs LLC, a technology consulting firm in San Francisco. “If [community banks] want to switch vendors, it will cost them more to do that, as providers are making it very punitive for them to leave,” Silva maintains.

“It’s now better from a pricing standpoint to go with one vendor for everything, than separately buying best-of-breed solutions. Banks might save in costs, but they might have lower quality.”

Alternatively, community banks can decide to spend additional money and buy a best-of-breed solution from another vendor and pay fees to their core provider to do that outside of the bundle, Silva says. “It’s a business decision, as they need best-of-breed customer-facing solutions to better compete,” he says. “They are surrounded by the [megabanks] or the super regionals, and they need technologies like best-of-breed mobile remote deposit capture.”

One perpetual consideration of vendor size is the relative vendor responsiveness and service. After large core software vendors buy smaller players, some may cease to provide the same level of customer support for the acquired platforms to force customer migration from their legacy platforms, says John Hargrave, managing partner at DD&F Consulting Group, a technology consulting firm in Little Rock, Ark. “Then they are thrown into a big pond and they just don’t receive the level of service and personal attention that they received from the smaller vendor,” Hargrave says.

Still, community banks have plenty of choices among existing vendors, technology consultants add. The five biggest core processing software vendors today are FIS (Fidelity National Information Services) in Jacksonville, Fla.; Fiserv Inc. in Brookfield, Wis.; Computer Services Inc. in Paducah, Ky.; Jack Henry & Associates in Monet, Mo.; and Davis + Henderson Corp. in Toronto, Canada.

Community banks can also choose one of the 40-some smaller core processing software vendors, such as Data Center Inc. in Hutchinson, Kan., Modern Banking Systems Inc. in Ralston, Neb., United Solutions Co. in Tallahassee, Fla.; VSoft Corp. in Duluth, Ga., COCC in Avon, Conn.; BMA Corp. in Salt Lake City, Utah; Cardinal Software in Center Harbor, N.H.; and FPS Gold in Provo, Utah.

“Sometimes smaller players can roll out more sophisticated products faster, such as a teller touch screen,” says Greg Schratwieser, president and CEO of International Consulting Inc. in McLean, Va. “Also, when community banks are a small fish in a big pond of a larger vendor, product enhancements are tougher to get, but when they’re one of 30 bank customers of a smaller vendor and they are the largest bank, the regional player is going to listen to them more readily.”

Yet there can even be advantages from core vendor consolidation for those community banks that prefer a “one-stop shop” option. And most of the largest software vendors continue to counter their best-of-breed competition over innovation by expanding their product lines and capabilities by continually acquiring smaller technology firms offering new or specialty services.

“Banks can negotiate one contract for everything they need” by placing their chips on a larger vendor, says DD&F principal Huge Patterson. “They don’t have to worry about trying to manage multiple relationships, which is one thing that regulators over the past 10 years have clamped down on—the management and risk assessment of all of their vendors. Having one versus multiple vendors is easier in the eyes of regulators.”

Dave Gordon, IT and security consultant with the consulting firm Young & Associates Inc. in Kent, Ohio, believes that community banks sometimes receive improved customer service if their smaller core vendor has been acquired by one of the larger players. “The larger companies have a broader experience with customer service issues and are able to resolve them,” he says. “They hear that Bank A in Ohio has an issue that they’ve already solved by Bank B in Illinois. Smaller vendors with a smaller number of customers might not see the same issue.”

A potential downside is less opportunity for community banks to have customized solutions if they have contracts with the larger core vendors, Gordon says. There might be fewer options for larger vendors to solve individual issues, or community banks will have to pay expensive fees for a larger vendor to solve their issues.

Still, community banks have some leverage in overall pricing when they are considering a new core processing system—provided they make the vendors compete against themselves, Gordon points out. “Make sure vendors know they are competing for your business … and that you’re taking it serious that the vendor needs to provide better pricing structures,” he says.

One bright spot about the vendor consolidation: competition is up and there is going to be a lot more aggressive pricing from all vendors to go after community banks’ business, several consultants agree. “This is probably the best time to buy that I’ve seen in 30 years of being in this business,” Schratwieser says.

Katie Kuehner-Hebert is a financial writer in California.