Down to the Core

Tackling core processing system conversions for functionality, efficiency and integration

By Karen Epper Hoffman

Changing up the core processing software system is arguably one of the most overwhelming tasks any community bank can undertake. But, done right, it can also be one of the most operationally beneficial and rewarding.

After several years of slower-than-usual conversions on the core processing front following the financial crisis, technology consulting and research firms say that the market has been picking up. Indeed, core processing platform replacements should continue a slight uptick in the next few years among banks and credit unions alike, according to the Aite Group LLC in Boston. “Most banks proceed with caution when it comes to core processing replacement—a lot slower than replacing other systems like online banking—because it touches every part of the bank,” says Christine Barry, Aite Group’s research director.

There has already been an increase in deployments of new platforms in recent months by banks with $3 billion to $10 billion in assets, and smaller community banks have long outpaced their larger banking brethren in their gusto to upgrade their core processing, Barry says. Out of close to 400 core processing replacements that typically happen in the United States every year—before the 2007 financial meltdown, it was roughly 500 replacements per year—almost all are taking place at community banks or credit unions, Barry says. Aite Group predicts an increase of 6 percent in core system replacements during the next few years, with 10 percent of community banks replacing their core systems over the next two years.

“Community banks are leading the way,” Barry adds.

But what factors should go into the decision for a community bank to undertake the monumental task of a core system conversion? Reasons run the gamut from recent growth or mergers precipitating the need for a more flexible or comprehensive system, to a desire to consolidate core processing and other IT operations to one vendor, say technology chiefs at three community banks that recently completed core software conversions.

Take the example of Riverview Community Bank of Vancouver, Wash.—an $800 million-asset community bank that had gone through significant growth organically as well as through acquisition, more than doubling its size in the seven years since its last core systems conversion. “It came down to the fact that our contract was up with our previous vendor and we had simply outgrown that core system,” says Chris Bell, vice president and systems administrator for Riverview Community Bank.

With 18 branches throughout Washington and Oregon, the bank was seeking a “feature-rich processor … with a system that was intuitive for end users,” as well as real-time features and end-to-end lending capabilities, Bell says. The project was a 22-month undertaking from the initial decision to replace through conversion, he says, adding, “A lot went into [this search] as our last conversion did not go so well.”

After an exhaustive search, the community bank chose the PhoenixEFE Core solution from Harland Financial Solutions Inc., now a unit of Davis + Henderson Corp. in Canada. In addition to the core system, the final software solution package the bank purchased, which went live in June, included enterprise content management, electronic funds transfer, online account opening, credit risk management, and compliant consumer and commercial account opening.

Riverview Community Bank’s core conversion itself took about seven months. “You get out of it what you put into it. … We learned from the sins of our past, from our last core conversion,” Bell says. “So we put in the time upfront. We assembled a team and we dug in hard.”

Similarly, vendor discontent was at the root of the decision for First National Bank of Fredrick, S.D., changing its core processing system, reports R. Scott Campbell, the bank’s president and CEO. “The previous system was going on six years old when we started thinking that we just were not that happy with the vendor,” Campbell says. Also, the $19 million-asset community bank had separate relationships with different vendors for imaging and hardware issues, which Campbell wanted to bring under one roof.

First National Bank’s solution came in choosing Modern Banking Systems Inc. of Ralston, Neb. Campbell says he liked consolidating the bank’s IT relationships. The bank made the decision in late 2012 and converted its processing, imaging and hardware/software support by February 2013. It began its manual conversion in January and converted 1,000 deposit and nearly 100 loan accounts in less than two months.

Employees are getting used to a new report format, but other than that, says Campbell, “so far, so good.”

“Modern Banking offered a good fit for us. It’s a small company a lot like our bank,” he says. “And it’s easier to call one number” than to deal with the back and forth of multiple vendors, he adds.

For Lewis and Clark Bank of Oregon City, Ore., which had been using the same larger core systems processor since it opened in 2006, there was also a value in going to a smaller provider, according to Barbara Erickson, the $122 million-asset community bank’s vice president of operations. “We were a de novo, and being small, we wanted to get a better culture fit. We felt [before] like we were kind of lost in the system,” she says.

Lewis and Clark Bank opted for Data Center Inc. of Hutchison, Kan., when the bank converted its core processing system at the end of 2011. “There were lots of capabilities, but it was mostly a [vendor] decision based on cultural issues.”

The bank began working with Data Center Inc. in the summer of 2011 and its core system conversion was complete by October. “It went really smoothly,” Erickson says.

Choosing to undergo a core processing conversion, of course, is not always just about a smoother core banking process, but also about the processes that surround it. Erickson says her community bank’s new core processing system has allowed for easier and more customizable reports, which support the bank’s finance and lending departments. Campbell adds that he has an easier time generating reports with his new core processor. Both Campbell and Bell feel that their decision of new core processing vendors has put them in a better position for online banking and online account opening offerings down the road.

And, especially for smaller community banks with limited manpower, streamlining the process can be a critical benefit. “When we do have a problem now, we spend less time struggling with whom to call,” Campbell says. “It doesn’t take me away from what I really should be doing.”

Likewise, Bell says that by consolidating vendor relationships through Riverview Community Bank’s processing conversion, “Everything is tied in to the core. Everything flows through one [channel]. There’s not as much double and triple entry. In the long run, that’s a cost savings.”

The relationship with Data Center Inc. has nudged Lewis and Clark Bank to look at other service lines, like remote deposit capture and remote banking, forcing the bank to seek out new functionalities and look for “more capabilities in what we can do,” Erickson says.

Not all community banks will have as smooth a road taking a core conversion route, but there are steps that they can take if they want to follow the path of banks that have undergone a successful core processing conversion. Campbell, for one, encourages community bankers to seek advice from their peers. “Take the time to visit other banks and talk with them about the systems you are considering,” he says.

Bell also urges his community banker peers to “put in the time upfront as opposed to doing clean up.” He says community banks should review their processes and procedures and update all their procedural manuals to accommodate the new system. Also, Bell stresses training every branch and operation center employee so that they feel conversant with the new system from “day one.”

And finally, Erickson encourages community banks: “Don’t just look at the core processing conversion from a cost savings or technology perspective, but look at the culture [of the vendor] and how they do their business. And do not be afraid to ask questions. You need to know everything that you can going in.”

Karen Epper Hoffman is a writer working in Europe.