The Big Switch

Changing core processing systems takes research, observation and a thoughtful review

By Jennifer J. Salopek

The current estimated size of the global bank core software system marketplace is about $8.6 billion, according to Celent LLC, the banking technology consulting firm. The firm estimates that the market will grow at a rate of 4 percent over the next four years, reaching $10.1 billion in 2017, indicating that more community banks will be exploring options for new software systems in the coming years.

Various IT experts—including Chandan Sharma, the global managing director of Verizon Enterprise Solutions for finance, who was recently quoted in Forbes—say that the need to compete on customer experience and agility will force banks to move to new core systems.

What factors should community banks evaluate to decide when it’s time to make a core system change? Which factors should they consider in selecting a new core system? To help find the answers, we turned to Sam Kilmer and Scott Hodgins at Cornerstone Advisors Inc., consultants who frequently assist community banks in finding the right outsourcing partner. The Scottsdale, Ariz.-based technology consulting firm, which has 40 employees, specializes in helping “everyday banks with everyday issues,” says Kilmer—from strategy to execution and assistance with benchmarking, research and performance measures.

Kilmer describes the core software system as the “heart” of a community bank, and Hodgins categorizes it as “mission critical.” It’s tough to know why—and therefore when—to pull the trigger to take the big step in adopting a new core system, says Kilmer.

Better pricing? “It’s unusual to change for price alone; usually the incumbent vendor will cut its margins before allowing a customer to defect,” Hodgins says. Newer, snazzier technology? “Modern core system providers are having trouble communicating the business benefit of new technology, although it’s long on potential,” he says.

At the end of the day, changing core systems is enormously expensive, complicated and risky. But a periodic survey of the landscape of software providers can benefit your community bank. “Most clients want to review alternatives to see if they can find something better, but have already decided that the time is right when they contact us,” Kilmer says.

At that point, Cornerstone Advisors tries to focus the conversation on functional holes, striving to determine whether there are good reasons for a community bank to change its core system. Some factors the company’s staff urges community banks to consider when comparing options: functions and capabilities as compared to the current system, flexibility, prospects for continued development of the new product and upgrades in the future, and projected ongoing maintenance costs.

Hodgins describes the decision making around those four issues in greater detail, a process that typically takes about six months.

1. System functions and capabilities. Community banks should evaluate the features and capabilities of their current core system and those of alternatives. For example, a community bank that is competing against a bigger bank for commercial clients may need a new system to process complex commercial transactions.

2. Flexibility. What is the underlying architecture and compatibility of the current system and of alternatives? What is the risk of conversion? What kinds of process changes might be required within your institution?

Look for ease of integration with third-party software products. This is one of the top three things Cornerstone Advisors’ clients seek, Hodgins says. This is a global trend, according to the Celent experts, who wrote:

“Banks increasingly want a core system that utilizes data analytics to provide a more complete view of the customer, which then allows for better customer–bank communication. Multi-channel options like ATM, mobile, Internet and [interactive voice recognition] are crucial in attracting and serving customers. Core banking systems are also expected to facilitate product development and provide flexible customization capabilities.”

Many core vendors have acquired the developers of third-party systems, Kilmer notes, and many now may be offered under the same company umbrella. “Integration is a huge issue,” he says. “It can mean the difference between taking 15 minutes to open a new account and taking 45 minutes.”

Don’t be seduced by the bells and whistles, Kilmer advises. “A common pitfall is thinking that just because a product is newest, it will be the best at integration.” Rather, experience and willingness to customize a system are more important than technical architecture, he says.

3. Future development and upgrades. Attending industry conferences is great for evaluating the flagship core systems on offer, as well as the financial strength of a vendor’s parent company, Kilmer says. Although there has been some consolidation in the marketplace and some vendors do offer several core software system alternatives, it will be obvious from the marketing push which product is receiving the greatest research and development investment. If you’re not sure, just ask, Kilmer says.

Also, you should be getting updates and compliance fixes from your current core system vendor a couple of times a year. Look for enhancements. That’s a clue to a company’s flagship product. Further, updates should be forward-looking, which Hodgins calls “market-need responsive.”

4. Ongoing costs. Getting an initial price for a system is fairly straightforward once you select your list of key functions and features. But once you begin adding interfaces with other products, you’ll want to know how prices change with growth. Surprisingly, few community banks do a formal cost–benefit analysis of a new core system, Hodgins says.

As your community bank contemplates whether to replace its core system, actively protect its investment by keeping these key issues in mind from the start.

Jennifer J. Salopek is a freelance writer in Virginia.