Upholding Core Values


Look beyond price, and think strategy and convenience, when considering a new core processing software system

By Kelly Pike

Community bankers often daydream about replacing their core systems. They’d have best-of-breed functionality and better pricing and service, they think. Ancillary systems would integrate seamlessly. That annoying error message would stop popping up.

But the reality of undertaking a core system conversion is daunting, which partly explains why so few community banks switch core processors every year. But after a severe recession followed by a wave of investment in online and mobile banking, many community banks are beginning to reconsider their options, say technology consultants.

Changing core processors is a huge tactical, strategic and philosophical decision—one that causes a community bank to reexamine nearly every software system in the bank. To make the process worthwhile, a bank must map its long-term institutional goals while understanding the day-to-day details and nuances of the system’s everyday use—both the good and the bad—to develop specific, concrete goals for improvements.

A long commitment

The average community bank stays on its core processing system for 15 years, says Christina Churchill, a technology consultant with Chicago-based firm RSM International Ltd. Yet when banks consider a core conversion, they soon discover that not much has changed.

“When it comes to core processors, deal with the devil you know as opposed to the devil you don’t.”
—Aaron Silva, technology contract expert

Long-established so-called legacy systems dominate the market. With big names and deep pockets, they are stable companies with platforms that offer a broad range of ancillary services—everything from sweep accounts and online banking to bill pay and mobile banking. While the companies have made large investments in developing these systems, the underlying architecture is based on platforms developed in the 1970s and hasn’t changed much. Their dependence on batching means most can’t truly offer real-time payments and other real-time applications, experts say.

Newer core processors have sprouted up to compete against legacy vendors by offering cloud-based technology that’s well integrated across all channels and databases. These systems offer fewer features than their more mature counterparts, technology consultants say, but work well with outside ancillary services. The result is a system that’s much cheaper, but in some ways less efficient and automated, says Dean Schumann, managing partner at Frederick Martin Advisors, an Eden Prairie, Minn.-based consultancy focused on community bank profitability.

“It can get the job done for a small bank, but it limits the bank from going after bigger, more sophisticated customers who need treasury management services,” he says. Meanwhile, few risk-averse banks want to be early adopters, making it hard for new core providers to make inroads.

The Total Package

Changing a core processor isn’t about one piece of software. At its simplest, a core system is a single application that handles customer records and accounting of deposits, loans and financials. But today’s core processors may touch as many as 15 or 20 other systems.

“They may call it a core vendor evaluation, but in reality they at least have to have conversations about their other big systems as well,” says Brad Smith, managing director at Cornerstone Advisors, a financial services strategy and technology consulting firm in Scottsdale, Ariz.

That’s why Churchill recommends that community banks open the conversation by deciding which of their existing ancillary products they want to keep. A bank may have a substantial investment in a storage system or value a mobile app that’s popular with customers. In that case, it may prioritize a core that will work well with those specific platforms, she says.

Others might choose a best-of-breed approach, sacrificing the bells and whistles of more cutting-edge vendors for the simplicity of a single vendor. “The big three aren’t trying to build an elite Internet banking product,” notes Smith. “They are shooting for the middle.”


Although every core vendor promises that its system is compatible with ancillary products, that’s not always the case, consultants agree. A self-proclaimed “open” core system may charge $50,000 for an interface and thousands a month for maintenance, Smith says. Others make the third-party vendor write the interface, only to have it break every time the core updates.

That’s why it’s important to talk to other banks about their experiences, especially if they use the same ancillary products. Churchill recommends that community banks talk to another bank that’s deep into the implementation of a core system they are considering. Then they should talk to another bank that has operated live for one year with the system under consideration and another using the prospective system for several years to see the life-cycle support, she says. Also talk to key third-party vendors about their experiences with a specific core provider.

“They may call it a core vendor evaluation, but in reality they at least have to have conversations about their other big systems as well.”
—Brad Smith, technology consultant

Community banks then must identify existing pain points—problems that hinder everyday users. Churchill recommends forming a task force of functional users—not managers or vice presidents—to create a wish list of things that could be handled better. Maybe an error message is hindering operations or the team would like to accelerate loan decisions or speed the account-opening process from 25 minutes to 10 minutes while increasing cross sales. Then a bank can see if there is a core vendor that can address enough list items to make the transition worthwhile.

One way to see these systems in action is through a demo. Instead of being wowed by a sales pitch, community banks need to be prepared with a script that specifically asks the demonstrator to show the bank how the system handles things that are currently difficult for the bank, Churchill says. “Every system can open an account,” she says, “but how do you do the tough stuff?”

Also consider a system’s customization options and how enhancements are made, Smith adds.

Making The Switch

Banks consider a core system change for several reasons: pricing, a merger or acquisition, outgrowing the core, a new CEO or extreme dissatisfaction. Although these can all be valid reasons, some consultants interviewed agree on one point: Don’t switch unless it’s absolutely necessary.

“When it comes to core processors, deal with the devil you know as opposed to the devil you don’t,” advises Aaron Silva, president and CEO of Paladin fs, an Austin, Texas-based firm focused on negotiating core and IT banking contracts.

Often a community bank can improve its core processor just by getting more value from its existing system, Smith says. If a bank has had a system for a long time, the system might have improvements it doesn’t know about or an optional module or service that might solve problems. “There’s a massive underutilization of core systems where banks are spending a lot but not getting a lot out of it,” he says. “They don’t know what it’s capable of and didn’t change their policies and procedures to maximize its capabilities.”

Community banks seem aware of this necessity. Less than 20 percent of banks that evaluate a potential core system switch actually change, Schumann estimates. Most stay with their current provider and negotiate better pricing. “As long as the vendor is putting in dollars to keep it compliant so regulators are happy, a system should last forever if the vendor keeps supporting and enhancing it,” he says.

But banks should still consider their options—if only to gain knowledge and leverage in renegotiating with the current vendor. Since the three main vendors all offer similar products, Silva recommends skipping the request for the proposal step and going right to the competitive bid process. Of course, pricing isn’t everything. A system’s capabilities, support and research and development budget are also important considerations, says Schumann.

Experts don’t expect a revolution in core processing in the next five years, which may prove frustrating to community banks that want to pull more data from the core or consider real-time payments. Although Europe has reinvented its core system, legacy vendors in the United States are focusing on payments, where they derive the most revenue, Smith says. Older legacy products will die off while core vendors try to guide banks into their strategic products. Eventually, core vendors will have to take a hard look at handling real-time and straight-through processing, Schumann says, and change will come.

Until then, community bankers can keep dreaming.

Kelly Pike is a freelance writer in Virginia.