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The core processors most banks use today are made up of a number of different of systems and were designed when real-time banking didn’t exist, making it extremely challenging to integrate technology that operates in real time.
In most industries, old systems and technologies are usually at the mercy of innovation.
But in the world of fintech, new startups, especially those looking to work with financial institutions, are limited by the decades-old technology in banks’ core processors.
And if fintechs want to deploy their technology through banks, the reality is that they will have to work with core processors and to some extent play by their rules, said Jason Henrichs, managing director of the Chicago-based consulting firm Fintech Forge.
“You are not going to see change overnight. You need to recognize the core has limitations, and even if you don’t necessarily agree with many of them, the reality is you are not going to force the core to change,” he told Banker & Tradesman. “The fintechs that do the best are ones that have a huge amount of patience and at least understand technologically where the cores are coming from.”
Core processors are the back-end system of the bank that interfaces with general ledger systems and reporting tools, and process daily deposit, loan and credit transactions. Three core processing companies – Fiserv, Jack Henry and FIS – control the majority of the market. Banks typically sign five- to seven-year contracts with these core processors.
Additionally, the core processors most banks use today are made up of a number of different of systems and were designed when real-time banking didn’t exist, making it extremely challenging to integrate technology that operates in real time.
“The core processors play a really important role in the infrastructure and ecosystem, and their existing tech platforms have limitations that the fintech community is trying to work around,” said Ben Malka, a partner at the venture capital firm F-Prime Capital. “Often banks require direct integration because critical information is stored with the core processor, so fintech companies need access permission.”
How Fintechs Break into the Industry
Many fintechs are naïve about how much the core factors into a bank’s decision-making.
This attitude isn’t surprising, according to Henrichs, considering many fintechs are venture-backed and need to scale their products quickly to pay back investors or prove their concept enough so they can raise more money.
The problem for these startups is that most banks move much more slowly.
Henrichs described a fintech startup with a phenomenal product that many banks were interested in. At one point, he said, the fintech had more than 200 active sales talks with banks. After two years of discussions, however, the fintech only managed to close two of those sales and is only just now starting to gain traction.
The key to scaling is finding a large, influential bank sponsor for a fintech company that will say a fintech’s product is worth the effort needed to integrate it, said Malka.
“If the product resonates with customers enough and banks demand it, the core processors will enable it,” he said. “However, finding the sponsor bank or banks is difficult and can take several attempts.”
Several companies are already developing new open core systems that will allow banks to make proprietary enhancements and custom configurations – things they currently can’t do without permission from their core processors – while also giving them full access to their data.
The Boston fintech company Numerated, which was incubated and launched at Eastern Bank, shows just how powerful having a sponsor bank can be.
The real-time lending platform makes automated credit decisions and funding of loans online, often instantaneously. Small business owners can use Numerated to obtain a loan of up to $250,000 within five minutes.
Numerated’s impact at Eastern was quickly noticed by other banks and drove its spinoff.
“Banks heard Eastern’s story of using real-time lending to become the top small business lender in Boston, wanted to replicate their strategy and needed technology to do so,” said Dan O’Malley, founder and CEO of Numerated. “In building the technology within Eastern we invested from the onset in intimately understanding the core processors in order to deliver on our vision, and we continue to focus development efforts here today.”
Since spinning out of Eastern 18 months ago, the company has onboarded 10 banks from $1 billion to $44 billion in assets and plans to add more in the coming weeks. Numerated has also partnered with FIS and has integrated its technology into a number of its core systems, which allows banks and credit unions with an FIS processor to go to market quicker with Numerated.
Changing Tides
While core processors have most of the power now, change could be on the horizon with the appearance of open core processing services.
Several companies are already developing new open core systems that will allow banks to make proprietary enhancements and custom configurations – things they currently can’t do without permission from their core processors – while also giving them full access to their data.
The American Bankers Association recently invested $30 million into Finxact, an emerging technology company that offers an open core banking platform for financial institutions.
Even though it could still be several years until most banks adopt open cores, the changing dynamics between fintechs and banks are already starting.
When the Boston fintech company Fincura, which drives more profitable commercial lending, first began selling its products a few years ago, banks were reluctant to work with them because they didn’t want to be the first client.
Bram Berkowitz
As the company has onboarded several clients, it has begun to get more selective about who it will work with, said Max Blumenthal, founder and CEO of Fincura.
For instance, Blumenthal said, banks with more innovative attitudes tend to be better suited to integrate Fincura’s technology. The onboarding process also tends to go more smoothly when the bank has performed integrations with other fintech companies.
“We can help banks that have never done this before, and it’s easy to see which banks are willing and able to move quickly,” Blumenthal said. “We understand that our clients have limited resources, so it’s important to pair prioritizations to ensure success for everyone involved.”
This article has been updated to correct the maximum loan amount borrowers can access using Numerated. The company can connect borrowers to loans of up to $250,000.
