Opinion: Integration, not reinvention, is the real imperative in core banking

The ABA’s 2024 Core Platform survey reveals that even though overall satisfaction with core providers remains low, only one in five bankers expect to switch cores upon renewal.

This isn’t terribly surprising; few bankers want to go through a core conversion unless it is absolutely necessary. It’s disruptive, expensive, and often doesn’t achieve the goal envisioned. After all, everyone knows the core processing is the “sausage machine.” It’s not pretty or even visual; it’s difficult, gritty work.

This is why there are only a small number of core providers remaining. Over the years, core processing has become largely commoditized, much like phone service has; someone must provide it, and except for differing hardware platforms, it mostly gets done the same way.

So, when a bank does decide to undergo the time and resource-intensive conversion process, it’s because of either serious service issues or the existing core has failed to deliver something critical. Increasingly, that disconnect has to do with a lack of integration. More than ever, banks rely on their core to seamlessly bring together the attractive, customer-facing pieces, including features and functionality such as digital account opening, money movement and tailored insights — the tools that ultimately attract deposits, retain customers and drive earnings. Most cores still struggle with the solution, but the one who does so with innovation and cost effectiveness could be the ultimate winner.

So, why not neo-cores?

Some argue that the neo-cores are presenting a better option than their legacy predecessors. However, if these new players’ value prop is just the core, then it’s a wasted argument. Right now, most neo-cores are essentially front ends, yet banks still expect those players to rebuild and support decades-old backend processes. There’s very little that is disruptive or glamorous in regulatory compliance, interest accruals or service charge routines.

The truth is, the battle isn’t about reinventing the manufacturing part – it’s about solving integration. Even if neo-cores are able to figure out how to integrate more seamlessly, the reality is they will still really struggle to establish the time, scale and trust needed to obtain critical mass and transform the industry. Long sales cycles and conversion lead times do not allow for speed to critical mass. Instead, neo-cores would be better off focusing on what they’re good at and what can meaningfully set them apart; at this point, that just isn’t core processing.

The integration imperative

As previously stated, the core processor that solves integration, making it truly seamless for banks and their customers, wins. Maybe not exclusively, but meaningfully. Just the hope for better integration has given birth to a number of successful integration companies strictly focused on the bank tech industry.

At the same time, not every bank will play ball. Many, if not most, CEOs start their technology planning with “we’re not doing a conversion.” And that’s valid. The costs are enormous and, in a time when bank consolidation is back on the rise and a weakened CFPB arguably lacks the power to protect community banks, the likely trend for smaller institutions just trying to stay afloat will be a strategic transaction. This will have a direct impact on the bank tech industry. If total addressable market (TAM) continues to shrink, investors will redirect their capital to industries with potential growth.

The opportunity ahead

For the last few years, every core vendor has stated they’re moving toward open standards. That’s the promised land. If the industry can actually come together—with the flagship cores structurally opening up and the digital players focusing on where they can create differentiated value – the impact for the industry could be huge. If an industry standard is achieved, it could lower costs for banks, accelerate innovation, and maybe even slow consolidation. Banks wouldn’t have to be impacted by the cost of new digital functionality which could allow them to further deepen their offerings.

If we as a bank tech industry are truly focused on helping community banks survive and thrive, then solving integration and not rebuilding the sausage factory is an industry imperative.

Mike Nicastro is the CEO and principal of Coppermine Advisors, LLC.