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March 8, 2002 by Carl Faulkner Carl Faulkner

Why Banks Are Not Changing Core System Vendors

Prior to Y2K, core vendor turnover at banks was as predictable as the changing of the seasons. Twenty percent of banks THOUGHT about taking a look, 10% DID take a look, and 7% actually changed their core system vendors. This rate of change, commonly called the “churn rate,” has been consistent for the last 10 years.

Looked at another way, when a bank decided to go through a structured process to evaluate core system vendors, the likelihood of a change prior to Y2K was 70%.

In a weak – but educated – moment in 1999, I predicted the rate of churn would accelerate post Y2K. I expected churn to double in the two to three years following the turn of the century. My prediction was based upon the artificial dampening of churn caused by the regulators pre-Y2K. It seemed logical that pent up demand would be unleashed and vendor change would greatly accelerate.

In fact, the number of banks evaluating core system options has not materially changed, but the probability of unseating the incumbent has done a flip-flop. If a bank goes through a structured process to evaluate a new core vendor now, the probability of a change is 30%, not 70%!

My associates at Cornerstone Advisors and I have given this an abundance of thought in order to answer the question, “Why the change?” It can really be attributed to three factors:

  1. Core system products have become commodity products, and banks can no longer justify a change. 
  2. Reduced churn has increased the cost of new business for a core vendor, causing the vendor to fire substantial price shots in the bidding process when it is the incumbent.
  3. The senior MIS person, long the champion of the new vendor, no longer wants to recreate the numerous integration points that have taken years to get right with the incumbent.

My associates in prior GonzoBanker missives discussed the first two reasons. Let’s shine some light on #3.

Once upon a time, the core vendor provided most of the total banking solution to a bank. Integration points, i.e., the intersection of two computer programs or systems, were the responsibility of the core system vendor. Vendors typically providing suite products, such as Metavante and Fiserv ITI, provide a near-complete product solution and have done an excellent job integrating the many parts of the total product.

Unfortunately, it is less and less likely that a bank of any size will be able to obtain all of the required system solutions from a single provider. For instance, Internet banking products were not available from core vendors when banks were entering the market. Trust products are only available from one of the core vendors. Loan origination systems have almost always been purchased from third parties. There are many other examples.

Whatever your senior IT executive’s title (VP, CIO, Manager, or “Hey You”), one of his or her top priorities has been to make all these products work together. This person has discovered it is not as easy as it should be, and it has taken longer than anyone imagined. In the process of trying to make it work, the IT exec was being “whupped upon” (perhaps put diplomatically: “Integration issues were being discussed with the senior IT executive…”) to complete the integration.

For most banks, integration is never complete; it is just better than it was last quarter. As we all know, any change in the product mix and an integration point can fail. Sometimes the failure is bothersome. Sometimes it is catastrophic.

Put yourself in the senior IT executive’s place. Would you want to throw away years of integration work? Would you want to start the integration project again and suffer the years of stress?

Senior bank IT executive, I feel your pain. If I were in your place, I would challenge the business units who believe the only way they can meet their new sales goals is with a new core system product. If the bank decides to change, be sure everyone understands the size and complexity of the project to make all the pieces work together.

This new core system project is not over at conversion; it is just beginning.

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