GonzoBankers, does everybody have their heads and hearts back in the game after a hopefully excellent holiday break? I trust you all took the opportunity to enjoy a few days off, maybe blow out the pipes a time or two, and not think about work for a brief while.
Hope so, because 2005 looks like another high stakes, winner-take-all kind of year. The beefed up team here at Gonzo’s mother ship, Cornerstone Advisors, is ‘roiding up (remember, first the clear, THEN the cream) in anticipation of yet another year of dominating the mid-size bank and large credit union core system selection market.
Inevitably, within the first few hours of the first visit to our system selection clients, the CIO, CFO or maybe even the CEO will pull us aside and ask, “What do you think the chances are that we will actually convert to a new system? I’ve got to tell the Board something!” Within maybe 45 seconds of receiving the RFP, vendors will call us to ask if we really think there’s a chance the bank will convert. Usually we’ll respond with a typically noncommittal consultant answer such as “50 percent.”
That question, recently posed to me by a new client, got me thinking. Based on a bank or credit union’s profile, can you really predict whether it will convert to a new system at the end of a selection process? To attempt to answer that question, I reviewed each of our system selection engagements over the past two years to see how the incumbent vendor fared. The result… a full 70 percent of our clients left their incumbent core processors. Seventy percent! Clearly, our sample is tainted by the fact that these institutions decided to spend the time and money, hire experts and undergo a formal selection process. I’d guess that, overall, this is a sample of banks and credit unions with more than your garden variety of heartburn regarding their incumbent vendors.
How did the vendors fare by their client banks’ asset sizes? Check it out, GonzoBankers:
|
Assets ($ million) |
Incumbent Won |
Incumbent Lost |
|
$2,000 – $10,000 |
75% |
25% |
|
$750 – $2,000 |
45% |
55% |
|
Under $750 |
12% |
88% |
Friends and detractors, can we just say that the bigger the bank gets, the more likely the incumbent is to win? Sort of, but it is not that simple. What we have to recognize is that the vendors that typically serve the under $1 billion market tend to be different than the vendors serving the $1 billion – $10 billion market. There are exceptions, but the numbers above reflect the thinking that as banks approach or even flirt with the $1 billion mark, their business lines begin to gain strength, the ways they operate and compete evolve, and the vendors that can serve them also must change. Once you get above $1 billion, the vendor community really does not change dramatically until you hit the $10 billion mark, so drastic system changes become less necessary and effective.
There is a simpler reason to explain why nearly 90 percent of smaller banks and credit unions switch core vendors at the end of the day. They can. It is considerably easier for smaller banks to make a core processing change. First, the politics are generally less brutal, and lines of business at smaller institutions are likely to be less powerful and influential in the process. It tends to be an already irritated CEO or executive committee making the decision, and they can make things happen. Second, and maybe more importantly, the smaller banks have less complexity to deal with in a conversion. While they arguably have a reduced amount of technical talent, the smaller players simply lack the hulking, imposing complexity that tends to scare off the big boys from a conversion. Smaller institutions are generally less burdened by inertia and have a much more close-your-eyes-and-get-it-done-if-it’s-the-right-thing-to-do attitude toward conversions than the larger banks.
Worthy of note, yes, but maybe a smidge on the predictable side. A more interesting look was suggested to me by Terence Roche, our high profile inspiration for the GonzoBanker logo, the “Jolly Terence.” Terence suggested that perhaps there is some correlation between a bank’s propensity to convert and its technology philosophy. Are banks that are true integrators, maybe using multiple core systems and a smorgasbord of best of breed ancillary systems, more or less likely to take a walk on the wild side of converting? Are product suite users more likely to give incumbents the boot, or stay right where they are in their cozy gardens of tight integration?
Let’s just see about that. I categorized the same sample of banks and credit unions by their technology philosophy, and this is what I found:
|
Technology Philosophy |
Incumbent Won |
Incumbent Lost |
|
Integrators |
50% |
50% |
|
Suite Users |
20% |
80% |
First, understand that most of the suite users in this sample are smaller banks, and most of the larger banks are integrators. See the following table:
|
Assets ($ million) |
Integrators |
Suite Users |
|
$2,000 – $10,000 |
75% |
25% |
|
$750 – $2,000 |
45% |
55% |
|
Under $750 |
12% |
88% |
Clearly, the size differential explains some of the disparity between the fate of incumbents, but there is more to it. I can tell you from experience that suite users tend to be smaller and will switch to other suite providers when they leave their incumbents. They later evolve into integrators as their business lines demand deeper functionality. On the other hand, integrators fall into two camps. Half of them live by the philosophy that core is a commodity and very replaceable if business needs justify the change. They deal with integrating their irreplaceable ancillaries later. The other half puts relatively high value on the time and effort that they (not their vendors) have put into integrating ancillaries to their core systems. These banks tend to stay put to avoid the confusion and cost of re-integrating their ancillaries to core.
So what does that mean to the CIO who has to give the insider prediction to the CEO or the Board regarding the bank’s core system direction?
Respek.
-smh