The Regional Processors’ Value Prop
With good reason chief information officers and the C-suite in general love to bemoan their core processors. Some of the best invective I’ve ever heard has come from angry bankers with a death wish for their core processor, usually one of the easy targets, the Big 4.
No, GonzoBankers, not the Big 4 of speed metal; I’m talking core processors D+H, FIS, Fiserv and Jack Henry. Sometimes, after blood starts boiling over bureaucracy/lack of attention/nickel and diming fees/missed development milestones at the Big 4, a chief executive officer or a CIO will ask, “Is there a smaller or regional provider that could do just as good a job as the Big 4 without the headaches?”
Let’s not forget that I’m a consultant first and an omniscient industry commentator second; therefore, my answer must be, “It depends.”
Let’s bottom line this one up front: If you’re a smaller (under $1 billion or $2 billion) bank or credit union and not in a best of breed environment, the regionals could be very attractive to you. If your bank or CU is bigger than that or, more importantly, you are best of breed or want to become that way, the regionals are probably not going to solve much for you.
What Do the Regionals Bring to the Table?
Ancillaries Drive the Proposition – One of the most important assets a smaller or regional core player brings is a suite of tightly integrated, affordable products. The emphasis on “suite” is because only very rarely will regionals integrate ancillary systems that are outside of their suite or very small group of preferred partners. They have the discipline to enforce that philosophy. The regionals don’t do “just this once” or “could you make an exception for us?” integration projects. You use their suite and you like it. Period. In a lot of cases, this vendor discipline can save the bank from itself.
Service – While this is unscientific and based on a couple of decades of observation only, regional core players tend to have happier clients than their Big 4 counterparts. What’s the biggest complaint that FIs have with their core vendors? Integration – and there isn’t even a close second. Limiting the number of third parties they work with helps the regionals nearly eliminate integration conflicts and creates a simpler environment to support. It’s a little heavy-handed, but the take-it-or-leave-it ancillary strategy is the secret sauce in regionals’ Better Service stew.
Beyond that, the regionals just pay more attention to service overall than the Big 4 do. Compared to the Big 4, regionals tend to:
- Work with and support smaller clients that demand more handholding.
- Maintain lower clients-to-service-rep ratios than the Big 4.
- Weigh customer satisfaction more heavily for employee compensation.
Price – For many good reasons the regionals are for the most part universally less expensive than the Big 4.
- Many of the regionals are not publicly traded (or they are traded OTC with very low volumes) so they can afford to work with lower margins without giving a bunch of snot-nosed stock analysts a damp case of the shakes.
- Promises of “great service” only go so far in attracting customers, so the regional players have to underbid the Big 4.
- Keeping the ancillary/integration environment simple and focused is just a much cheaper way to deliver.
The truth is that maybe 25% of banks and CUs that have gone down the best of breed path really are different or niched enough to merit the best of breed strategy. That leaves 75% of best of breeders either forced into that strategy because their core suite is so weak or they’re believing their own BS about being unique. Oftentimes, banks and CUs see the light about their best of breed strategy when they compare regional versus Big 4 pricing.
Fit Matters at Regionals – The Big 4 vendors say they are looking for clients with a great fit, but let’s face it, revenue trumps fit every time with the big boys. When the Big 4 look for “fit,” it’s a question of evaluating which of their various core products best fit the prospect. Regionals have to decide whether a prospect is a fit for their company at all. Regionals have the luxury, even the mandate, to find clients that fit because fit drives their whole value proposition. Plus, regionals simply can’t afford to participate in every deal. Poor fit at a regional means higher costs of delivery, weaker service and more complexity than it cares to handle.
If your bank or credit union is looking for a longer-than-your-arm list of $1 billion+ installations, you probably won’t be impressed with the regional core players. If you are married to your best of breed ancillary strategy, move along and focus on the Big 4.
However, if you want better service that accompanies a focused vendor and a simple, well integrated ancillary strategy, the regional core players are worth a look.
Let’s continue the conversation and happy shopping, GonzoBankers.
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With a potential outlay of several million dollars, a core system decision may well represent the most significant strategic and financial investment your institution will make in the next five years.
Cornerstone Advisors has the in-depth knowledge and the tools to ensure you make informed, well-documented vendor decisions that support your organization’s strategic goals.