There are over 6,000 community banks in the US. Many of these manage significant assets, and have meaningful IT budgets. Their small business and consumer customers are looking for competitive digital banking services. But community bank technology is often outdated, and difficult to enhance. What an opportunity for FinTech!
There is no clear asset size dividing line for community banks. We could consider the 140 or so with between $5 and $25 billion in assets as regionals. But 520 banks have between $1 and $5 billion of assets. Nearly 700 sit between $500 million and $1 billion. The rest are under $500 million, with over 1600 under $100 million. (Data is from US Bank Locations which has some great information on bank branch locations, staffing, asset size, etc).
FinTech executives will see immediately what an opportunity this could be. Forget trying to get into the big banks, with their 6-9 month buying cycles and 12-18 month implementation project timescales. When your VC is breathing down your neck demanding revenue this year, surely the smaller banks would be a better bet?
But there are some things to be aware of before you bet the ranch on them.
Community Banks and Technology
It is dangerous to generalize. But many, or even most, of the US community banks single source the majority of their primary software needs. They typically source from a single core banking software provider. There are four major players: FIS, Fiserv, Jack Henry, and D+H. Between them they own 96% of the community banking market. There have been some inroads by the global leader, Temenos. Also companies like Oracle have been successfully selling down market from their more standard Tier 1 and Tier 2 customers. And some new entrants are making a little progress. But these are still very much exceptions.
FIS and Fiserv own most of the larger banks. Jack Henry has the major portion of the smaller banks (plus credit unions). D+H (previously Harland) has made some headway across the board.
For more on this conundrum, see my earlier blog post. FinTech and Core System Providers - Between Scylla and Charybdis.
Here’s the thing. Community bank IT staffs are typically very small. A few of the bigger banks have in-house IT development groups, but most outsource pretty much all their technology. They also don’t want to have to deal directly with large numbers of vendors. So they source through their core banking vendor, and buy a large number of components from them. Many of these software products are provided by a third party and licensed through the core banking vendor.
Result? Huge revenues for just four core banking vendors – most of the IT budget for 6,000 banks! And, since many banks have very old versions of their core banking systems, the “big four” have a bonanza going on. Banks finally have no choice but to upgrade, if only to be able to meet escalating regulatory compliance needs.
What Does This Mean for FinTech?
There are, of course, some things that the core banking providers simply don’t offer. Or, in particular market niches, the core banking offerings are so inadequate that other products have to be bought.
Most core banking system providers do not publish an API. Even if their current versions did, most banks are running older versions. Also most core system implementations are batch-posting systems. This means that real time posting data is not available, even though memo balances are maintained internally.
FinTech companies are starting to create digital core banking platforms for smaller banks. An interesting example is Nymbus. But generally the key for Fintech companies is to focus on areas around the periphery of the core banking systems. This will reduce the dependency on the core vendor. Where integration is non-complex, vendor integration costs will be less. Examples could include:
- Big data predictive AML solutions using transaction history, including an end-of-day data feed from the core systems.
- Interfaces from mobile or web UIs to external payment or credit services. An example would be an API-driven cross-border B2B payments engine like Currency Cloud.
- Data analytics and Business Intelligence solutions using data extracts from the core banking systems.
Identifying the right banks to approach is a challenge. For example, some banks are looking to expand through acquisition, and are ripe for digital technologies.
Targeted marking efforts, industry events, webinars, blogs, white papers and referrals from industry players are all vital tools. On the other hand, navigation within the community bank organization should be much easier than with a bigger bank. Smaller banks will tend to have faster decision-making processes. And integration is certainly easier, despite core vendor obstacles. All this results in much shorter time to revenue..
Partnering with Core Banking Providers
The other option is to make the core banking providers’ oligopoly work for you, rather than against you. Most banks buy the majority of their software from their core provider. So they are more likely to buy FinTech solutions through the core provider. Of course, the FinTech provider will only see a portion of the overall revenue, and negotiating the right deal will be challenging. But once a deal is completed, integration with the core system will become easier, and sales volume will tend to be much higher. This could also be a viable exit strategy for the successful FinTech. Core providers have grown many of their capabilities through acquisitions.
Sticking to Basics
Whichever route is taken, a number of principles remain in place for FinTech companies:
- Ensure that you are solving a real problem experienced by a significant segment of banks.
- Craft your solution for ease of integration. This applies to technology integration with existing core systems, and mobile and web applications. But it also includes regulatory reporting, customer service, operations, management reporting, and all impacted aspects of the bank’s business.
- Know the regulatory environment in which the bank operates, particularly as it relates to your product domain.
- Ensure you can communicate clearly, and in banking terms. This should run through all your marketing collateral and in phone and face-to-face meetings.
- Express your value proposition in banking terms. Even if you sell through a core banking vendor, they will expect you to have this clearly defined. Help the bank to quantify benefits in terms of increased revenue, improved margins, reduced operating expense, or better use of capital (e.g. through risk reduction).
- Ensure that you can provide necessary integration and implementation support. This may be as a partner with the core provider, or with the bank’s System Integration partner.
- Provide a clear and credible plan for post-implementation support. This needs to include all aspects of training, problem resolution and ongoing support and maintenance.
There are many challenges facing community banks today. FinTech companies can help with product enhancements, digital transformation, efficiency improvements, and regulatory compliance. But FinTech companies must be smart about the overall package they are presenting, who they partner with, and how they present.
With 6,000 banks (and more than 6,000 credit unions) needing help, there is great scope for a sustainable business model for the right FinTech solutions. Hopefully some of these thoughts are useful for FinTech companies planning to enter or grow in this marketplace.
Graham, a 30 year banking veteran, runs BankTech Consulting. He is an expert in commercial banking, and provides strategic insight and internal business cases to banks. He works as a fractional Customer Success Executive to Fintech firms, facilitating their partnership with banks.