Core data processing at one time was a massive and diverse business that included dozens, if not hundreds of organizations. Some of the most recognized names in financial technology once operated vast and large data centers scattered about the United States.
Recently, I found a copy of the now-defunct Federal Savings & Loan Insurance Corp. magazine from 1985 that listed the top 50 data processors in size order. That’s right, 50, and that was just for thrifts and qualified credit unions. The list included NCR and Marshall & Ilsley, which became part of Metavante and eventually FIS. There was also a young and aggressive company led by George Dalton and Les Muma called Fiserv.
Acquisitions accelerated and technology evolved. As the personal computer (PC) became more powerful, the concept of distributed computing took hold, taking over more of the applications previously handled by the mainframe. By 1993, the flexibility of the PC had given rise to client/server computing and a number of client/server core upstarts entered the market to deliver fully operating core systems, such as Phoenix International, East Point Technologies, Perot Systems and Open Solutions Inc. (OSI).
Taking advantage of UNIX/NT operating systems, these new core providers also introduced relational databases into the mix as the primary data structures. In doing so, they crushed the antiquated flat file master record architectures which were hamstrung by space limitations and mainframe/legacy hardware. The new systems’ user interfaces (UIs) were graphic, as opposed to “green screen,” and the depth of data and service information available to customer service personnel was far more robust.
Over time, the upstarts would each meet a different fate. Phoenix went public but eventually sold out to Harland. Perot never got out of the gate. East Point was acquired by Metavante and then spun out to a consortia of banks that sold it to OSI. OSI, itself, went public in 2003, recapitalized with private equity in 2007 and then sold to Fiserv in 2012.
Today, only OSI and Phoenix survive – OSI inside of Fiserv and Phoenix inside of D&H. Regardless, the disruptive nature of the functionality they introduced changed the industry and made it imperative for all providers to enhance the presentation layer and improve data management by providing business intelligence at the core level. In many ways, these companies paved the way for the Internet banking companies that would launch in the late 1990s.
This abbreviated history begs the question: is there a next generation of core systems to come and, if so, does it matter?
Cloud Game Changer?
Over the last 30 years, the core data processing industry has consolidated to four major players and a small number of what could be considered regional providers. Attempting to join that mix are a couple of international providers trying to punch their way into a market that continues to consolidate.
Whether these offshore providers will be successful is yet to be determined, but the precedents are not encouraging. In 1996, Bankworks, a division of Software AG (Germany), at the time the largest software company in the world, announced they would enter the U.S. market with a client server core solution. It never happened and Bankworks folded up U.S. operations within a year.
The challenge for the international entrants is the same today as it was in years past. For U.S. financial institutions, redeveloping their core systems to meet the demands of the regulatory environment along with the need to provide a single solution for both the depository and lending side is costly and demanding. That’s not to say that the international players haven’t developed quality core solutions for their markets; in fact, they have. But for these foreign entrants, maintaining their existing systems while at the same time trying to build a U.S.-compatible system with the same framework just isn’t profitable.
Despite the challenges international entrants face, it is clear that they have learned from their predecessors’ mistakes and have approached the market with new tactics. They have made acquisitions of U.S.-based ancillary products and, in other cases, have used the development of key channels such as internet banking as a Trojan horse to enter into the market. Whether these tactics will result in a beachhead wide enough to garner critical mass remains to be seen.
Which brings us to the heart of the question: Is there an opening for a next generation of core systems? Those who have invested in the idea would certainly argue that such an opportunity exists. A “core system in the cloud” is the claim they make as being a potential game changer. But is it?
Actually, a core system in the cloud is nothing more than a return to the days of traditional outsourcing. We’re returning to the days when the data and the applications were stored in the data center. The end user interacted with the system by what appeared on their green-screen cathode ray tube (CRT). However, with some contemporary marketing spin, we now call it SaaS (Software as a Service) and “The Cloud” translates to, “it doesn’t matter where the server is located.”
Yes, “Cloud” application developers will say that what they do is completely different and that the applications they build are easily modified and allow for the end-user to create their own custom experience. The client server upstarts made the same argument when they delivered applications with a new UI developed with 4GL (4th Generation Language) tool sets. Very few, if any financial institutions want their service staff to have numerous versions of the work screens complicating training and making audit trails difficult. The alleged demand from consumers is overblown at best when a solid mobile app does the trick.
So, while both SaaS and Cloud Computing are natural elements of FinTech evolution, neither is transformative and neither is disruptive. In fact, we’ve yet to see if this evolution will pass regulatory muster for safety and soundness. Let’s not forget the data centers operated by the remaining providers store massive amounts of confidential financial information. Regulators have enough concerns about the protection of the traditional data centers, which have been around for decades.
Make no mistake, it would be great to see a new core provider take the industry by storm. But there is no known road to travel on to get there, especially in an industry that continues to consolidate and where regulatory constraints are getting tighter and tighter. Add to this the fact that there is no secret sauce or discernable technological disruption from a “core in the Cloud” and it’s hard to see lightning striking again. Besides, with little to distract them, the remaining big core providers won’t be caught napping this time.
Mr. Nicastro is principal and CEO of Bristol, Conn.-based Coppermine Advisors, LLC. He can be reached at [email protected].
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