The core banking channel is dominated by a few important and long standing players including Jack Henry, Fiserv and FIS. The majority of the market share for banks and credit unions is concentrated with one of these three major players. There or other important core banking providers like Nymbus, Thought Machine and Mambu, but the vast majority of the market share in the $1-10b in assets space is still with one of the big three. For context, in the $500MM-$10b in asset space, Jack Henry has 46% market share so the industry still goes where Jack Henry goes.
Core Banking Channel
The core banking providers are often a one stop shop for all that banks and credit unions need. As you think about the complexities and regulatory requirements of running a commercial and/or consumer bank and all the infrastructure that comes along with it (branches, etc.) the core banking providers can generally provide all that is needed and are generally on par with each other from a capabilities standpoint. As a result, banks and credit unions will generally go to their core banking provider first to seek a certain solution or solve a certain problem. As a result, fintechs that want to sell to banks must be integrated into the core banking providers and ideally have contractual revenue sharing programs in place so the bank can gain exposure to the fintech through their existing core banking provider.
Considerations in the Context of the Core Banking Channel?
There are many considerations in the context of the core banking channel including integration with the core, revenue sharing arrangements with the core and leveraging the exposure and sales processes a core banking partner can provide. Given that most fintechs will require connectivity to the core from a data perspective, integration is often the most discussed aspect of partnership with a core. A bank has heavy reliance on a core in the context of loans, deposits and transactions and many fintech products need to leverage this data to power their product. Revenue sharing agreements and being able to leverage the existing sales efforts of the core is another important aspect a fintech needs to solve for early in their partnership journey.
Costs Associated With The Core Banking Channel?
The costs associated with the core banking channel are similar to the digital banking channel. The costs are generally in the form of revenue sharing, which can range from 5% to 30% depending on the product and represent a material impact to the margins of the fintech. Beyond revenue sharing arrangements there are often material costs and time associated with integration and testing. These costs can range from five to six figures and can take months given the backlog of projects of most core banking providers. Clearly, the costs associated with integration and revenue sharing are significant considerations and must be factored in as the fintech is establishing its partnership programs.
How To Compare Core Banking Providers?
Comparing core banking providers is often complex given all the different aspects of a core banking provider. The major core banking providers often have several core banking products under one roof, some designed for banks of certain sizes and some designed specifically for credit unions. Understanding the focus of each core banking provider in the context of market share, size and types of banks and/or credit unions that core banking provider is working with along with distribution and sales capabilities are all important when comparing which core banking partners to consider from a partnership perspective.
Lessons Learned: Measurable Results
From the most basic standpoint a fintech has to be able to demonstrate measurable results and impacts for a bank or credit union. These results must have a meaningful impact on the P&L and balance sheet of a bank. When these characteristics of a fintech are true, the partnership aspects of working with core banking providers tends to fall in line. Being able to show a meaningful impact for the clients of the core banking providers is an important aspect of establishing a partnership with a core banking provider.
Plan Ahead
Partnerships of this nature generally take a substantial amount of time to put together. Depending on the complexity of the fintech product and the backlog of the core banking partner, the integration alone can take several months to build and test. Add the time it will take to negotiate the right revenue sharing agreement and this could be another few months. Identifying the right core banking partner within the channel and planning ahead will be a key factor to incorporate into the overall distribution plan.
Identify the Right Partner
Identifying and prioritizing the right core banking partners is mission critical. Depending on the segment of the market a fintech is focused on will aid in the identification of the right initial partner or partners to pursue. Over time, the fintech can continue to build partnerships within the core banking channel, but identifying the right partner or partners initially will determine success or failure.
Actionable Advice: Where to Start
Start with a thorough understanding of what types of banks and/or credit union the fintech will focused on. All other decisions will be a function of the answer to this question. With over 9,000 financial institutions in the U.S. currently, narrowing that scope and identifying a much smaller segment of targets is important. Once that smaller segment of targets is established, the fintech can then build partnerships with the right set of core and digital banking providers in the space.
Final Thoughts: Sales Process
Narrow the focus of bank and credit unions by establishing a set of ICP parameters. Ideally, this focus should be on 200-300 targets depending on the resources of the fintech. Once the focus has been established, choosing the right core banking provider becomes much easier and efficient. Over time, the fintech can widen their scope of target banks and credit unions and even core banking providers.
About Finov8r
Finov8r is a leading embedded advisory consultancy that supports banks, fintechs, and corporations. Bridging finance and technology, Finov8r provides tailored solutions that foster profitable growth, simplify technology complexities, and deliver 5x ROI through fintech innovations. With hands-on advisory, Finov8r works within teams to achieve long-term results, unlock new revenue streams, and modernize operations. For more information, visit finov8r.com and follow on LinkedIn.
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Bank executive, fintech founder or business owner and want to get in touch regarding Finov8r advisory? Email me at allan@finov8r.com.
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