Core processors support almost every financial and transactional element of a financial institution. Banks are heavily dependent on the products and services offered by their chosen core processor, and they usually have a limited ability to customize or add solutions to their existing core. In today’s tech-savvy world, competition is steadily increasing, and financial institutions may need to implement fintech solutions not offered by their cores to enable growth and success.
There’s been a lot of frustration aimed at traditional core processors associated with the complexities and costs of integrating outside technologies. Meanwhile, new open core processors are being developed and gaining popularity for their flexible and fast solutions. Prior to making any monumental strategic decisions, there are many factors (both pros and cons) to consider when deciding what type of core processor works for your financial institution. Before deciding between a traditional core processor and an open core processor, institutions must analyze their unique business, environment, and client base to assess how their choice would coincide with their objectives and strategies.
Considerations for Traditional Core Processors
Traditional core processors are more stringent. They have deep expertise regarding the banking industry and are able to offer solutions that often correspond with more conventional financial institution initiatives.
Regarding Data
According to Federal Deposit Insurance Corporation (FDIC) Chairman Jelena McWilliams, “Data is the new currency. If you have data, if you have access to data, you can change the world.” Traditional core processors have certain limitations when it comes to data extraction and analysis. On these cores, accessing data can be challenging, and many of the extraction tools offered center around reporting instead of analysis.
Full access to transactional data lets institutions evaluate the patterns and needs of their customers. This information is essential, and can help institutions create new products and services to address demand. They could also harness this data to advertise existing products or services directly to a customer that could benefit from them.
In traditional cores, data is typically stored in silos, with customer information allocated to separate applications within the interface. This separation and access restriction makes it difficult to gain a holistic picture of customer profiles, hindering the ability to assess customer needs. However, the separation can also be a significant security advantage—making it more difficult for malicious actors to access your data.
Architecture
Traditional core processors stick to what they know works when administering solutions. If enough clients have a demand for a certain solution, the core will often invest and eventually make the product available on their platforms. When utilizing a traditional core processer, you’re investing in a system designed to keep traditional banking systems running. For banks whose primary concern is security, resilience, reliability, the tried-and-true traditional platform is a viable option.
Application Programming Interface (API)
In a traditional core, the API is more rigid. If you identify a desirable new fintech solution, you’ll need to consider the cost of adding it to the existing core. An API will be necessary for the fintech to access your customer data, which can be time consuming and expensive to develop. If you’re not an early adopter of technology and can wait for the core to offer enhanced products, then the lack of integration may not be an issue.
Contracts
Whether or not implementing fintech solutions is a current strategic initiative of your institution, financial institutions want to be in a position to respond to new opportunities and threats as they arise. Ensure you’re aware of the exclusivity requirements often included in traditional core contracts, as well as the conversion and de-conversion costs.
Monetizing Existing Customers
Institutions must remain aware of emerging fintech innovations in their industry and identify how these evolutions are going to affect their target customer base. For instance, SoFi is a personal finance company that helps college graduates refinance their student loans. SoFi is in the process of receiving a bank charter, which will allow them to offer new products and services (such as deposit or checking accounts) to these graduates. Recognizing their customers’ requirements, SoFi will be able to give these graduates a centralized location to address all of their banking needs.
This might raise significant competition for an institution relying on a traditional core processor. By offering better opportunities, this fintech-focused company might gain more of the customers that the traditional bank is targeting.
It all comes back to having a good strategy and being able to look at your data and know what your customers want. Once you recognize your customer needs, you can work with your traditional core processor to establish the tools and solutions that would satisfy and maintain the customer base.
How Do You Know if a Traditional Core Processor is Right for You?
Institutions sometimes blame their traditional core processors for a lack of innovation. But your traditional core might be capable of meeting all of your needs for your current initiatives. It all comes down to strategy. To make the traditional core work for you, you must have a specific vision of what you need to serve your customers and achieve your goals. Then you’ll be able to work with your traditional core processor to establish a path on how to get there and learn how their tools can tie into the institution’s overall strategy. If your traditional core processor can successfully implement solutions to fill your needs, you may not have to implement outside fintech solutions simply because they’re “new” and “innovative.”
You also have to consider whether your institution has the resources to support working with outside fintech solutions—because you might not have the necessary developers, cloud experts, and security experts to initiate a successful partnership. If this is the case, a traditional core processor may be a better option.
Considerations of New Open Core Processors
Some fintech companies are developing new cores with open architecture. These core processors have open APIs that allow other fintech companies to “plug in” their own systems and share their tools and platforms. This allows financial institutions to choose the best software available from all of the various fintechs without having to worry about the extra cost of building interfaces. This system also allows data to be easily transferred between outside fintech companies and the core.
More Large-Bank Focused
These types of open cores often cater more to banks with significant in-house technology expertise not as often found at community banking institutions. If you’re considering transferring to these cores, you must take a critical look at your team and determine if you have the necessary resources and technology experts to successfully utilize these open core processors.
Limited Existing Customers
You should be aware that these cores often have a limited number of customers (due to the amount of work it takes to serve each), which might make it harder for your board to accept the proposal for transition. Boards of financial institutions are normally risk averse, and if you propose a change to a newer core that only has a few customers, you might be met with skepticism and wariness.
Pent-Up Demand
Transitioning from a traditional core processor to an open core processor is a monumental change. Transferring the massive amounts of data from an institution’s old core to the new platform takes a significant amount of time and resources. For this reason, open core processors usually can’t onboard and serve a lot of institutions at once. If you determine that you’d benefit from these platforms, negotiate your contract early, because you might have to wait a while to start using it.
Bank Culture vs. Fintech Culture
You should also consider if you’re prepared to communicate your needs correctly to the new core. Traditional cores are often well versed in the banking industry and its nuances. Newer, open core processors are often more tech-centric—which might create a slight rift in communication between institution and core. If you make the switch, you might have to navigate the cultural differences between banks and fintechs.
Monetizing Existing Customers
On an open core processor, data can be easily accessed and extractions tools are geared towards analysis. Further evaluation of your customers’ behaviors can give valuable insight for possible new solutions or potential advertisement strategies for existing solutions. With open core processors, you have more control over what solutions and interfaces you can choose to address customer needs. This ability makes it much easier to pivot and go in another direction if recent developments require a change in strategy to continue to serve your customers.
How Do You Know When to Pursue an Open Core Processor?
The first step in this decision making process is to evaluate your company to identify what would be most beneficial to your organization.
Think Towards the Future
If your focus will be on attracting a younger generation of customers, they’ll most likely want advanced online banking solutions. Not having these tools readily available is a problem that many institutions will encounter. Engaging an open core with more fintech solutions would provide extensive technological options to improve online presence.
Also, by leveraging the innovative open core technologies such as bots, artificial intelligence (AI), and blockchain, you can become less reliant on one single vendor to solve your business challenges.
Niche Markets
If you cater to a very specific niche, you want to have a fintech strategy to help you become the best in your market. You want to invest heavily in anything that will make your company stand out and provide the latest optimized services for your particular client base. For this reason, you might consider using an open core processor to give you the necessary freedom to carve this unique path for your business.
Return on Investment (ROI)
There’s a lot of discussion around the profitability of offering online banking solutions. In the short-term view, there isn’t a large ROI that can be easily calculated by offering these services. However, as the world continues to move more online, it can be argued that a financial institution can’t fully cater to all of the needs of their customers without online channels. If you don’t fully understand your customers and don’t have the right technology to serve them, you might struggle to attract new customers.
Determine your bank’s goals. If your particular fiscal and growth initiatives require more nuanced technological solutions, you may be inclined to consider a more flexible open core processor with a heavier fintech focus. Through this analysis, you might also find that your traditional core might already be providing adequate tools to satisfy your needs.
Conclusion
To make the right choice between an open or traditional core processor, you must have a holistic understanding of your business, its customers, and its goals. Both core types offer solutions for enhanced customer service and business development. But to capitalize on the right processor, your institution must reflect on how its initiatives align with each option.
