Core banking is taking to the cloud. Finxact, developed by fintech industry veteran Frank Sanchez has announced $30 million in equity financing from some stellar sources — the American Bankers Association (ABA), Accenture Ventures, SunTrust Bank, and Finxact’s existing investors, including Live Oak Ventures, First Data, Woodforest National Bank, and T.N. Incorporation Ltd (TNI) of Thailand. Yes, First Data which announced Jan. 16 that it was being acquired by Fiserv, one of the oligopolic Big Three (with FIS and Jack Henry) that Sanchez is set out to disrupt. This should be interesting.
Frank Sanchez, CEO of FinxactCourtesy Finxact
Last week was a big one for cloud banking apps. I wrote about Temenos which has separated its front office, so it can be used as a digital modernization for the Big Three. Both Temenos Infinity and its back office, Temenos T24 Transact, can link through APIs. And that same week UK TechMarket View said Lloyds Bank plans to move 500,000 customers to a core banking platform — Thought Machines’ cloud-based Vault platform.
LLoyds BankPhoto by Tom Groenfeldt
Finxact is going after an intimidating business — replacing the core.
“We started Finxact in the beginning of 2017, and we have focused on building a banking system of record that can effectively replace legacy core systems and also serve as a platform for rapidly evolving digital banking requirements,” said Sanchez. “We’ve developed a platform that is functionally robust, reliable, scalable and highly efficient. We have multiple customer implementations currently underway and have raised capital to expand our capacity to go to market on a broader scale.”
Finxact will focus on the core, he added.
“We are not trying to be every part of what a bank does,” he said. It expects that fintechs and banking application developers will integrate to the core platform and give banks choice of whom they work with for features such as web, mobile, business intelligence or loan decisioning. It will rely on on firms like Accenture for integration services.
At Finxact, the new funding will support its growth as it completes development and builds scale to match the market’s demand for a new category of core banking platform. Finxact’s Core as a Service, or SaaS, is the new trend in core banking systems. The company’s announcement said it represents a first-of-its-kind option for banks to efficiently differentiate their customer experiences by seamlessly integrating new services and migrating to a real-time digital banking enabled system of record.
Core replacement scares bankers, said Sanchez, rattling off some of the familiar metaphors he has heard for years — changing the engines on a flying jet at 30,000 feet or changing tires on a car traveling at full speed — but in reality, he said, it’s not so difficult. Sanchez Computer Systems, the company where he built what was probably the latest modern core system in the 1980s and then sold it to FIS in 2004.
Conversions were a large part of the business, Sanchez said.
“Perception on conversions is metaphor-heavy. They are not easy but they can be done and we did it as a matter of course. We can convert. The data part of the conversion is pretty straight-forward. What is harder is the operational change from batch and stove pipes and many small parts that have to be reconciled to a single core with real-time balances. We will rely on our partners to do that.”
He has already seen demand in the marketplace, so the challenge for the company will be to scale up to meet it.
“That’s the reason we raised capital.”
One of the problems a new core banking system faces is that the big three lock banks into long contracts — often five to seven years. But since the U.S. has thousands of banks, a significant number of contracts expire each year and banks typically begin reviewing their core provider several years ahead of the contract termination to look at alternatives, like Finxact.
“Banks are calling us and some are willing to pay the penalties [for early termination] or argue against them, because that would be beneficial to them. Digital banking puts a real strain on legacy infrastructure because you hide batch behind online channels and it’s not easy to do that. You have a lot of handoffs to make something look real-time that’s not.”
The problem is increased by the massive movement of transactional banking away from checks and paper to P2P networks and e-commerce, he added.
“The banks’ cost structures are really high. Even if they cut branches, there are still high costs of technology and the banks are just tired of the lack of innovation in banking systems, the lack of innovation we see in other industries while we are stuck on old cores. Meanwhile fintechs are using modern technology and can take our lunch, leaving banks as transaction wholesalers rather than retail organizations.”
Rob Nichols who has been CEO of the American Bankers Association for three years, said he has spent a significant amount of his time traveling around the country talking to bankers.
“I’ve been asking what’s on their mind, such as top operational and public policy issues Early on I learned that outside public priorities, their chief desire is to have a nimble and agile core offering. We saw this (Finxact) as an opportunity to invest in an innovation which could push the whole core processing dialogue in an interesting direction.”
He demurred when asked why the big three haven’t provided a satisfactory core solution. The largest banks build their own systems, but beyond those, the regional and smaller banks rely on vendors.
“This is one of the top issues that gets surfaced with me every time I interact with CEOs — an agile and nimble core that allows them to keep pace with customer demand and customer innovation.”
The half dozen largest banks plus USAA and Navy Federal Credit Union had the top mobile banking apps in 2018, according to Javelin Research and Strategy, putting the smaller banks with less sophisticated customer-facing apps at risk of losing tech-savvy customers.
Bankers are nervous, Nichols said.
“The marketplace has a lot of competition from non-banks — the fintechs, marketplace lenders, credit unions and farm credit, and obviously banks compete against one another. The women and men who lead these bank are thinking five, 10 and 15 years out about how they can best compete. Again and again they talk about the need for an agile and nimble core so they can enhance the customer experience.”
Sanchez said Finxact can get banks off old core systems quickly and with low upfront costs because the system is cloud-based.
“We can spin up a container on ASW or Microsoft Azure, and we have clients on both, and offer a full banking system in the time it took to say this sentence.” A new bank might be operational in a couple of weeks; moving an existing bank and its customer records to a new core could take anywhere from six to 18 months.
“The Finxact core is designed to address the entire marketplace from community banks and credit unions to the largest money center banks,” said Michael Sanchez, president of Finxact.
“The core banking market in the U.S. is set to experience significant disruption in the near future, as banks continue to grow frustrated with their existing core providers and advances in cloud and digital technology make it possible to upgrade aging systems without doing a full rip and replace,” said Brett Goode, a managing director at Accenture and head of the company’s North America Core Banking Practice. “We are pleased to invest in and form a strategic alliance with Finxact, enabling us to jointly bring our clients innovation that will help them transform to meet the digital needs of today and tomorrow.”
Finxact is currently working with multiple U.S. and international financial institutions, from de novo banks to top-tier banks, on projects ranging from full bank conversions to digital-only initiatives.