Banking Briefing: More eyes on core banking software
- Core banking software may not have been as scrutiny-grabbing as BNPL or crypto, but now that the industry is growing, the CFPB is taking notice.
- Meanwhile – what’s up with Apple’s recent acquisition of Credit Kudos? And just how do banks play a role in consumers’ mental health?
Last month, Tearsheet spoke with Jack Henry CEO David Foss on the company’s move to unbundle its core. The decision is a pretty drastic one as far as core banking decisions go. It means that instead of forcing financial institutions to buy the entire combo meal, it’s giving them the option to pick and choose – whether they just want the cheese burger, the fries, or that weird bag of mini-carrots.
“We’re now starting to think differently about what banks and credit unions are going to want to do in the future. You may not necessarily want to go buy this one big thing. You may just want to buy components out of that big thing – some of the things that you would have done historically in a core, you’re probably going to want to do with a fintech in the future,” said Foss.
The shift is noteworthy in that it may speak to Jack Henry’s confidence in its offerings – and its strength in the market. For example, for its fiscal second quarter, its revenue increased by 17% year-over-year. According to senior equity analyst Brett Horn, payments is “a key component of growth [for the company] going forward.” And in fact the company recently boasted that 67% of financial institutions on The Clearing House’s RTP network are its own clients.
The growth in core banking has to do with incumbents’ push towards digital transformation and an increased focus on maintaining consumers’ interest as they become more dependent on digital banking services.
But the market, while growing, is now being put under the lens. During his opening remarks to the Community Bank and Credit Union Advisory Councils earlier this month, Rohit Chopra, director of the CFPB, accused the market of being “heavily consolidated.” He pointed out that, as it is now, Jack Henry & Associates, Finastra, Fiserv, and FIS serve 78% of all U.S. banks.
This can have some negative effects in the long run, according to Chopra, including making it difficult for financial institutions to switch core banking software providers.
In the comments he made, Chopra also mentioned that the CFPB is currently taking steps to address this dynamic:
“I have asked our staff to work with core services providers and our federal partners, including to answer questions related to banks’ collective bargaining on core services’ contracts. We will also work with other agencies to examine third-party service providers and potentially referring complaints to other law enforcement agencies.”
Thoughts on Apple’s acquisition of Credit Kudos
A little while ago, Apple acquired Credit Kudos, a British fintech startup that builds software focused on using consumers’ banking data to make better credit checks for loan applications. The deal valued the UK fintech at about $150 million.
Apple has been pretty busy in the past decade in terms of its moves into financial domains – from Apple Pay to Apple Card, the tech giant hasn’t been idle.
Only, with this move, it’s hard to know exactly what Apple’s plans are. As a spokesperson for the company told CNBC – "[Apple] buys smaller technology companies from time to time, and we generally do not discuss our purpose or plans.”
Still, there have been some speculations regarding motives behind the acquisition. David Whitcomb, VP of Product at MX, shares his insights:
“It’s hard to imagine Apple won’t stretch the bounds of open banking and find new, innovative ways to leverage consumer current account data. With the engineering prowess at Apple, we’re confident they’ll use the data and resources of Credit Kudos to be more intelligent about financial operations beyond loan decisions.
For a company that’s been digging into US payment technology for nearly a decade, Apple has focused heavily on US markets and seen great success. The US financial services market is one of the most diverse in the world, and its diversity allows for a company like Apple to enter the market, make an impact, and measure success. In addition to the US-only approach, the company is strategically moving through financial services safely, making low risk decisions and staying inside regulatory boxes, which only strengthens Apple’s approach.
If they can deploy a similar system in the UK, where data sharing is regulated and legal, they can learn even more about the payment patterns of their users. And if they expand Credit Kudos’s AISP services into PISP services, not only will they create the opportunity to intelligently lend, but they can also collect payments at lower fees. This would increase their margins in a win for Apple, and decrease fee amounts in a win for consumers.
We’ve seen Chase and Goldman Sachs attempt to enter the UK market in the past year, and if Apple moves into payments in the UK, we’ll see if a technology brand can best the big US brands as well as the UK’s big banks and proven neobanks. At a minimum, with Goldman’s reentry into banking in the UK in late 2021, maybe we’re seeing the foreshadowing of the next Apple/Goldman partnership.”
Finance and mental health are forever linked – now how do financial service providers come in?
72% of Americans under 40 say finances have negative effect on mental health. 62% say they’re constantly stressed about finances in general and 79% feel they would be less stressed about their finances if they were better educated about this stuff, according to research by Laurel Road. In January, Laurel Road hired Aja Evans, a financial therapist and licensed mental health professional to offer consumers resources and material to deal with the overlap between finances and mental health:
“Money is emotional, it has the ability to impact almost every facet of our lives. Our thoughts, beliefs, and feelings about money are usually formed before we’re even old enough to earn it,” said Evans. “Because of this connection throughout our lives, finances and our emotional wellbeing – aka mental health are linked.”
It’s probably no secret that a person’s financial state can weigh on their mental wellbeing. But the question is – how should financial institutions get involved?
Maybe a decade ago the answer would have been – not at all. A person’s finances are her own problem – why should her financial institution have to take responsibility?
Of course now things are changing. With personalization on the rise, consumers are looking for more from their financial institutions. They want the meal – but they also want the recipe. (second food metaphor, I know). 81% find their banks’ support in their financial health at least somewhat important, according to research by JD Power. Meanwhile, almost a fifth of the respondents found it extremely important, while 31% found it very important.
All this to say, financial institutions that want to keep customers on their side may need to up the ante in terms of financial support – including offering both service and guidance.
New on the Banking Podcast: The story of Dave going public and BNPL as the new challenger bank
Episode 17 of the Banking Podcast explores Dave's challenges as a public neobank and what that means for the rest of the industry. Hosts Zack Miller and Josh Liggett also talk about BNPL, MetaBank, and Apple’s acquisition of Credit Kudos.
Psst..check out the transcript version of the podcast, as well!
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