‘We’re putting the power in the hands of the banker’: Jack Henry’s CEO David Foss on unbundling its core

As we continue to press on the technology throttle, core software providers like Jack Henry are changing, too. The firm recently announced a new technology strategy that would unbundle its software – essentially taking its core-system parts and making them discrete services that can be customized and rebundled alongside other fintech offerings. 

In my talk with CEO David Foss, he compared core software to a car chassis. Banks and other FIs have been used to buying the whole car – now, Jack Henry wants to provide its clients with options to pick and choose the components they want in their technology stack. 

It’s a big move – one that will take years to unfold. But the train (or car, I guess) has left the station. Jack Henry’s CEO David Foss joins me on the podcast to talk about how we got to this point in history. He shares his own personal experience, beginning at his firm as a programmer decades ago. David sees a big opportunity for banks to leverage the renaissance of technology we’re living through to best serve their customers.

It’s a broad conversation. I want to invite you to find a comfortable chair and clear off your schedule to listen. 

Jack Henry CEO David Foss is my guest today on the Tearsheet Podcast.

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The following excerpts were edited for clarity.

Intros

My name is David Foss, I am board chair and CEO at Jack Henry and Associates. I run a 45-year-old technology company serving community banks, regional banks, and credit unions in the United States.

I've been in the CEO role now for almost six years. I added the chairman title last July. I've been at Jack Henry for 22 years, but I've been in the industry for 36 years. So my entire career has been serving community and regional financial institutions. I started out as a programmer, and I've done pretty much anything you can do in this industry, and now ending up as CEO.

Evolution of financial services

I talk about this a lot with people. I've been doing this for 36 years and I'm a technologist by trade. That's how I started my career. So the technology side of this business has been really fascinating to me over the years. And what I've said to a lot of people recently is that this period that we're in right now, from a technology point of view, is the most exciting period of my career. 

When I first started, it was about automating the back room at banks and credit unions. So it was when core systems were first really becoming a packaged thing. And then with the advent of the Internet, of course, that was an exciting time, because we were trying to figure out how to transition all this technology that was only used by bank employees or credit union employees, to now putting them online, so that consumers and small business and business customers could access those things. 

But now, today, there's this kind of revolution happening, with banks and credit unions trying to work with fintechs and figuring out where is fintech my friend and where's fintech my foe and how do I connect up with them and create an experience for my users, whether it's a consumer or a business customer, that's really cool, and really engaging?

That has created all these unique and interesting challenges for technology companies like ours. And it's been really fun to try and figure out how to address these and how to help our customers attract new customers and certainly remain relevant to the customers that they already have.

Jack Henry, circa 2022

There have been so many adaptations for our company. Of course, the genesis of our company in 1976 was as a core provider. So we were writing software. This is long before I joined the company. As the company evolved, because of technology needs, we got into the business of writing a number of different, what we refer to as complementary, solutions or ancillary solutions. So Jack Henry, for example, wrote a teller system and a check capture system – those types of things – to help address some of the technology needs that banks had in those days. 

In the early 2000s, two major changes happened for Jack Henry. Number one was we acquired a company called Symitar. Now we were a major player on the credit union side of the business, as well. And we really started to build out that credit union presence. The other thing that happened in the early 2000s was we created what is today known as Profitstars. And the whole idea behind Profitstars at Jack Henry was to get away from this dependence on core, this real strict dependence on core in the bank and credit union base, and create a whole line of products that were non-core that could really broaden our reach and broaden the opportunities for us to serve banks and credit unions with all kinds of different technologies. 

Between 2000 to 2010, we also innovated a number of solutions, all of them non-core writing solutions, and we were acquiring products to create this broad suite of solutions. So today, we support four different cores, one on the credit union side, and three on the banking side, but we support about 300 products.

This very broad suite of technology solutions is all targeted at at customers in the United States. We are very US focused – around 8500 banks and credit unions in the United States use at least some technology from Jack Henry. 

So our company has evolved significantly from where we started to today. And of course, through all that, the technology that we use and we offer has evolved significantly, as well. Back in the day when I was writing software, we were only writing for employees of the bank. It had to be functional but it didn't have to be pretty – it just needed to work.

Today, because almost everything we do is also used by the consumer, the small business, or the large business customer, it has to be functional and really has to be usable – we have to think about the customer experience. User experience and design is a big part of what we do today. 

Banking has evolved

If you think about community and regional banks and credit unions in the past, so much of what they did was around either geography or the field of membership. If you think about a credit union, for example -- it was a very tightly defined field of membership. And if you think about most community or regional banks -- it was some geography that they served, whether it was a small community, a larger statewide presence, or across state lines.

Today, all those rules have been thrown in the air. Banks and credit unions now really think differently about who is the customer that I serve? And how do I define that customer? Now, what are the needs of that customer? That's point number two, and what technology do I need to satisfy the needs of those customers that I've defined? 

And that's a whole different way to think, as compared to, 35 to 40 years ago, where it was all about somebody else defining the rules for you. Banking executives can think so differently about finding customers, attracting customers , and serving market niches, that can be nationwide, and in some cases, global, even though they're based in a particular city, or location.

So it's really an exciting time, I think, not only to be a technologist, but to be a banker, because you can think much more broadly than you used to in the past.

Finding a bank’s sweet spot

I think there's a continuum there – you have some banks that are very kind of traditional and conservative, and maybe not so worried about some of the disruption. And then you have people on the other end of the spectrum that are very concerned about potential disruption, and what's our strategy going to be to make sure that we're competitive, and that we're addressing those needs of potential customers or existing customers that we have

I do a lot of work with CEOs, executive teams, boards of directors, for community and regional banks, and for credit unions just thinking about strategy. I've learned there is a real continuum of thought around that topic. Many are either actively engaged or trying to think through strategy today of how do I work with fintechs -- 'what is my role going to be to create a differentiated solution when it comes to these potential disruptors to my business?' 

One of the topics I talk about a lot is when you think about your bank or credit union, and your relationship with fintechs, you have a couple of key options, a couple of key decisions to make. Do you want to be embedded or do you want to embed? In other words, do you want to be the bank rails underneath the fintech?

We've certainly heard a whole bunch of stories about banks that are doing that – there's the Silvergate and Coastal and Lincoln Savings and there's a bunch of players that are embedding their financial institution underneath a fintech, and that certainly creates opportunities for that financial institution because the fintech brings a whole bunch of customers in and the the financial institution provides the processing rails underneath. 

The pros are you offer tremendous revenue opportunity and certainly a bottom line opportunity by doing that. The con is the customer who's doing business with that fintech probably doesn't know who you are. If you're the one underneath doing the processing, there is no real relationship between the customer and the bank or credit union – the relationship is with the fintech. And so the thing I stress all the time is if that fintech decides to go somewhere else because they got a better offer from a different financial institution, then where is the fit? Where are you? Where's that opportunity for you?

BaaS vs. embedding fintechs into a bank’s stack

How about if you look at the other option – at the idea of embedding fintechs in your platform and your solution, so that a bank, or credit union can provide that differentiation and your brand is what's meaningful to the consumer? So there isn't any risk of being disintermediated, because the processor underneath goes away, because you are the processor. And how about if you provide those opportunities to embed these fintechs in your presentation layer and create a differentiated story for your customers, by leveraging relationships with fintechs to do that? 

For me, as somebody who eats, sleeps, and breathes community and regional financial institutions, that's one thing that I've really been trying to encourage people to think about. And I'm not trying to pick winners and losers here. But I think so many are focused on this idea of 'I gotta go find a way to embed myself underneath a fintech because I'm reading all this stuff about that.' Okay, you could do that -- but there are only so many opportunities you can take. 

But what if you look at it the other way? I think the payoff may also be greater because you create this reputation, this brand loyalty, and this name for yourself as a technology forward provider of solutions to your customers, and the customer relates to your brand and your financial institution. I'm encouraging people to think about both options. These aren't even mutually exclusive – you may do both, you may embed under somebody else, while you're creating this differentiated solution of embedding fintechs into your platform. That's fine. But I really am concerned these days about people not giving enough attention to the other option when it comes to banking as a service.

Jack Henry’s new technology strategy

In February, I announced a pretty significant technology strategy for our company. Jack Henry has been in this space for 45 years –  we're a well rounded financial technology company serving community and regional financial institutions. And we are passionate about serving that customer base.

As we've looked at all the disruption that's happening in the industry today, we've been working on a strategy for several years. The thing we've seen coming are these disruptive forces -- things that are potentially disruptive to our customers. What can we do to help them really be proactive about creating a strategy for themselves, anticipating where they're going to want to be five or 10 years from today? 

What we started on about three years ago was with programmers writing code to create this new platform now, where we're redefining core. Five to 10 years from now, we probably won't even refer to the word core anymore, because we're totally redefining that term. We’ve created a cloud native public cloud platform.

That was step one: create this platform that we can build on. We built our digital banking solution on that platform. It's already in production. We have millions of users on the platform and hundreds of banks on that platform.

But we've expanded that whole philosophy pretty significantly now.

We are unbundling the core. So if you think about it -- when you buy a core system -- and I don't care if it's from Jack Henry or anybody else in the industry -- it's a great big thing with all kinds of different functionality in it.

At Jack Henry, we're now starting to thinking 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. 

An analogy to unbundling the core

We're unbundling all those components in the core. We're making them standalone features that sit on the public cloud on this platform. We're giving the bank the flexibility to couple our components with components that they might get from a fintech to create that differentiated experience, create that differentiated story for their customers. 

An analogy that I've used that seems to resonate with bankers is that for the past 4 or 5 decades, we've all been in the business of selling SUVs. We sell a big thing that is built for a purpose. SUVs are very multifunction, and you can buy a big SUV or a small SUV, but you know, we're selling SUVs – all of us have been. You can get your trailer to the back of your SUV, you can put a luggage carrier on top, you can tint the windows, you can paint the outside, but it's still an SUV. Well, what if you need a pickup or a luxury car? There is no corporate core provider who has ever sold pickups or luxury cars, we're all selling SUVs, because they all kind of do the same thing. 

With this strategy, Jack Henry has essentially created a frame for a vehicle – we have a pre-established wheelbase. Now what engine do you want in your vehicle? Do you want V8, V6, or a plug in hybrid? As in do you want Azure or AWS? Or do you want private cloud? 

And now, what features do you want in your vehicle? We're putting that power in the hands of the banker to decide what solution she needs to serve her customers most effectively. And pick and choose what I need from Jack Henry. 

The other key component and all this is on that same platform, we've created this connectivity tool. We took all the connections that we've had with these vendors that we've developed over the years – today we support 850 fintechs – we took that connectivity layer and we’ve rewritten it to sit on this public cloud platform. For the fintech, if they've been doing business with Jack Henry historically, it's the same connection for them. On their end, it feels the same. But for us now, it's sitting in this public cloud environment where we can easily connect to other solutions via API. 

So in the end, the Jack Henry customer gets the advantage of a single platform with all the security components that are inherent in a single platform – delivery, the usability components, the design components, all that stuff that we that we have in our digital banking solution, Banno – it's on that same platform, but they'll now experience as they start to piece together these other pieces from Jack Henry into that experience that they want for their users.

In the future, we believe this will create the foundation for our customers to be able to differentiate themselves. This is a strategy. It isn't all in production yet. We're in the process of rewriting all these components and putting them on this public cloud platform. It allows us to set the strategy and help customers and prospects understand where we are going. 

New strategy but old solutions not disappearing

For current Jack Henry customers, the thing I stress all the time is we are not slowing down our investment on our existing cores. Because we know that a bunch of banks and credit unions as they think five or 10 years in the future, they're going to say, you know, this core that we've got from Jack Henry is great. We just want to keep doing what we're doing. And Jack Henry allows us to connect fintechs into the core that we already have. We just want to keep doing that. 

We recognize a lot of customers are going to want to do that. That's totally fine. And we are absolutely committed to continuing to serve those the way that we have historically. But we do see this segment of the market that is really trying to figure out this differentiation strategy. And so for us, it's imperative that we serve those customers and position them for the future.

Response to Jack Henry’s new direction

It's been interesting. We've had a number of prospects over the past several months that we took under the covers in the months leading up to the announcement. And they would ask questions about the future -- 'are you guys planning to move to public cloud?' Those types of things. I think every one of them that we took under the covers has signed with Jack Henry as a core provider. Many of them have said we're so relieved to hear that you all have this long-term strategy that will help us get to the future, so that we don't have to execute it right now – we can take it on at our own pace.

We know there are people in the industry that are doing the lift and shift, meaning take your old stuff, and make it work in the public cloud. There are CIOs, particularly in regional financial institutions, who are very, very in tune with what's happening in there. Their response is, we're so happy that Jack Henry isn't doing that, because that's kind of just making it work.

Pricing model

Pricing is one of the areas of flexibility that a customer will have with this solution. They'll be able to decide, pick and choose which pieces they want, and then put them together in their own bundles. And so certainly you have to price by the component as opposed to today, where you buy this monolithic core. And so there's the price that you pay for that.

But the new pricing will be by components. The concepts behind pricing will be the same, though. So if you think about the way that we charge for things today, it's either per transaction, per customer or per account. And so all those rules apply, even if you're breaking out the components separately.

Monetize fintechs?

The idea is not to try and charge for every single time that a transaction flows back and forth between the fintech. That's not philosophically who we are. It's not the way we do business. We will certainly charge for that connection from a customer, but it is not our intent to charge for every single transaction that flows across that platform to and from a fintech.

In-house skllsets and talent

We've been working on the Banno digital banking development for seven years. it's consistent knowledge and experience and know-how that goes into delivering this new technology. We've already had people in our company who have moved from some of our traditional product groups into these new product groups, because we've been up-staffing to create the development environments and to deliver what we've done already. As we add people, and as people retire, it isn’t likely that we're going to go and find somebody that's going to do exactly the same thing that the person who retired did. 

We're going to have people with a broader skillset who can cover two bases or something like that. It certainly is an evolution. I's all about creating opportunities for people who come to work at Jack Henry, as well.

Future acquisitions

We've been historically known as an acquisitive company. So if you look at our company since 2004, I think we've done 32 acquisitions. That will continue. And we’ll look at those acquisitions that they have to fit in this platform and fit in this strategy. That certainly is part of the strategy. 

The challenge in the past couple of years when your company is a large public company like ours is that with every acquisition we do, we have to share all the financial details with everybody. Trying to get acquisitions done in the past couple of years has been pretty challenging because IPOs and SPACs have been hot. Selling to a strategic like Jack Henry wasn't at the top of a lot of folks’ lists. But those things have really died off.

We've always competed against private equity, when it comes to acquiring companies – private equity is still active. I think 2022 will provide that opportunity for us to be on a much more level playing field when it comes to completing acquisitions at a reasonable valuation. I believe we will have the chance to do more acquisitions in 2022. And as we look at those, though, they will definitely be with an eye of how does this fit into the strategy? How does this fit in this platform? 

International

We used to have an international division -- we sold it about five years ago. So we know how to do business internationally.

We used to serve most of the major banks of the world – we had an office in London and we were a significant player in South America. The thing for us is serving customers in the domestic US, we see a ton of opportunity for our company, so that we don't have that need to go international. We see a lot of opportunity to continue to gain share in the US. We see so much demand for the solutions that we offer in the US, we are growing our top line at a nice pace today. 

But every January, I host a strategy session with the board. And every January, I ask, okay, you know 'is now the time you feel this need for us to create an international strategy? And every year, we pretty much come out with the same answer: we kind of explore it and then we come out with the same answer.

If we see an opportunity, if there's some opportunistic thing that comes up, we're not opposed to international expansion. But we don't see it as a strategic imperative. 

Rolling out the new tech strategy

The digital banking solution is there today, and the platform is there, and the connections are there for the fintechs. Now what we're doing is breaking out all these components from core -- slowly but surely be fully phased in. They'll start operating on this public cloud platform. And of course, these are cloud native, and then these solutions are built as cloud native components. So we're in beta today with the first module – it's wires, by the way, so wires was the first module that we carved out. New account opening will be next. And that'll be this summer. 

Attracting new types of customers and sidecar brands

We've already had somebody who's not running a Jack Henry core, who has talked to us about consuming one or two of these components. They know our roadmap, and they are interested in starting to consume some of those things. Their thinking is, we can start to consume this stuff and we don't have to go through a big conversion – we can go through a smaller conversion if we're starting to do these things with Jack Henry.

These conversations are ongoing, not only with our existing customers, but with prospects.

The first real implementation of this strategy for a full bank will be with a sidecar. You'll have a bank who says I have my brick and mortar and I'm doing all these things over here. But I want to create a sidecar – a digital only bank. I believe that'll be the first implementation of a complete bank offering that you'll see using this platform. Part of the reason I believe that is we've done some of these things already with a number of banks to create sidecar deliverables and some of that is based on this technology. It's not literally running on this platform, but we've leveraged all these concepts with some of these banks. 

The rise of niche banking

So as an example, you may have heard of IncredibleBank, or you may have heard of Rising Bank, both digital only brands, very innovative in their approach to touching new markets and attracting new customers, attracting new deposits. That's been a combination of mostly Jack Henry technology, but then they have fintechs that they've embedded into those solutions. I think those are good examples of what you'll see customers do with Jack Henry. 

Incredible Bank was identified as a really tight niche. It was to go after those people who buy the really high end RVs – the bus RVs. I believe that's a pretty narrow niche. And yet, that was the strategy. We found this, we have that skill set within the bank, we know how to serve these customers, we see a demand out there for this really skinny niche, we're going to go and try and attract those customers. 

And it turned into this huge strategy for the bank. So much so that they just recently renamed the brick and mortar bank to be IncredibleBank because it transformed the way they do banking.

That's a really niche, creative strategy and we see it happening with other institutions, as well. They're finding these niches where they have some expertise within the bank or credit union, some skill.  And they're saying, let's go create a story online to attract those customers.

I don't see this slowing down at all. In fact, I see it picking up now that people are seeing some of these success stories and finding new opportunities. So I believe that you're going to see that continue for a long time to come. Because people will recognize some unique ability -- some unique skill they have that can attract and serve customers. 

And then you add to that, all this discussion that's going on about underserved – where's the opportunity to serve the underserved community? Since the underserved community don't trust banks sometimes, is there an opportunity to attract those customers and provide a service –  a real service – but through a digital channel? A lot of banks are trying to explore how to do that. And whether they're CDFIs, or MBAs or whatever, they're trying to figure out if there is an opportunity there. How would we do that? And much of that is going to be done, I believe, as a digital only brand, to attract those customers. 

Biggest opportunities and challenges looking ahead

The pandemic isn't over, of course, but banks and credit unions feel like they're coming out of the pandemic. And I've learned a lot through the pandemic about how to serve customers without the customer walking into the branch. There's a lot of thought going on about how can I use technology to become more efficient, differentiate my service offering, and all those kinds of things. So I think there's a lot of opportunity around that topic.

The challenge for any of us in the business of serving customers, whether you are running a financial institution, or you're running a technology company that serves financial institutions – the cyber environment that we all live in is only getting harder and harder every day. And with the geopolitical stuff that's going on right now, there's a lot of attention that all of us are paying to that topic. The constant vigilance around that is going to be more top of mind for everybody for the next few months than it has ever been. And it's always been top of mind for me anyway. But you know, it's just something that isn't slowing down. 

I think there are certainly challenges but man, there are a lot of opportunity if you're running a community financial Institution. The one thing I say all the time: we at Jack Henry absolutely believe that community financial institutions are the lifeblood of Main Street America. This world is not a better place if we don't have community financial institutions. And so it is incumbent upon us to figure out how to provide technology, how to do everything we can to be good partners to help them ensure their success, because we think that makes us a stronger and a better country. 

It's an obligation that we take very seriously but we love. We love being in this business. I'll just tell you that.