New Cornerstone Advisors/Agora Services Study Supports Modular Banking Initiatives

By W.B. King


Many mid-size credit unions have long lacked the budgets of big banks and often lag behind on adopting new technologies. These well-intentioned institutions hope for suitable plug-ins to existing legacy systems or consider undertaking a daunting and costly core conversion. But according to a new report from Cornerstone Advisors, there is a better third option: modular banking.


“Core providers will go back to their top five clients, the ones with the resources to test new things out, and everybody else goes into a first come, first served queue that could be anywhere from six to 24 months before you get to start implementing the product or feature,” noted Visions Federal Credit Union’s Chief Digital Officer Tom Novak in the report, “Modular Banking: Delivering Innovation Without Touching the Core.”

The Cornerstone Advisors’ report was commissioned by Agora Services, a New York-based company that helps financial institutions “ramp up their digital experience without replacing their core banking system,” explained CEO Arcady Lapiro. He added that Agora provides and co-creates tech tools for financial institutions that accelerate the digital journey, including implementing fintech products.


Agora Services' CEO Arcady Lapiro.
Agora Services' CEO Arcady Lapiro.

In total, 260 community-based financial institutions were surveyed for the report. And among findings were statistics that found a reluctance to approach a core conversion. To this end, 72% of respondents said replacing a core operating system was not part of a 2021 digital transformation strategy. Fourteen percent said it was, with the balance saying “they didn’t know.”


Alex Johnson, director of fintech research for Cornerstone Advisors and author of the report, maintained that mid-size banks and credit unions will “struggle to win in this market unless they make significant changes to their operating models and tech stacks.”


He also pointed to another questionable Cornerstone Advisors survey metric that found 66% of banks and 68% of credit unions believe fintech partnerships or investments are going to be “somewhat or very important” in 2021. Despite these figures, the same survey found that a majority of banks and credit unions reported that “existing fintech partnerships had moderate to no impact on their key performance metrics.”


The Modular Banking Pitch


While Johnson explains that modular banking platforms typically offer all the same functionality as a modern core banking system, the key difference “lies in the assumption underlying the design” of modular banking platforms.


“Most clients won’t use all (or even most) of the platform’s functionality but will rather use it to augment the functionality of their existing core system or build new digital products on top of it,” noted Johnson. He further explained that modular banking essentially breaks apart a core banking system’s functionality into a series of “loosely coupled microservices and application programming interfaces (APIs),” which he added can be rapidly combined and deployed in a cloud environment to facilitate specific use cases.


“A modular banking approach allows banks to start small and then add more use cases as the platform proves itself,” stated BlackFin Tech’s Investment Director, Michele Foradori. The Paris, France –based venture capital firm assists clients in the finance, insurance and real estate markets.


Cornerstone Advisors' Director of Fintech Research and Author, Alex Johnson.

The common elevator pitch for modular banking usually focuses on one word: flexibility. And for mid-sized community financial institutions watching respective budgets, the cost and time-to-market for desired digital innovations – this noted flexibility – becomes a more achievable goal.


Johnson writes that modular banking allows for three important strategies: 1) to quickly launch new products; 2) to innovate on existing products; and 3) to build a digital-first stack. Matt Smith, head of direct banking and banking-as-a-service at the Montebello, New York –based Sterling National Bank, agreed.


“Even for the most tech-forward banks, your core competency isn’t developing technology, but your core competency could be assembling technology from multiple sources in order to solve customer problems in a differentiated way,” said Smith.


Sam Levy, managing director at the New York –based Equiteq, an international mergers and acquisitions specialist, said that core providers are more focused on maintenance. And that while “they try to innovate,” it’s difficult when “the bulk of their revenue comes from these big, established installations.” Modular banking, he added, shifts the leverage back to the financial institution.


“Instead of being dependent on a big core system provider and waiting for them to return your call, you can efficiently assemble best-of-breed providers for each modular function, which incentivizes them to continually compete for your business,” said Levy.


Core Conversion Fears


Any executive that has undertaken a core conversion has experienced the fear of the unknown. With the average timetable of 18 to 24 months, the biggest concern usually centers on service disruption and whether or not third-party offerings will seamlessly integrate.


“The fear is in the conversion. Whenever you change something, you run the very real risk of attrition,” said Sterling National Bank’s Smith. “What you want, ideally, is to deliver new functionality without disrupting your existing customer base at all.”


Visions FCU’s Novak agrees with Johnson’s modular banking premise, which requires “decoupling critical infrastructure.” Unlike larger financial institutions, he said the $5.1 billion Endicott, New York –based credit union, which serves more than 217,000 members, can’t, and doesn’t want to, go it alone.


In Novak’s view, “doing everything in house” doesn’t necessarily produce a better end product or service. To this end, he said Visions FCU has a “60/40” split approach.


“We’re trying to strike the right balance, where we leave the things that don’t differentiate us and that we’re not experts at to our partners,” said Novak. “That’s the 60%. And we then focus on really owning the remaining 40% – the product features and UX – that differentiates us in the eyes of our members.”


Conceding to the obvious, which is that mid-sized credit unions simply do not have the resources to compete against the large, well-funded financial institutions, Novak said modular banking is a way to level the playing field.


“We can’t just outsource everything to our core vendor,” he noted. “We need to do things differently if we are going to punch above our weight class.”


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