DM: Welcome everybody to Zafin’s Banking Blueprints Podcast. This is the second series, so if you haven’t seen the first series, I strongly urge you to do so. I’m your host again for the second series, I’m Dharmesh Mistry, and this week we are going to look at The status of core modernization, what it means to people, et cetera, and who better to bring onto the show than Terry Hickey from Zafin. Terry, for those people that don’t know you, can you just tell us a bit about yourself and what your role is at Zafin?
TH: Yeah, absolutely. First of all, thank you so much for being with us. This is a fantastic opportunity to talk about what we’re doing and what we’re hearing in the marketplace. So Terry Hickey, I’m the Chief Revenue Officer of Zafin. I’ve been with the organization for about just under a year. I lead everything related to sales, marketing, partnerships, Our strategy and our consulting business that we’ve got within the organization, so fairly responsible for everything up front other than the delivery and the product itself. Previous to Zafin, I was at a bank and at that bank, I had two different roles. The last role that I had was one of the CIOs for a big Canadian bank. And before that, I was actually their Chief Analytics Officer. So I’ve got a number of different experiences that have been very helpful in coming into Zafin. In fact, the bank that I worked at was a Zafin client. so not only being here at Zafin is exciting, but having been come from a customer, I know what it’s like to sit on the other side of the table and use the platform and be responsible for the platform. So it’s been very exciting to be here.
DM: Fantastic. And as CRO, you’re always out talking to customers and prospects. So who better to really give us a view of what it’s like in the marketplace? I mean, I came from a legacy vendor in the core banking space and we typically only really talked about core replacement, but more and more as I look into the market and in my own podcast, I spoke to a number of core banking vendors. I keep hearing this term core modernization. I mean, What’s your take on it? What are customers prospects asking for when it comes to updating their kind of core banking system? Are they looking for a wholesale change or this term called modernization?
TH: Yeah, good question. I think that what we’re seeing in the marketplace today is substantially different from what existed or the request that might have been coming five years ago. Five years ago, organizations around the world were still contemplating doing wholesale replacements of their technology. They were interested in moving from core number one to core number two. And the problem that we found as organizations around the world was that it was very costly It was very risky and most importantly, it was very time consuming. So it’s not something that you can do over a weekend. It takes years of planning to get from one system to the other system. So we’ve seen that slow down to what I would call a trickle. There are still organizations around the world that are doing these kinds of things, but the ratio has tipped in the new direction of core modernization. been really low. And core monetization is really more about thinning out the existing core that they may have, a bank may have today, and taking out some of those features and functions that allow them to reduce the functionality of the core to its essence. That might be ledger, subledger, interest calculation, reporting, those kinds of things that almost have to be done inside of the core. And the core is fantastic at doing those kinds of things. That was originally what it was built for. been very low. And by removing some of these other things, whether it’s customer information or product and pricing or offers or loyalty and removing those things, it allows the bank to be able to modernize at the same time as reducing their risk or reliance on a legacy core banking application. So imagine you’ve got a 40 year old core. Your board is probably worried about what are you going to do? Like this is written in COBOL. How are you going to get the system to be modern? What happens if we can’t find developers that are going to be able to work on this? Like all of these kinds of things, which I think there’s some validity to those questions. by doing them core modernization, it allows you to be able to make that start to deciding where you want to go in the future. I think the premise that we have is that make the ledger as small as possible, move as much of it out into third party software. And then when you’re ready, you can decide if and when you want to move to a new core at that point. Because if the core really is ledger, sub ledger, interest calculation, et cetera, does it really matter that it’s on a legacy type core? It may or may not. Some banks may be comfortable with that risk. But I think that what organizations like ours are doing is that we’re hopefully buying time for banks to be able to make that decision. I’m not convinced that we understand who’s going to win the core wars. who is going to eventually win? So we’ve got to figure out, there’s so many different vendors that are out there today. Some are new and up and coming, and there’s new ones coming every year. Who are the top three going to be in three years from now or five years from now? Do banks really want to make that guess today based on what we know? Or can they start working on what they’ve got, delay that decision, kick it down the road, and then make it a number of years from now? that’s really what we’re getting more and more asked about when it’s specifically around technology. More often, than not, we’re actually getting questions from banks around business problems that they’re trying to solve. So I’m trying to get pricing, or I’m trying to get new products, or I’m trying to create loyalty with our customers. How do we do that? We can’t do it today in a fast, easy way with our current core. And what we’re often brought in is to answer the business questions with the retail line of business or the commercial line of business to say, how can you help me with that? The byproduct is we’re helping with their core modernization, but they don’t think of it often as a core modernization problem. They think of it as a business problem that they’re trying to solve. And more often than not, that’s where we have our entry into the banks to help them solve their business problems and truthfully help them on a business transformation journey versus trying to solve a discrete technology problem.
DM: I really like that kind of business problem focused approach because when I think about kind of core replacement, it’s literally saying, well, our old technology has its problems and we need to replace it with something else. It doesn’t automatically says to me that I’m going to get immediate return on my investment, but it does highlight the fact that I’m going to be doing this open heart surgery on something that’s central to Absolutely everything that the bank does, whereas the business problem led thing basically says, I don’t need to replace my core. I can fix the problems that you’ve got, address an immediate opportunity to give you some return straight away without having to replace your core. Is that kind of where you’re coming from? Yeah, I would say.
TH: That’s the essence of what it is that we’re stating in the market and we’re seeing in the market. But I think that there’s actually a bigger driver that we try and highlight to organizations. What we see when people are trying to do these core replacements or they’re trying to do side cars, you know, setting up two cores and moving people from one to the other, they are trying to go from like to like. they’re not introducing new features. They’re not introducing new functions. They’re saying, this is what my checking account looks like today. This is what my checking account will look like tomorrow, my savings account, et cetera. The way that we approach it is, how can we help you create business value that helps you with the return on investment to pay for that entire core modernization that you’re going to get significant business value out of it. At the same time, you’re going to be replacing that functionality inside of that core versus it just being about the replacement where it’s, really hard to do an ROI on a core replacement. But if you’re adding new features and functions, if you’re able to get better offers and products out to market faster, You can actually start to look at saying, look, we can create an extra 100,000,000 dollars or 100,000,000 euros of deposits in the first 12 months of you being on a platform like ours. What’s the profitability of that drive? How much will that pay for the actual implementation of a product? It actually starts to pay for itself when you think of it from a business perspective rather than from a technology perspective.
DM: When it comes to the core modernization, does that mean that there’s not one provider that basically just does core modernization to the point where you can get rid of your old core, but there’s a lot of suppliers, let’s say somebody that’s doing KYC, AML, really well, leveraging AI and stuff. Somebody doing product management, somebody doing loans management, let’s say, or the loan life cycle, somebody doing credit risk assessment, et cetera. So literally you’re going to get like the best of breed approach, almost like the Android phone versus the Apple where Apple was everything from one supply and Android is the best of what you can get in the market, right? Is that really what’s happening with cool modernization? Yeah.
TH: I think that’s what we’re seeing. We’re seeing partners or vendors in the marketplace today that have functionality and capabilities that far exceed anything that a generic core provider might be able to produce. The challenge, you know, if having been a CIO, the challenge that these organizations have to think through is how do I make sure that all of these systems are going to be interoperating with each other? How do I, like, I’ve got to now perform regression testing across all the different systems to make sure that they work together and something’s not going to break something else. So there is some additional complexity that potentially gets added into it. But one of the things So one of the things that we encourage people to look at or think about is are there standards in the marketplace that organizations like ours can be adhering to so that if they’re aligned to this particular standard, that someone else coming in, if they’re aligned to the same standard, it’s going to be substantially less risky or transfer data between two applications that apply to the same standard might be able to make that risk substantially lower. Buy in is a perfect example of that. So when you’re buy in aligned and you’re following, I’ll say, the rules that they’ve laid out in terms of how data might be stored or should be stored and your need to share that with another application, if two applications are buy in aligned, it means that you’ve got a pretty good comfort level that they’re going to be able to work together it’s going to reduce a little bit of that risk. But I think to your point, you’re not likely ever to get the best of any one thing inside of a generic core. That’s not what they’re built for. They’re built to be good enough in many things, but they’re not going to be the best. And I’m not sure if I’m a bank today and I’m, you know, I’m leading retail or I’m leading corporate commercial, I would be worried that if I don’t have a system that can allow me to be differentiated by some of the features and functions or speed that purpose built application can bring to me, then how am I going to compete in the market? Like the market’s changing. What’s the difference anymore between a savings account at one bank and a savings account at another bank or a loan at one bank or a loan at another bank? truthfully, we’ve gotten so commoditized in terms of our products and we’ve effectively reached digital parity in the applications that we carry on our phones, what’s making bank one different from bank two? And we believe that’s going to come down to offer rewards, loyalty, that products that are bespoke or purpose built for individuals where you might not mind to take a little bit less or a little higher cost on a mortgage or a little bit less of a return, if it’s going to give you some other advantages of dealing with that particular bank. We liken it to the airline industry. Most countries have a preferred or a national carrier, if you will, but everyone likes to complain about their particular national carrier, how you’re effectively forced to fly with them. You’re not forced. what they’ve created is this loyalty program that you feel like in order for you to be able to get on the plane first or get that extra bag or do these other things, you need to keep traveling on that particular airline. We feel and what we’re seeing, we’re actually seeing this in Europe, North America and Australia, what we’re seeing is that same kind of thinking coming from the retail industry into banking where people are rethinking about how do we differentiate that mortgage or how do we differentiate that savings account because it can’t just be on price because that’s a race to the bottom and that’s not good for anyone.
DM: I mean, it’s interesting because, you know, my background from the very early days of the internet, there’s been this ongoing mantra that customer experience is everything. But largely in banking, when it comes to customer experience, people talk about how easy it is to register or to onboard a customer to use their self service capability. They really talk about the usability of the online presence, right? But more recently, I’ve spoken to banks that kind of have been slow in upgrading their mobile and web applications but really haven’t seen any loss in customer base and really what they retained customers and even grown customers on is actually their product set and offers. So is that what you’re seeing as well? I think that I suspect.
TH: that there are a number of studies around the world in mature markets where you’ve got like a big four or big five number of banks in any one particular country or region where for the most part, customers are apathetic to the bank that they’re with and whether their mobile experience is going to be somewhat reduced, I don’t think that’s necessarily cause for them to switch from bank one to bank two. if it’s subpar, like they’re not providing the basics that you need in order to be able to financially bank at that particular organization, that’s a different thing. But for the most part, as I said before, I think digital parity for the most part in these mature markets, it is happening. And what we’re seeing is that people leave less because of the digital experience, but more because of the products and offerings that another bank is giving to them. And you know, if you’re on a legacy core where it takes you six months and multiple millions of dollars to get a new product out the door versus a new solution like ours, where you can get a new product to the market in a day. Like you have the ability to respond to what’s going on in the market. You can make changes, you can run AB tests. You’ve got a lot more flexibility to be able to create bespoke offerings for individuals or groups or cohorts of people that you wouldn’t be able to do with a legacy banking core. These new kinds of products that are out there today are giving organizations the ability to do exactly what you’re talking about. Create these new products, offerings, rewards that make it easier, hopefully easier, for customers to be able to make the switch from one system to another. Now, I’m not saying that digital is not important because as you make that switch, that onboarding, if it’s complicated, if it’s cumbersome, if it’s annoying, they’re going to abandon that enrollment and decide that it’s just not worth it. Because if it’s so hard to enroll, then what’s it going to be like when I’m an actual client over there? So I’m not trying to say that it’s not important at all. I’m just saying that it’s probably not the thing that typically drives people to switch.
DM: Yeah, totally agree. I mean, I guess another area that I’m very interested in, because I come from a history of working with some bigger banks in the UK. And even after I left, I’ve kind of sold to new technology solutions to bigger banks. But I always also like to look after the smaller guys, right? When it comes to modernization, does it also apply to the smaller banks that have Not really a huge IT department, not necessarily the technical capability to do lots of new integration and stuff like that. How does modernization work for, or doesn’t it, for community banks and credit unions?
TH: Yeah, it’s an interesting question because even though they’re a smaller bank or a credit union, they play in the same ecosystem as the rest of the big banks. So they’ve got to be able to compete in that marketplace. Now, what we typically see in those smaller banks and credit unions is they’ve got a core that does way more than what a core would do in a much larger bank. Because to your point, they don’t have the IT shops to be able to do, create the onboarding and the digital application. Like it comes with so much more than you would get at the other end of the spectrum. I would argue that in those kinds of systems, it’s more likely that it’s more genericized and less functional than what they might be able to get at the larger side of the spectrum. But they’re at a point where they have no choice but to create products and offers, rewards, loyalty to compete with those big banks and I’m not convinced that all of the partners that exist in that ecosystem or that space have the capabilities to be able to allow them to be able to do that. We’ve got a number of customers around the world that are on the community bank credit union side that absolutely see the need to be able to create those products and services and offerings to be able to compete with the big banks that are trying to entrench into their territories. They might be in a particular region, they might be for doctors or lawyers or whatever the particular credit union might be for, but the big banks they’re seeing an opportunity to go in and take that market share at a relative low cost to the budget that they’ve got. So these credit unions and smaller banks have to figure out a way to be able to defend their territory and they need tools like ours. I’m not saying that we’re the only tool and I’m not saying that we’re the only tool that they need in a modernization journey but they do need tools to be able to compete effectively. There’s no question.
DM: Cool. So again, just going back to the kind of like the status quo in the market, what are the key trends that you’re seeing? I mean, some of this stuff is cyclical. When the economy is down, people are reducing costs and but generally always back to trying to sell more. What kind of trends are you seeing in the market right now?
TH: I think that what I would look at is three trends that we’re seeing and these are global. So that’s not any one region. I would say that for the most part, they’re consistent around the world. And we started off on this topic. It’s around modernization versus replacement. So that’s been a fairly big shift that we’ve seen in the marketplace. And very rarely are we getting called into an organization to have a conversation where they’re looking at doing a wholesale replacement because those conversations really just aren’t happening as much as they used to. I think the next one is around the ability for organizations to compete on products, services and loyalty versus on price. I think that if you go back and you think of how banks have tried to historically compete, it’s been on how do I get the best price out to a customer or on those kinds of things. Or it might’ve been, do I have the best digital channel or am I sticky? Is my onboarding quick and easy? What we’re seeing is it’s a shift away from those kinds of things to be specifically around the products and services and offerings that they’ve got because a race to the bottom isn’t gonna be helpful to shareholders of that particular bank. And it’s not really a winning scenario for an organization. and the last one that I would say is what we’re seeing around the world is our banks thinking about being more than a bank. So they’re looking at being a participant in a platform or a network where they’re going to be part of a home buying journey. Today, banks are at the back end. So I’m going to go shop for a house, I’m going to go online, I’m going to go whatever. And the very last step is, oh, I better call my bank so I can get a mortgage. to go buy a house, I’m going to go buy a house, I’m going to go buy a house. Banks are rethinking their approach and the mortgage journey is one. It could be a car loan journey. There’s a number of different journeys that organization, that banks could be looking at. But the mortgage one is one that we’re seeing often where they’re trying to get involved much sooner in that process where they may even adopt their own website that allows you to be able to shop through them to find the home. to see the schools that are in the neighborhood to understand what’s the walkability score and those kinds of things. So they actually control more of that experience or journey than just the very end. Because if you’re at the very end, you’re now again competing just on price. And I don’t think that’s where any bank wants to be able to be. And I’ll add a fourth because I think it’s important and it’s driven by number three. There are so many fintechs that are out there today that are eating around the edges of what a bank does and they’re taking the most profitable parts of that bank and leaving the bank with all the overhead and regulatory compliance issues that exist And they’re saying, oh, that’s fine. We’ll disintermediate you bank and we’ll hold the client relationship. But we need you for KYC and we need you because you’ve got to report to the regulator on these kinds of things. The banks have to get out of that space. They have to get more in front of customers because they don’t want to be anonymous. As soon as they become anonymous, it’s going to be a slippery slope for them because at that point, the FinTech can switch the back end to any organization that they want. So it shifts the dynamics in that scenario and banks are having to figure out how they get more forward in that conversation. And these banks can’t get involved in every platform and every network. So they’re not going to be able to do home loans and auto lending and wealth and all the 10 or 12 different things that we’re seeing in the market today. we think that they’re going to have to pick three, four, five, maybe five on the outside where they think that they can actually compete effectively and be known for that because they can’t be any good at 12 things. This is a new muscle for them. They’ve got to figure out how to exercise that muscle. So they’ve got to do some tests and learns in small markets and figure out how to do this. But I think that this is critical to the banks of the future that they just can’t be that deposit holding organization. They have to rethink what the bank of the future is actually going to become.
DM: Yeah, I mean, I really like that. And my summation of points three and four would be that be more like Uber on the entire journey. Forgive the pun, obviously. But it’s everything from finding the cab to getting in, having the journey, paying the fare, everything, not just paying the fare, versus being like Revolut, which is a conglomerate of FinTech features and payments and all sorts of financial services, adding more to the confusion, I think, to the user than actually providing a valuable, differentiated service. I think what’s interesting in what you say about three and four, it’s a space I’ve called driven banking. So you take an experience like buying a car or buying a house or saving for your kid’s education, and you look at that value chain and say, right, how much of that can we piece together ourselves plus with a network of FinTechs and other tech companies so that they just come to us for the entire thing? The upside on that is that you don’t have to compromise on price because you’re getting enough value that people think, look, I love this simplified journey. I don’t need necessarily to fight for a point one difference on the fees, right? So, I mean, it’s a very compelling proposition.
TH: That’s what we believe. I would say that we’re seeing this, as I said, in all the different markets. People are thinking about what platforms or what networks they’re going to be participating in. The future thinking banks are really trying to figure out how they can do this to exactly your point. They’re hoping that they don’t have to compete on price. They can compete on that journey. But I think that has to be A complimented by a loyalty component because that drives it even more. If you get more features and functions from your bank because you’ve got a mortgage with them, with the credit card, with the savings account, with all of these kinds of things that gives you much more, that they give you more features and functions because you bought your mortgage for them on top of what you’ve already got. I think that also drives them your way versus them just using you for the 99 percent of that journey. And then at the very last step, they’re like, well, I can get it for point one somewhere else. I might as well go somewhere else.
DM: Yeah, absolutely. So it’s probably going to be quite a common theme for me, but I always like to chuck in one question at the end with the most dominant kind of technology trend, and that’s Gen AI. What’s your view on Gen AI and how it can help, let’s say, with modernization?
TH: Yeah, I think that this is a topic, to your point, everyone’s talking about. It’s something new in the market that organizations are trying to figure out. What is it? How does it work? And the complexity that we live in from a banking perspective is we’re a regulated industry, which means we can’t necessarily, in every market around the world, just create something using Gen AI and throw it into production and say, okay, well, the system made the decision and there’s no way to be able to duplicate that or understand the logic necessarily of how it got to that particular position. That said, do I think that most, if not all organizations around the world today, whether they’re a software or SaaS solution like us or a bank themselves, trying to understand what Gen AI can bring to them? Absolutely. I think from our perspective, we’re doing things like embedding Gen AI into our user interfaces that you can use it as a conversational tool to be able to interact with the software, to be able to do stuff. And stuff might be program the system. It might be to understand what’s going on in the market. So give me, who are the top five providers of savings accounts in this particular market at this particular moment in time? a great job. Instead of you having to go and do research on the internet to do that yourself, we’ve created tools that allow you to be able to do something like that using a tool that we’ve created. So I think that there’s a lot of edge cases where it’s starting to become more ingrained into the fabric of what the products are doing. I think that there are some companies that are out there that are starting to use it for risk. They’re starting to use it for KYC. They’re starting to use it for a number of different use cases. We’re not involved in those particular industries or spaces. So we don’t run up against them to for me to know exactly how they’re using it. But from our perspective, we’re definitely leveraging it in the interfaces that we’ve got for our clients to use. And obviously we’re using internally for ourselves and we’ve made it available internally and soon externally for our clients to be able to interact with our documentation. How do I do this on the platform? And it will say, okay, it’ll summarize the answer and it will then take you to that particular page in the manual. Our manual, it’s thousands of pages long. It would be really hard for someone to be able to find that without a tool like this. You don’t need to use the exact words. It knows the intent of what you’re trying to ask and it takes you to that page and says, okay, to do the following things, here’s how you need to do it. So it’s absolutely a useful tool. And I think that what you’ll see is more and more vendors year over year embedding more and more functionality as much as it can into their products and solutions where it doesn’t have an impact on that regulatory compliance. I think that what we need to wait for is the regulators and the different markets to be able to say, here’s what the rules are, here’s what you can or can’t do. I know that’s a tall order because they don’t often like to say things like that, but I think that we need to figure out what the rules of engagement are in allowing Gen AI to be able to participate in the decision making process. The last thing that I would say is what we’re also contemplating doing next year is making it proactive. So leveraging Gen AI to be proactive to, if we go back to my scenario that says, what are the top five providers of a savings account in the marketplace today? is you could actually use Gen AI to be able to watch the market and when someone creates a better savings account or a better mortgage, the Gen AI tool could actually reach out to you and say, hey, your competitor in this particular market just did the following. I recommend that you answer that by doing these three things. Would you like me to configure that? Yes, no. Click yes and it auto reprograms your system to be able to go off and do that. That’s absolutely something that we’re working on today that allows you to be able to leverage the technology to make you compete more effectively in the marketplace.
DM: Wow. I certainly got more than I bargained for because I’ve got not only a view of the current trends in the market when it comes to modernization, but also a view out to the future. I like both the things that you said about the experience driven banking, but also how things are going to get shaped up. Proactively with Gen AI. I think that’s a very interesting point. Look, it’s been a fascinating conversation. I’ve learned so much today. Thank you so much for your time, Terry, and wish you all the best.
TH: Thank you so much. I really appreciate the time.
