How Can Legacy Core Processors Battle Platform Plateau Fatigue?

By Richard Crone, CEO, & Heidi Liebenguth, Managing Partner, Crone Consulting, LLC

Leveraging FinTech partnerships with open banking API’s is an important part of “sustaining” innovation and fighting the natural inertia of Platform Plateau Fatigue (PPF).

Platform Plateau Fatigue describes the natural tendency by companies in the saturation and decline stage of the Product Life Cycle to extend cash-cow returns as long as possible by limiting updates to bug fixes, security, regulatory and other “sustaining” features without market-making disruptive innovations.

PPF is enabled by high barriers to exit, cost and the risk of a conversion for Core computing and mature processing systems. PPF is the force behind the “sullen but not rebellious” approach, a service (or lack thereof) mantra of Ray McDonald, the CEO of Burroughs in the 1970’s.

PPF is not typically addressed by the Cores until they risk losing an account to fulfill unmet requirements in a Request for Proposal (RFP). With their hair on fire, quota-driven sales people scramble to embrace Application Programming Interfaces (API’s), Software Development Kits (SDKs) and partnerships to win Core deals with “must have” functionality they lack. FinTechs’ most important virtue is unlocking the Green Screen Core competency to focus on the end user interface (UI), the ultimate reason for the Core’s existence, but generally not a part of their internally focused computing utility cultures.

But not without a cost: FinTechs likely command more than 95% of all the new incremental revenue from both their sustaining and disruptive innovations, working with and without legacy Cores. For example, the online-only FinTechs have originated more loans than the entire credit union industry since 2016.

If you’re not the system of record (SoR) you are always struggling for relevancy, lacking superior value chain control of the source account data and the ultimate user interface (UI), the fundamental premise behind the promotion of open API banking by the heritage Cores.

Clayton Christenson, author of The Innovator’s Dilemma, describes this market phenomenon as the Law of Conservation of Modularity, which states “when modularity (APIs) and commoditization (legacy Core computing utility) cause attractive profits to disappear at one stage in the value chain, the opportunity to earn attractive profits with proprietary products (as the SoR) will usually emerge at an adjacent stage (FinTechs with APIs, SDKs and open banking, banking as a service initiatives).”* The most profitable “stage” is enrolling end users as the SoR, and controlling the Customer Experience (CX), the very definition of superior value chain control. Vivid examples include Uber for Taxis, AirBnB for hotels, PayPal for payments, SoFi for loans and mobile vendors such as Malauzai, Q2, Alkami, etc. for Core processors (which further squeeze and isolate the legacy Core as they duplicate and reference their own SoR whenever possible to avoid pinging charges).

As banking becomes commoditized, profit opportunities squeeze out to the Point of Presence, where FinTech disruptors enroll customers directly as a preemptive distribution strategy out ahead of the legacy Core platforms (thus the importance of payment, digital account opening and artificial intelligence).

Product development and partnership strategy is dominated by the goal to sustain legacy Core, comparing the efficiencies between make, buy and partner options, with the tenet “there’s always a bigger fish.” Meaning, if an ancillary application gains traction, move from “partner to purchase” and make it a plus-one differentiating feature of your legacy Core before someone else does.

This is a rearview mirror approach to growing a platform business and a flagrant symptom of PPF. An unmanaged open banking app store hosting an endless supply of unprioritized, loosely vetted FinTechs, academics and wannabes is risky. It could easily become a fatal distraction for already scarce innovation resources, especially when you don’t even know the percent of revenue coming from partnerships, which most legacy Core providers don’t track explicitly. APIs, SDKs and Banking as a Service (BaaS) don’t abdicate the need for achieving superior value chain control, with focused vision and determination for making market vs. lagging as a follower, which by default leaving development entirely to others does, even if it is slickly packaged as “open banking.”

Some legacy Core providers have gone so far as to explicitly state that they view “banking as a commodity service accessible through Open API’s.” The forces behind this are FinTechs, guided by venture firms that know how to maximize value. All ahead of the legacy Core computing platforms that are encumbered by PPF and commoditizing forces of running a legacy utility burdened by bank rules, regulations and the like.

The key question is how to use partnerships, APIs, SDKs, BaaS and open banking initiatives to gain superior value chain control vs. relegating incumbent Cores to some commoditized central computing utility like electricity or dumb pipe and leaving the disruptive innovation to others.

“The New Rules of Retail: Competing in the World's Toughest Marketplace,” by Robin Lewis and Michael Dart, states that “While some functions in the value chain such as production or distribution will be shared or collaborated with third parties, the entity that originates, owns or creates the brand (whether retailer, wholesale or service provider) should exercise dominant decision making control, or at least be relentlessly pursuing it. Most importantly, it must control those parts of the chain that directly connect with, or touch, the consumer (e.g., end users in the wild, not in branches). After all, continuous innovation emanates from tracking and responding to consumers’ (end users’) ever changing desires. So the dominant brand must control origination and development (as the SoR).

This symbiotic interdependence combined with the high barriers to exit for legacy Cores give them the runway to think differently about their “supplying” and serviced FI “client” partners. But not without first carefully considering the vital signs of each.

Crone Consulting, LLC has 15+ years of longitudinal data gleaned from our consulting engagements with every size and shape of financial institution, from top 25 global leaders to super-regional/regional, community banks and credit unions. Our Service Interaction Analysis? is used to track the top use cases, trends and innovations in every channel, product and customer touchpoint. This data provides analytical rigor for objectively assessing at the end user level the vital signs of an organization and is used not only by FIs, but their infrastructure suppliers and other industry stakeholders requiring a 360o view of the FinTech ecosystem. The insight has been extremely helpful in due diligence for some of the largest transactions in the space. Our position: not analyzing service interactions is flying blind, whether you’re a bank, core, or investor in the space.

The top service interactions in every channel, such as balance inquiries to the contact center (IVR/CSR) or physical check deposits in branches and the like can all be performed better in a mobile app. 

Yet, adoption rates and active use of mobile banking in FI’s less than $60 billion is generally about half that of the top five banks in the USA or any number of other global FI’s. The mobile missteps by FI’s and legacy Cores in the community category have created a steady exodus of the younger cohorts, the life blood of growing transaction and lending activity. The attrition rates show up in higher natural age per account holder and the rising number of dormant and deceased accounts (which in several of our engagements were the fastest growing account types at the FI).

This is further validated in J.D. Powers 2019 Retail Banking Satisfaction study that claims “ten years after great recession, innovation overcomes reputation as bank switching hits record low.” J.D. Power goes on to say that:

• Big banks surpassed smaller rivals in customer satisfaction…(for account holders)…under 40…(resulting in)…only 4% of customers (industry-wide) switching banks in 2018
• Big banks are not only bigger, they are better
• In 2009, mobile banking customer adoption was minimal
• In 2019, 53% of retail banking customers use mobile banking—with midsize banks experiencing significant declines in innovation and satisfaction scores among customers under 40

Let’s compare the vital signs of heritage branch-oriented smaller financial institutions (FIs) less than $60 billion in assets using the Crone Consulting LLC Service Interaction Analysis? aggregated and anonymized (no public disclosure) with that of FinTechs, supplying partners and competitors as reported by KPMG and EY.

The challenger, neo-banks and FinTechs are packaging these facts into their promotions. How is it that advertising executives—unschooled, lacking the real inside data—are able to see this ahead of the banking industry and credit union movement? The answer is Platform Plateau Fatigue, not only at The legacy Core computing provider(s), but at the edge of the network within their serviced FI’s.

To avoid being blindsided, think of heritage processing Core as a restaurant franchisor and their serviced FI’s like Howard Johnson’s franchisees. What happens when the franchisor loses control of their value chain and franchisees cut corners, skimp on ingredients, don’t reinvest in their infrastructure and don’t adapt to ever-changing consumer preferences? Preferences that have moved to mobile, a channel lacking in many FI’s less than $60 billion in assets.

Ironically, legacy banking Core providers have a completely digital offering and the edge of their network is no longer restricted to the street curb, parking lot, branch, ATM, contact center, signature card and paper account-opening forms of their serviced FI’s.

This begs the question: Is there an opportunity to diversify their access to end users beyond just a backstage B2B2C or B2P2B2C provider, leveraging a preemptive distribution strategy without taking their focus off the Core business or upsetting their existing channel partners (paper/branch-bound FI’s)? 

The analogies include Netflix producing its own original content, Amazon hosting six million other businesses on its platform besides its own and retailers promoting private label products alongside the national brands on their store shelves.

It is our humble opinion that there is way too much “dumb money” chasing too few quality investment opportunities, resulting in a proliferation of FinTech startups, most of which will fail. That is not the case for Tier 1 “smart money”, where a disproportionate number of their investments actually succeed. In our consulting experience, companies that prioritize their partnerships in the same way as the Tier 1 venture firms yield the same or better results, namely:

Is this a market-making opportunity? Big enough to sustain a company? Or is it just a product or product feature, or worse yet a distraction?

Invest in “A” teams only, knowing that smart people working to define a new market will figure out the right product

Clear focus on a market-making opportunity ensures you avoid the fourth F: Failure

If you are not the SoR you are always struggling for relevency. This all leads to one key business principle, Crone’s Rule: The One Who Enrolls is the One Who Controls. The highest valuations go to those that control enrollment with a brandable customer experience (CX) with the most active users at the edge of the network.

Our Service Interaction Analysis? shows that payments and payment-related activities command more than 75% of all the CX touchpoints for an FI, with both consumers and businesses.

Given the fact base above, it is not hard to understand the upside potential of Fiserv’s acquisition of First Data and FIS’ of WorldPay. It is a preemptive distribution strategy to gain value chain control, enrolling consumers and businesses directly at the most lucrative part of the value chain, in the wild, at the edge of the network, at the point of presence and point of sale. With and without their serviced FIs. Besides reducing channel concentration risk with their heritage FI’s, the move gives them big upside on the new revenue streams and value creation in-context from mobile payments, which we estimate are worth approximately $300 to $500 per year in incremental revenue per active user, more than twice what a typical FI brings in per demand deposit account (DDA) annually.

This move sets the stage for expanding their presence in artificial intelligence and machine learning, which is one of the few cures for Platform Plateau Fatigue because it continuously improves the system without having to release new software updates.

Run the movie forward; Clover, like Square Capital and PayPal Capital, has a continuous view into the lifeblood and health of the businesses using their payment services. Payment processing is like a heart monitor or the Apple watch on my wrist, all feeding an AI engine the vital signs of that business. This allows them to render a customized, continuous set of credit options to the businesses prior to any formal loan application. Loan payments come off the top as a percent of future processed payments on the platform. This is the same model the government uses for taxes, and courts use when they garnish wages. They tap into the original revenue source, positioning Fiserv and First Data (FIS and WorldPay) as the alpha and the omega of the supply chain, the very definition of superior value chain control.

The true digital and mobile-only lenders are doing the same, using their AI-driven platforms to open up new customized credit options at the Point of Presence and POS. Machine learning enables “critical mass customization” and economies of scale for profitable new lending segments with a much greater FICO score range. The opportunity: to waterfall loan and account applications not meeting an existing FI’s requirements to accommodating challenger banks and FinTechs, keeping the applicant satisfied despite their lower FICO score.

What makes these direct scenarios possible is a tightly integrated true digital and mobile account opening and loan origination capability, a staple of the challenger, neo-banks and FinTechs.

In conclusion, superior value chain control comes from focusing3 make, buy, partner and partner to purchase efforts on “market-making” opportunities first in payments, digital account opening and AI-driven customized credit in the wild at the point of presence. Prioritizing FinTech partners that help legacy Cores and other established mature platforms achieve value chain control directly with end users, for preemptive and traditional FI distribution, is the future of banking.

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Richard Crone is CEO and Heidi Liebenguth is Managing Partner of Crone Consulting LLC, an independent advisory specializing in mobile strategy, personalization and payments.