The decision to install emerging technology is an expensive one. And as a recent failed business deal between two vendors shows, it's also fraught with risk when the systems they are promoting don't have long track records — especially for their customers.
The latest case in point involves a move by a core systems vendor to convert several community banks to new processing software, a million-dollar-plus investment, by yearend.
On Thursday, executives of Rurban Financial Corp., the Defiance, Ohio, bank holding company that owns Rurbanc Data Services Inc., announced they were scrapping a plan to spin off the technology subsidiary into a separate public company and merge it with New Core Holdings Inc.
Rurbanc, which goes by RDSI Banking Systems, encountered several problems in trying to deploy a new core processing system developed by New Core, a Birmingham, Ala., company operating as New Core Banking Systems, according to filings with the Securities and Exchange Commission.
State Bank and Trust Co., also a Rurban subsidiary, in March converted to Single Source, the system that New Core developed, but determined it needed "further enhancements to operate in a number of complex areas," a recent filing stated. The bank subsequently decided to migrate back to its previous core system.
At May 14, 53 of RDSI's 74 core processing customers had notified it of their plans to move to a new core provider rather than migrate to Single Source.
"A lot of risk was taken here, and banks, in the end, are the ones that are suffering," said Paul Schaus, the president and managing partner of the bank consulting firm CCG Catalyst in Phoenix, who is familiar with the situation.
That number continues to grow because RDSI will stop offering core processing at the end of the year.
"New Core will continue to develop its proprietary software, Single Source, and pursue its own strategy," Mark Klein, the president and chief executive of Rurban, said in an interview Friday. "RDSI under the (Rurban) umbrella will continue to market the services that they have core competence in."
Those include item processing, image exchange, network services and information technology consulting, Klein said, adding that it is exploring other core processing options.
A vendor's track record typically is a major factor in determining to migrate to a new core system, said Eric Weikart, a senior director with the bank consulting firm Cornerstone Advisors Inc. in Scottsdale, Ariz.
"We look at things like have they ever converted a bank from the core system that the bank is on" and the number of banks that are operating on the system in question, he said.
RDSI's struggles seem to be the result of both technical issues with Single Source and timing. Before announcing plans to join forces with New Core, RDSI was licensing a core system from Information Technology Inc., now Fiserv Inc., and selling it to its own clients.
In April 2009, RDSI entered a reseller license agreement with New Core to become the exclusive provider of its Single Source software and announced the merger plans.
Subsequently, Fiserv notified RDSI that it planned to terminate their license agreements and sued RDSI in U.S. District Court, accusing it of breach of contract.
The companies settled the suit in July 2009, agreeing to phase out the licensing agreement by Dec. 31, 2010. After that date, RDSI is no longer able to offer Fiserv's Premier core software system to clients. As a result, RDSI clients were forced to decide to migrate to the Single Source system by the end of this year, go to Fiserv directly to license its core system or seek an entirely new vendor.
In a statement provided by a Fiserv spokesman, the Brookfield, Wis., vendor said based on RDSI's plans and "our analysis of the effect those plans would have on Fiserv, we determined that the relationship between Fiserv and RDSI was no longer viable."
"It was determined that a suit was the best way to protect the interests of our clients and business at that point in time," the company said.
Most clients decided not to stay with RDSI but a handful did sign agreements to adopt Single Source, including several community banks in Ohio.
Messages left for executives at three of the banks were not returned as of deadline. An executive at a fourth declined to comment.
Klein declined to discuss the status of those agreements but said RDSI will not be offering the Single Source system to banks as planned.
The problems resulted in a $10 million pretax loss in the second quarter, including $8.6 million in impairment charges and writedowns of hardware, software and development costs, Rurban reported Thursday. Rurban also announced a significant management shuffle for RDSI, including the replacement of several board members and the appointment of a new president for the subsidiary.
In the case of Rurban's $650 million-asset State Bank and Trust, Klein said it encountered "gaps" when running the Single Source system that needed to be addressed and decided it made the most sense to revert back to the Fiserv software it previously used.
Klein would not go into detail about what the specific issues were, but in an SEC filing the company said "significant challenges" occurred "due to the fact that the Single Source core system is untested in a bank environment of the size and complexity of State Bank."
New Core already had a handful of agreements with banks to use Single Source before the merger plan announcement with RDSI, including at least one bank with $350 million of assets and 16 banking locations that had been running the software since February 2008, according to the filing.
A call and e-mail to New Core's president, John Aranowicz, was not returned as of deadline Monday.
Fiserv and other major core banking vendors have said interest in upgrading systems has increased this year as financial conditions for banks firm up. In recent years small startups have jumped into the fray, hoping to attract smaller banks with systems that aim to consolidate multiple functions often handled by separate programs that were bolted together, such as loan origination and Internet banking, onto a single technology platform.
While some of the systems have shown promise, experts say the risk of adopting such new programs are high because the providers may lack sufficient financial backing or have little to no experience in actually converting banks from a legacy system to a new one.
"The bank has to weigh the risk and do that risk analysis," CCG Catalyst's Schaus said. He said that when he is consulting with banks on technology projects, he recommends they include provisions in their contracts that grant them access to source code for new programs in the event that a company encounters problems.
Because of the potential for disruptions, just deciding whether to change core systems is often a long, drawn-out process.
"For smaller institutions, it can take on average about six months from the point of initially starting to put together the RFP and talking to the vendors and analyzing the different solutions and doing the needs assessment," said Christine Barry, a research director with Aite Group LLC in Boston.
The actual physical deployment of a new system can take multiple years depending on a bank's size and number of locations, she said.
"I don't mean to say there can't be any new players to enter this space," Barry said. "But the company itself needs to be well known or trusted, and they need to have strong financial backing."
This story was reprinted with permission from American Banker.
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