Community banks and Credit Unions buy most of their technology from the core banking system providers. So they aren’t terribly excited about buying directly from a FinTech.
There are four main core system vendors:
FIS, Fiserv,
Jack Henry, and
D+H. Between them they
own 96% of the community banking market. This presents a rather limited set of options to the 6,000 community banks and 6,200 credit unions in the US.
Scylla (aka Oligopoly)
For a FinTech company, this may look like an opportunity. But breaking into the “club” of core banking providers is very difficult – even such a well-established global player as
Temenos has struggled. This is what is known in economic terms as an
oligopoly. True, some community banks have bought niche FinTech solutions, but critical mass is very hard to reach.
Charybdis (aka Oligopsony)
The obvious option is to sell through the core banking system providers. But now the problem is reversed. Instead of a small number of sellers with a lot of buyers, we now have a small number of buyers (the same four core banking vendors) and lots of sellers
(2,000+ FinTech companies). This is known (less commonly) as an
oligopsony. Competition is fierce enough when selling to banks, but selling to just four customers may be a bridge too far for most FinTech companies.
Navigating Hostile Waters
So what’s a poor FinTech to do?
See my next blog, where I will make some suggestions for strategic approaches.