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New fintech firm is challenging legacy core bank system providers

A new fintech firm, Neocova Corp., is looking to chip away at the dominant market share of core system providers for banks.

Three firms — Fiserv Inc., Fidelity National Information Services Inc. and Jack Henry & Associates Inc. — are the core system providers for the majority of U.S. banks. A handful of new entrants have emerged, such as Nymbus Inc. and Finxact LLC, looking to use their cloud-based platforms to challenge the big three.

Finxact has the backing of SunTrust Banks Inc., the American Bankers Association and others. ABA President and CEO Rob Nichols even wrote to the major core providers in October 2018 asking them to offer banks more nimble technology to better serve their customers.

Neocova is the latest challenger to enter the fray. The firm's founder and CEO, Sultan Meghji, said in the latest Street Talk podcast that he decided to create Neocova because products offered by other core providers do not allow community banks to effectively compete with larger institutions or efficiently comply with regulations like anti-money laundering, or AML, and Bank Secrecy Act, or BSA, provisions.

"I saw a huge gap in this market. The technology that most of the community banks are using is just atrocious. It's vintage," Meghji said in the episode. "We're bringing technologies to market that will hopefully allow them to stop hiring so many people so the people that are in their office doing work can focus on higher-value activities."

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Neocova set out to create a cloud-native core system that is artificial intelligence-based and driven by an application programming interface. In the process of creating that platform, Meghji said the firm found the technology it created could serve as a toolkit and operating environment for community banks to build other products, such as mobile applications or customer analytics.

The executive said the firm offers AI products that will go online in the next month that are specifically engineered to automate and drive efficiencies in banks' back-office functions, including AML/BSA and know-your-customer provisions.

Meghji believes the product could reduce the headcount required for BSA work by as much as 50%. He noted that one of the firm's clients employs 170 people just focused on BSA work and said the potential reductions could offer "some real money to the bottom line of a bank."

Neocova announced a funding round in August, and banks, directors and investors in the banking sector made up the majority of investors in the offering.

Ray Chandonnet, head of the financial strategy group at Hovde Group LLC, helped with the capital raise. Chandonnet said the banks participating in the offering see the investment more as a research and development expense because of the options they gain through the platform.

"The return on that investment almost becomes the cherry on the sundae," Chandonnet said on the same Street Talk episode.

Neocova says it offers one-year contracts with fixed pricing for five years and no termination fees. The firm says that is different from the legacy core providers, whose contracts tend to be longer-term and can carry notable termination fees.

Chandonnet acknowledged that it can be difficult to convince banks to get rid of legacy core platforms since they are in production and serving customers. However, he said banks can gain immediate utility from Neocova's data analytics and AI products without having to complete an immediate core conversion.

The adviser believes other challenger platforms made a mistake in taking the incumbents head-on by trying to force conversions rather than using a "side-door strategy" like Neocova.

"I felt, right from the beginning, that [Neocova] had a much higher probability of success," Chandonnet said.

Meghji said a handful of banks have been willing to undergo a core conversion to Neocova's platform but noted that those institutions are in the minority.

"There [is] a new generation of community bank CEOs that don't see it as a threat. They see it as the only way they're going to survive," Meghji said.