Digital technology is transforming banking, says everyone from bankers to consultants to vendors, and certainly, the surge in the number of mobile banking apps indicates customers are on board this change as well. Digital banking means many things, but the focus for the consumer is on faster access to his financial information, money, and advice. But how much of this change can take place on top of aging cores with their decades-old technology remains an open question.

Gartner defines digital transformation in business as “the process of exploiting digital technologies and supporting capabilities to create a robust new digital business model.” Examples of changes to the business model in retail stemming from increased use of digital technology include less reliance on fees resulting from consumer oversights, such as overdraft, and more opt-in or premium services, such as expediting payments.

Wells Fargo & Co., for one, is betting new cores are not needed, for now. The San Francisco-based company built its digital bank, Greenhouse, on top of its existing core. Purveyors of new cores, naturally, think otherwise.

Frank Sanchez, a co-founder of the new core-as-a-service platform Finxact, says his company has four implementation projects underway, with one announced — Wilmington, N.C.-based Live Oak Bank. The company also works with several fintech companies and has active implementations both in the U.S. and abroad, including Thailand.

“We built a friends-and-family implementation in late July with a simple savings product,” Sanchez told Bank Innovation. This was followed in the fall by a timed deposits product, and a demand deposit account will be offered before the end of the year, Sanchez said. Lending will be offered in the first quarter of 2019.

“Infrastructure requirements raised around digital and mobile are stressing core systems built around branch and batch and proof of deposit,” Sanchez said. “These systems were built in the 60s and 70s and they’re patched up, but certainly not optimal.”

In contrast to the larger core providers, Sanchez says Finxact does not aspire to be a “monolithic full-stack solution” but will work on a partnership model, with other vendors providing certain applications.

Dharmesh Mistry, chief digital officer of Temenos, offered a similar viewpoint. Temenos offers a single product, a modern digital core that updates centrally. “There is pressure on old cores, coming from micro-payments and the gig economy, both of which result in more transactions, more cycles on the cores,” Mistry said. Temenos, like Finxact, offers a marketplace where multiple apps from multiple vendors can be offered to customers.

A new kind of account
Wells Fargo, similar to rival JPMorgan Chase, launched a digital bank under a separate brand this year. But the bank decided to build the brand, called Greenhouse, on top of its existing tech stack, said Peggy Mangot, SVP of innovation at Wells Fargo.

But that’s not to say Wells Fargo shies away from doing new things with Greenhouse. The service offers users two accounts, with two account numbers — one a “set aside” account for bills, and the other the “spending” account. Greenhouse also offers personalized to-do lists and learns from user behavior to surface the most relevant, important data, said Mangot, who is no stranger to building innovative products. Before Wells Fargo she was a startup co-founder at Y-Combinator-backed Spark Gift, which enabled the digital gifting of investments, and before that was on the team that built Google Wallet.

Mangot, a self-professed saver from a young age, is highly tuned into the “day-to-day struggle” of many, if not most, Americans, which informed her work on Spark Gift. This means a savings product of some kind should be expected from Greenhouse, and one that is a bit out of the ordinary. But the set aside account helps differentiate the mass of money that arrives in one’s account every two weeks, or more, if one is a gig worker. “We noticed in user testing the hacks people used to organize their money,” she said. “They had the Notes app or calendar entries to keep track of bills.” The “envelope” method, with real or virtual envelopes of money for certain bills informed how the set aside account was built. Users designate the most important bill, for example rent, then a second, a phone bill or similar.

The result is two checkless DDA accounts, Mangot said. Greenhouse will formally launch later this year.

Account innovation such as that used by Greenhouse demonstrate that innovation happens outside of the core — indeed nearly all innovation in financial services happens this way. But Mistry from Temenos said the days of this sort of patchwork innovation are numbered. “Banks offer so many products, they can’t compete in every product, they can’t all be best-in-breed,” he said. Customers will demand this, and banks will be forced to bring in more partners to deliver services. Open banking at scale, and increased transaction flow, will add stress to aging cores. It’s a matter of time, but it may be a very long time.