The popular refrain in the industry is “innovate or die,” but community banks face added obstacles resulting from the costs and structural limitations of working with core tech providers.

A recent Bank Director survey of industry executives found that just 21% were “completely satisfied” with their core providers, and among institutions with $500 million to $1 billion in assets, just 11% were completely satisfied. Across the board, complaints included cost and the slow pace of innovative solutions or upgrades.

These pain points represent openings for startup core tech providers, including Neocova, a St. Louis-based company aimed at small- to medium-sized institutions that launched in October. Concerned with mounting costs, inflexible contracts, and technical limitations, Neocova’s target institutions are looking for alternatives, said Sultan Meghji, Neocova’s co-founder and CEO.

New core providers like Neocova are on the rise as legacy providers face pressure from changing industry dynamics.

“The first [challenge] is the technology — it’s just not innovative; the second is a business model challenge — the model [legacy core providers] push is equally archaic, with five- to seven-year contracts; and fintechs and other non-depository financial institutions are beginning to make plays in the space,” he said.

Neocova is far from the only upstart core banking tech provider on the market. Its competitors include Mambu, Finxact and Nymbus. Meghji would not comment on Neocova’s customers or funding (it’s raised more than $3 million, according to a recent SEC filing), but the startup reportedly secured undisclosed investments from two community banks, including The State Bank Group, based in Wonder Lake, Ill., and Amesbury, Mass.-based The Provident Bank. Reports of Neocova’s investments from community banks come after Finxact confirmed a $30 million funding injection from the American Bankers Association and a group of banks last January.

Neocova’s pitch to customers is flexible, cloud-based technology that allows for API integrations, simpler contracts and cost reductions that can amount to $0.50 on the dollar compared to some legacy providers, according to Meghji.

“[Our technology] is strategically aligned to how the technology market already operates and how it’s going — everything from artificial intelligence being built right into the system, high degrees of automation, and continuous integration. Our contracts are more straightforward,” Meghji said.

While new tech core providers like Neocova see opportunities, capturing market share could take time, given the entrenched relationships banks have with their existing core tech partners. Most U.S. banks use core solutions from industry giants FIS, Fiserv and Jack Henry.

Stephen Greer, senior analyst at Celent, said the growth of startup tech providers points to bigger issues small banks face.

“Big tech firms have strong armed a lot of smaller community banks into very unfavorable [situations] where to integrate into any third party costs an exorbitant amount of money, and the amount of money to get out of a contract is extremely costly,” he explained. “You kind of have no other option.”

In response to these concerns, at least one core tech provider said it’s working to address them. Meanwhile, industry observers point to threats to core providers’ business models resulting from new competition from startups and large banks’ growing in-house tech investments.

For Neocova’s part, the best solution for its client base is one that’s flexible enough to accommodate a range of needs. To allow for this, a simple contract and affordable technology that lets clients go to market with new products quickly is crucial, noted Meghji.

“It isn’t a one-size-fits-all-solution — some percentage of our clients are very much pushing the envelope, and they’re trying to do new and interesting and different things,” he said. “It’s about leaving them the flexibility and giving them the opportunity to own their own destinies.”

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