FIS is shaking up its business model with a new subscription-based core banking solution

  FIS announced the launch of ClearEdge, a subscription-based core banking product targeted at community banks, per Finovate. With this cloud-based product, FIS departs from the traditional, on-premise model for core banking, bundling technologies into a platform offered as a service for a monthly fee.

The model shortens contract terms, as well as eliminates exclusivity agreements and damages charged for terminating a contract. ClearEdge dovetails with  

   -  CodeConnect, 

  -   FIS's API marketplace, 

enabling cafe-style integrations from an ecosystem of vendors, fintechs, and the banks themselves. While this model could open up FIS core integrations to competition, it will help the company retain financial institution (FI) clients by drawing them into a suite of services dependent on the FIS platform — much like Microsoft, Apple, and Google do with their offerings in consumer and business software.

Dependence on entrenched core vendors has impeded digital transformation, especially for small FIs. Fiserv, FIS, and Jack Henry dominate the North American market for core banking providers. Together, they reported revenues of more than $23 billion in 2019. There are over a dozen competitors offering similar services, but it has been hard to shake the power of vendors. It is costly to end contracts and replace on-premise systems — and risky, lest FIs interrupt services to customers. Small FIs in particular have struggled to keep up with the digital capabilities of their larger peers, stuck with outdated platforms that are difficult to upgrade.

A subscription model lowers risk and a cost barrier to upgrading core systems. Community banks and small credit unions have traditionally relied on on-premise core banking services from large vendors. When the vendor handles the infrastructure, the FI no longer bears the bulk of the expense of an upgrade. The transition to private clouds shifts FIs' cost away from paying to maintain infrastructure to paying for access to infrastructure and relevant software — covering compliance, payments processing, bill pay, fraud protection, and digital banking. And with the mid-pandemic economy putting pressure on budgets, a subscription-based investment is more viable than one with high upfront costs.

By offering Core Banking-as-a-Service, vendors insulate themselves against emerging competitors. Emerging cloud-based core providers like nCino are a threat to incumbents' relationships with FI customers of all sizes. And smaller FIs in particular will benefit from more intense competition between the legacy and insurgent core banking providers racing to develop more cost-effective and flexible digital platforms.