The US core banking market “needs to be disrupted” for proper competition to emerge and take on established names, according to Christopher McClinton, senior vice president of the American Bankers Association (ABA), speaking of the trade association’s investment in cloud banking firm Finxact.

The organisation announced $30m in equity investing from a number of sources, including the ABA, Accenture, SunTrust Bank, and First Data. Founded in 2017, Finxact is among a number of new cloud-based entrants into the core banking space, with others such as Nymbus and Germany-based Mambu.

“The core landscape in the US needs to be disrupted for competition to re-emerge. Finxact has assembled an extraordinary team of bankers and technologists that bring deep domain experience in building core banking software,” says McClinton. “The people involved inspire a high level of confidence, and they share a vision that aligns with ours of how a core should be a catalyst for innovation for financial institutions.”

“The continued consolidation of major fintech companies will further limit choices and stifle innovation,” said Frank Sanchez, CEO and founder of Finxact, in an email. “We formed Finxact in response to the lack of innovation and choice in the core banking segment over the past decade and more.”

A perceived market saturation in the core banking space led to ABA CEO Rob Nichols inviting major vendors to join a specially-created committee. In a letter, seen by American Banker , Nichols asked the CEOs of Fiserv, FIS and Jack Henry to provide more lenient contract terms and upgrade their technology to match their customers’ needs.

“The ‘traditional’ vendors are fintechs, too,” says McClinton. “They provide financial technology after all. What has happened is that over time they’ve come to do it in a way that places a lot of constraints on the banks because those constraints serve a purpose. They create annuities that safeguard the value of the providers’ stock. I think community banks would prefer to see their current providers change the way they deliver their service, both in terms of contract structure and technology stack. However, it’s unlikely they will because that would affect earnings, and they are under a lot of pressure to meet short term earnings estimates.”

One of the investors in Finxact, First Data, was acquired in January by financial services giant Fiserv in a $22bn deal. “The First Data acquisition further strengthens our case for an open system of record (SOR) platform that can integrate with both legacy providers and emerging solutions,” wrote Sanchez. “Both Fiserv and First Data have valuable and broadly accepted solutions that can and should be integrated to the Finxact core as a service platform.

“While the First Data investment in Finxact doesn't obligate either party to engage or partner in the marketplace, we are pursuing initiatives to Integrate platforms and technologies where it benefits our mutual Customer base or creates new market opportunities.”

Andrew Beatty, senior vice president of global banking solutions at FIS, says that Finxact “brings very competent capabilities to the marketplace”. “From our side there’s perhaps a lack of understanding on the amount of investment that FIS has made in modernizing our technologies,” he adds. “Legacy isn’t always a bad word. It gives us an incumbency status with these big banks. We can take them on a journey of modernisation.

“Rather than replacing the whole of the core banking system and going to another provider, we’re taking customers on a journey to meet the objectives they have around customer interaction and regulatory compliance. In 2018 we went to market with a modern banking platform which meets the requirements of today and the future, including being cloud native. This was built from the ground up.

“We’re positioned in the same way as a lot of big banks. Everyone wants a piece of what we’ve done, and that’s good. It’s good to be challenges and it helps us up our game just like the banks have had to upgrade. We’ll win and lose and they’ll win and lose, that’s the reality of the competitive market – it’s not a monopoly.”