The Rize of the Middleware Providers to Bond Legacy Bank Technology Together

I was on a panel at a bank conference recently to discuss bank innovations relative to core modernization. I shared the stage with two savvy bankers, each of whom had chosen different paths to innovation.

• The first banker launched a new bank, applied for a state charter and was running on a modern core provider. He was building his customer base as his core provider continued to build out the needed features to support his growing institution. Unencumbered by tech debt, he was not burdened by the unenviable choice of a core migration.

• The second banker was like most of his peers in that he had to balance the tension of modernizing his core without disrupting his current customer base. Instead of replacing his core, he opted to innovate around it, by building a middleware layer using a traditional API integration layer like MuleSoft or ModusBox.

These API layers are definitely a step in the right direction if the bank doesn’t need intelligent routing, rules and limits at the customer segment level or multi-tenant architecture to divide embedded finance programs. Since the latter use case can only scale so far using branch logic within the legacy core.

However, if the bank wants to make waves in embedded finance while simultaneously innovating above their core for their direct business, then it appears the new “rizing” trend is to either buy or partner with a BaaS middleware provider. Fifth Third’s recent acquisition of BaaS provider Rize is evidence of this fact. In speaking with industry contacts and leaders at the bank, Rize’s limited customer base was not the acquisition driver, it was the technology.

Though it’s yet to be determined how the bank will integrate the technology into their existing tech stack, it’s safe to say that a bank as large as Fifth Third could run the Rize platform independently of its core and just net settle GL positions across all cores or systems of record at the bank. This is a common approach when banks are running multiple cores.

But how is a BaaS platform integrated when the acquiring entity isn’t a bank, but instead an incumbent in the core banking space? Does an entity like this “bond” their multiple cores and value-added services together to offer a multifaceted BaaS offering? And aside from the tech, which go to market is the best route to avoid channel conflict? Do they sell this offering to banks or embedded finance customers directly?

Regardless of the business entity or business model, it’s evident that the rip and replace phase of core modernization is transitioning to a more realistic alternative of innovating above the core using a middleware offering. The question is who will own the platform, the bank or a standalone tech provider?

At infinant our bet is on the banks owning the platform. Because while it’s always possible to abstract the core, you can never abstract the charter.