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Live Oak outpaces larger rivals in moving core system to public cloud

Live Oak Bank has begun deploying a core banking system from Finxact that runs on Amazon Web Services.

The move is significant because the use of core banking systems that live on a public cloud, rather than an internal mainframe or private cloud, is still rare.

The founders of Finxact and the Wilmington, N.C.-based Live Oak have a long history in financial technology.

Live Oak, which has $8 billion in assets, was founded in 2007 by Chip Mahan, who also started the very first online bank, Security First Internet Bank, in the 1990s. Live Oak is a Small Business Administration lender that caters to medical professionals and has a strong technology bent. The bank created its own loan origination software and spun it off into a software company called nCino in 2011. nCino held an initial public offering in July that valued it at $7 billion.

“The seamless customer experiences that every customer expects from Amazon and Apple, but that the fintechs are able to offer, are superior customer experiences to what banks are currently offering,” says Huntley Garriott, president of Live Oak Bank.

Finxact is a core banking startup founded by Frank Sanchez, who along with his brother created core banking software that many banks use today. That software was bought by FIS in 2014 and sold under the name Profile.

Mahan and Sanchez first met decades ago in the office of John Reed, then the chairman and CEO of Citibank, when Citi chose Mahan’s previous company, S1 Corp., to provide its front-end software and Sanchez Computer Associates to provide core-processing software.

About three years ago, Mahan asked Sanchez to build an open, fintech-friendly, real-time core banking system that Live Oak could use. A year later, Sanchez launched Finxact with $12 million in capital from Live Oak Ventures and others.

Last year, Finxact received $30 million in equity investments from the American Bankers Association, SunTrust Banks, Live Oak Bank and others. It also received a rare, official blessing from the ABA.

“He has created a headless core processor that the world can develop to, to provide functional parity to the oligopoly,” Mahan said in an interview last year, referring to Sanchez. “We strongly believe that open wins.”

Finxact’s transaction processing system has a connector to Salesforce’s financial services cloud, so that banks can use customer relationship management software and financial applications built using Salesforce tools. It has also been integrated with Cedar reporting software and Apiture digital banking software as well as legacy core providers like Fiserv and FIS.

Finxact offers one of the first core systems to run in the cloud and be sold as software as a service — in other words, paid for with a per-user monthly subscription fee and little capital outlay and hardware maintenance.

Going live at Live Oak

Deploying a new core system is never easy, and Live Oak’s case is no exception.

“It’s been a bit of a journey for us as Finxact got off the ground and got started,” said Huntley Garriott, president of Live Oak. “Building a new core is not for the faint of heart.”

The bank is converting to the new core in phases.

The first thing it did with Finxact is book Paycheck Protection Program loans. The bank originated 11,000 PPP loans this year, a huge increase over the 1,200 Small Business Administration loans it made last year.

“Our ability to scale was largely a part of our ability to book all of those efficiently onto the new core,” Garriott said. The bank’s existing core system vendor could accept manually loaded PPP loan applications, but Live Oak needed to automate the booking of those loans to handle the volumes of applications it received.

“There were some very specific aspects of that origination process around employment records and payroll that broke the existing SBA application process,” Sanchez said. “There was a lot of activity around modifying and extending the application origination process to a very specific workflow that was driven by PPP. It was a one-off, we had to react fast. And in the volumes that we’re talking about, it had to be an automated, end-to-end process.” Even ACH payment instructions were built into the workflow, he said.

Sanchez’s team is now working with nCino to build an automated PPP loan forgiveness process.

Getting to market quickly

The new core lets the bank design and deploy products more flexibly, Garriott said.

“Flexibility matters in two ways, primarily,” he said. “One is product design, so we can create or shift products, we change an interest rate, we can offer a reward.”

It takes a long time and is expensive to design and deliver a new product through a legacy core, he said.

Last week, the bank launched digital savings accounts and certificates of deposit for business customers through Finxact.

Small businesses that have received PPP loans from the bank can open a new business account with a tap or two, according to Sanchez. All information about the business that was gathered in the loan application is applied toward the deposit product.

“It’s pretty rare for someone to be able to open a business account perfectly seamlessly straight through,” Garriott said.

Live Oak hopes to soon start offering checking accounts. Later, it will combine deposit, payment and lending products.

The ability to be all-digital is important to Live Oak, which is a cashless bank that doesn’t have any branches other than its headquarters.

Garriott said the Finxact core and the customer experience software from Apiture will help Live Oak compete with fintechs. Apiture is another Live Oak family member — it started in 2017 as a joint venture between First Data Corp. and Live Oak.

“The seamless customer experiences that every customer expects from Amazon and Apple, but that the fintechs are able to offer, are superior customer experiences than banks are currently offering,” Garriott said.

Another advantage of the new core is the ability to integrate with other types of software business customers already use, such as accounting and enterprise risk systems.

“Our ability to do that is light-years above what we could do if we were still on a legacy core,” Garriott said.

For instance, Live Oak works with a lot of veterinarians, pharmacists and dentists. Each of those industries has a handful of practice management or enterprise management software programs that handle scheduling, inventory management and other tasks.

“When you’re just starting or setting up a new practice and you’re signing up for that new software, could you not have a way of also setting up a new bank account in a way that’s embedded?” Garriott said. “The customer has already typed in all of their information to register for that software, validated who they are — why are they then going and starting a new bank account and having to type in the exact same information again, when that data can just be fed through an [application programming interface]?”

And when practice or office managers want to check on their business’s cash flow, instead of logging out of their day-to-day software and then logging into their bank account, the bank would like to embed certain banking functions into that software to deepen the relationship with customers.

The cash-flow and payment data from the practice management software could also be useful to the bank in making credit decisions, Sanchez said.

Large banks like Citi have been trying to do the same thing for their big corporate customers, by integrating Treasury functions within enterprise resource planning software from providers like Oracle. Payment fintechs like Square and PayPal also integrate point-of-sale and credit systems.

The bank has been testing the Finxact software for a while, Garriott said. It will run its old core alongside Finxact for a time, then convert all existing customers to the new system.

Garriott is not troubled by the data breach that Capital One Financial suffered last summer to customer data it had stored in AWS.

“I think anytime the industry faces something, there’s a concern and a ripple effect,” he said. “But this seems like it was pretty clearly an individual breach that could happen anywhere to anyone.”

Amazon and its cloud competitors have an unmatched ability to scale, to build security and deliver something cost effective, Garriott said.

“It’s really remarkable, and it’s hard to see how you would go back,” he said.

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