The Intersection of Financial Institutions and Technology Leaders

Why Two Cores Can Be Better Than One

By Kiah Lau Haslett

PeoplesBank had two problems: It needed to grow deposits outside its existing markets, and it wanted to issue customized bank statements and debit cards to new customers following its 2018 acquisition of The First National Bank of Suffield.

But it struggled to do both with its existing core system. Holyoke, Massachusetts-based Peoples ended up standing up a sidecar core to create a digital-only bank, says Aleda DeMaria, executive vice president of consumer banking and operations at the $3.9 billion bank.   

Some financial institutions are using a second core to launch a new bank brand or service. The second core in this arrangement is sometimes called a complementary or split-core, as well as a sidecar or guesthouse core. Some financial institutions want to innovate via more-complex fintech partnerships and instant payments — and have encountered the limits of their current core provider. But there are risks involved. 

Financial institutions are deeply familiar with the large legacy core providers. While these firms offer time-tested, seasoned technology, advocates for change have promoted other options. The accelerated pace of innovation means banks have encountered long waits and sometimes hefty price tags to make changes, says Chris Nichols, director of capital markets at Winter Haven, Florida-based SouthState Corp. 

“All you need to do is use the core for a general ledger,” he says. “Everything else should be pulled out.”

Integrating with a bank’s core was the biggest challenge to planned upgrades and implementations that respondents identified in Bank Director’s 2023 Technology Survey, at 74%. This challenge was especially pronounced at smaller institutions: 77% of respondents at banks below $500 million in assets said it was a challenge, along with 91% of respondents at banks between $500 million and $1 billion. 

A sidecar core allows an already-established bank to “start from scratch” to build a brand or product while operating in a laboratory environment, says Mohammad Nasar, a principal in financial services consulting at Crowe LLP. It also allows an institution to build the capabilities and skills needed to operate this kind of technology, which can make future expansion and migration easier.

PeoplesBank partnered with cloud-based core provider Nymbus to launch Zynlo, its digital bank, in 2020. DeMaria says the sidecar core was cheaper than opening a branch, and it took about a month to construct Zynlo, which broke even in two years. Nymbus offers business process outsourcing, including call center training and operations; Peoples also has three employees running the brand. 

Jeffery Kendall, Nymbus’ chairman and CEO, says banks are more open to running a sidecar core because cloud technology has lessened the infrastructure and maintenance required to manage one. Sidecar cores can also be cost-effective because of built-in technology integrations that banks may pay for separately, like positive pay, which is an automated cash-management service used to deter check fraud, or document storage, he says. 

Sidecar cores have benefited from the explosion of application programming interfaces, or APIs, that has made it relatively easier for banks to add new software or bring on new partners. Potential use cases for sidecar cores include instant payment products, digital-only brands and intensive technology partnerships like banking as a service — projects and products that are potentially technology- and time-intensive that a bank may want to quarantine away from its primary core. 

“A lot of banks have great ideas that they can’t articulate,” Nichols says. “[T]hey’re constrained by their traditional core to show that creativity and the future is all about product development for banks.”

Institutions interested in using a sidecar core for these endeavors should also prepare for the intense strategic, operational and compliance considerations they come with — along with the complexity of a second core. They will need to figure out how this investment will support growth, such as in interest income, deposits or loans and resist the impulse to “solely chase technology for the possibility of its capabilities,” Nasar cautions. 

DeMaria stresses that adding another core was a lot of work. Researching different options required a lot of collective learning within the bank, and she now provides the board with frequent updates on Zynlo’s performance. Additionally, she decided to hire externally for talent with experience managing a national, digital footprint. 

“You are running another bank. If you can’t commit to all of the things that go with running another bank, it’s probably not for you because it’s going to be a waste of money,” she says. 

PeoplesBank’s sidecar core was enough of a success to persuade management to fully convert to Nymbus’ core, a project planned for the summer of 2025. DeMaria says that the conversion is arduous, but that the sidecar increased executives’ confidence that this was the right move for them. 

“We could see the difference side-by-side between the quality of the Zynlo customer’s user experience versus the PeoplesBank one,” DeMaria says. “We’ve proven the Nymbus concept with Zynlo, which [removes] some of that mystery of the unknown. … Being on it gives us a higher degree of confidence for sure.” 

Kiah Lau Haslett is the Banking & Fintech Editor for Bank Director. Kiah is responsible for editing web content and works with other members of the editorial team to produce articles featured online and published in the magazine. Her areas of focus include bank accounting policy, operations, strategy, and trends in mergers and acquisitions.