#88 - Winners and Losers in the New Core Banking Order

A strategic breakdown of how banking is being restructured, the bifurcation of financial services and why core banking vendor economics will never be the same.

Illustrated by Mary Mogoi

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Introduction

A couple of weeks back I wrote an Article called “Neobanks are Not Coming for the Mega Banks”, the core thrust of the article was that there’s an emerging dichotomy in financial services that mirrors a bifurcation of the broader economy. On the latter, the argument was that we’re moving towards post-industrial economics where a barbell economy is shaping up. The underlying logic is that technology has lowered barriers to entry into a lot of industries and enabled small companies to build global distribution and marketing. This is being powered by global platforms like Meta, Alphabet and local platforms like Safaricom, MTN and others. In this economy, where there are large platforms and multitudes of smaller businesses being powered by the platforms, returns will be two fold;

1. Returns will go towards the platform providers that provide the tooling to everyone else - An interesting stat is that Kamal, CEO of Little Cab and Craft Silicon recently revealed to me in a podcast that 37% of their revenues go towards paying Alphabet for Google Maps.

2. Returns will also go towards small companies that are able to leverage these tools to build profitable small businesses.

My long-term view is that economic production is splitting into two poles. Large platforms will supply the essential tools; connectivity, intelligence, payments, and media, while a vast tail of small businesses and solo creators will use those tools to generate value. The middle ground will steadily erode.

The broader point of the article was that if this is true, the financial services will also bifurcate. Large corporate banks like JP Morgan, DBS and locally the likes of Standard Bank, Kenya Commercial Bank and Access Group will do well by banking the large platform providers. At the other end of the barbell lies the explanation for the massive growth we’re seeing in the Neobank space from Nubank, Tymebank, Kakao, WeBank and Moniepoint. These companies have emerged to serve a new breed of person, people who straddle personal and small business banking and require basic payments, store of value and contextual credit.

It’s important to look beyond these implications and apply some second order thinking particularly around what will happen to the core banking industry. If the underlying industry changes, then for sure, all supporting industries will adjust, none more so than Core Banking.

Failing to consider second- and third-order consequences is the cause of a lot of painfully bad decisions, and it is especially deadly when the first inferior option confirms your own biases. Never seize on the first available option, no matter how good it seems, before you’ve asked questions and explored - Ray Dalio

Whereas traditionally, this bifurcation didn’t exist and the banking industry looked like a pyramid, now the middle is being squeezed out and this has significant implications for the core banking industry. This article will look at how the core banking industry has been shaped, the economics of core banking, how banking is changing, the pressures being felt in the core banking space and the strategic options that core banking vendors will have to face to stay relevant in an increasingly dynamic industry.

Ultimately, Core Banking vendors will have to adjust.Vendors will win by either expanding outward, into payments, data, or embedded finance; or downward into hyper-specific niches. Anything stuck in the middle will fade alongside the mid-tier banks it once served.

The Heydays of Core Banking Vendors in Africa

Understanding Core Banking requires a solid understanding of the evolution of banking services particularly in Africa. If you take yourself back 30 years, banking in Africa was much different then it was now. This is captured in my article “#57 Building the Next Banking Giants - What Today’s Challenger Banks Can Learn from the Past” that traces the history of past challenger banks like GT and Capital one, whilst arguing how their paths mirror those of current Neobanks. The core theme that maps out to today’s article is more around the structure of the banking industry in the 90s and early 2000s. Back then, a few core themes were overlapping to shape the core banking industry.

1. It was the post cold-war era and the Washington Consensus was the dominant economic paradigm. Based on this, economic thinking across the continent moved towards a more pro-capitalist stance and the dominant themes were based on banking sector liberalisation. Subsequently, there was an explosion in the number of banking licenses. In Nigeria alone, it’s estimated that over 80 licenses were issued in the 80s and 90s. In Kenya, this number is 42. There was an energy around enabling new banks and this was enhanced further by MicroFinance Reforms in most of Africa adding the total number of licensed financial services providers;

2. Similarly, liberalisation moved beyond the banking sector into the broader economy with trade, manufacturing and telecoms all benefitting from liberalisation. Large companies such as Safaricom, MTN and the likes of Dangote got a wind during this period. Import controls were largely relaxed and trade grew significantly. This led to demand for ever more sophisticated banking services and a growing entrepreneur and SME class that needed basic financial services. GT and Equity rode this wave and key to this was their decisions around their core banking systems;

3. Similarly, there was a technological shift changing powered by the Client-Server era. This enabled the digitisation of banking operations. The client-server that started in the late 80s into the 2000s enabled banks to set up their infrastructure around centralised databases often powered by Oracle whilst connecting many networked computers onto these centralised databases. This enabled a new form of core banking provider which was effectively cheaper than the traditional mainframes thus enabling broad adoption amongst the banks that were being founded at the time. Key players in this era were Oracle Flexcube, adopted by the likes of Access Bank, Microbanker, Temenos, Finacle and Finastra. Local solutions included the likes of Craft Silicon in the 2000s.

The banking industry then started to resemble, a pyramid. At the top of the Pyramid were a few large banks, at the time, decades old banks such as Barclays and Standard Chartered in Kenya, Ghana Commercial Bank in Ghana and the likes of First Bank and Union Bank in Nigeria. In the middle of the pyramid were local pioneers Commercial Bank of Africa, GT Bank and Access Bank which later came to be dominant in Nigeria. At the bottom were locally owned banks or niche international brands that served a specific clientele. Many of the local banks at the bottom of the pyramid didn’t have ambitions to be titans, they often served very specific niches including specific industrial groups or even political families.

This combination gave core-banking vendors a perfect commercial setup. A large, captive customer base of new and incumbent banks all needed to modernise quickly; the biggest institutions wanted to keep pace with rising competitors, while ambitious mid-tier lenders sought systems that could support rapid branch expansion and ATM roll-outs. With no credible self-build or neo-core alternatives yet on offer, suppliers held the leverage to sell multi-year term licences, tack on annual maintenance fees of roughly 20 percent, bundle in the required hardware, and mandate expensive periodic upgrades. The result was a dependable, high-margin revenue stream built on sticky, long-term relationships.

How Times Have Changed

Economic dynamics are never permanent, technology and market dynamics always cause structural shifts. For both the banking industry and the core banking software industry, the impact has been significant. A number of shifts have emerged that change the competitive position for both banks and vendors.

The Mid-Market Squeeze

The core insight from our article a few weeks back was that the banking industry is changing with the middle being hollowed out. Banking is being restructured by the same “barbell economy” shaping global production. On one end are large-scale platforms and mega corporates with complex financial needs. On the other is a growing mass of agile, digital-first producers: gig workers, solopreneurs, and niche businesses. In between sits a shrinking middle mid-sized banks struggling to stay relevant.

This new structure is changing how banks compete:

• At the top, large banks are becoming infrastructure providers. They don’t just serve end-users, they power platforms. JP Morgan’s Kinexys, HSBC’s tokenised deposit service with Ant Group, and Access Bank’s ecosystem integrations across Africa show how top-tier banks are embedding into the workflows of enterprises, fintechs, and governments.

• In the middle, mid-sized banks are losing ground. Once competitive through local coverage and SME lending, they now lack the capital, talent, and agility to match either the scale of incumbents or the efficiency of neobanks. Their core advantages have become liabilities.

• At the bottom, Neobanks are scaling fast. With payments-first models and API-native infrastructure, they’re built for the long tail of the economy, users with variable income, digital footprints, and global financial needs. This is where tools like M-Pesa, Moniepoint, and Revolut thrive.

The industry is splitting in two. Banks will either serve the platforms or serve the edge. Those in the middle must choose, move up to become infrastructure, or go niche and specialise. The old generalist model is no longer sustainable.

The data shows this. The diagram below compares the total number of banks in Kenya between 2004 and 2023. I use Kenya simply because the Central Bank of Kenya has very consistent data around market share in the banking industry spanning from the 90s to now through their Banking Supervision Reports. In 2004, there was a literal pyramid, with 14 mid-tier banks (market share of between 1% and 5%) and 25 small banks (market share of less than 1%). 19 years later and the number of both mid-sized and small banks has reduced materially.

The dynamics are that mid-sized banks have either acquired or grown their way into relevance e.g. I&M, DTB and the merger of NIC and CBA - whilst others have collapsed e.g. Chase Bank and Imperial Bank. When it comes to market share, the results are even more dramatic with large banks obtaining around 2000 basis points in market share over the last 20 years.

Large banks had around 58% of the market share in 2004 and this has grown to 76% in 2023. Mid-sized banks have seen a halving of their market share, from 30% in 2004 to 15% in 2023. Small banks have slashed off 400 bp from their market share, moving from 12.5% to 8.19% in a 19 year period. This is not just a Kenya story. In Nigeria, the top 5 banks have gained around 800 basis points in market between 2015 to now. In Egypt, this has been even more dramatic with an around 1700 bp swing.

For Core Banking vendors, mid-market numbers can be deceptive because a large slice of “tier-2” assets is already captured by subsidiaries of big international groups that standardise on a parent-chosen core. In Ghana, roughly 50 percent of mid-tier deposits sit inside Access, UBA, Société Générale and similar pan-African brands; in Kenya the figure is about 59 percent, led by Citi, Bank of Baroda and Bank of India. Once you exclude these banks, unlikely to switch vendors locally, the truly contestable mid-market for independent core providers is less than half the headline total.

The Core Banking Shift

The Core Banking industry is definitely being affected by this change. A few trends have emerged, trends which I covered 4 years ago in this article about Core Banking, my most viral article to date.

As the banking industry bifurcates into platforms at the top and digital insurgents at the edge, core banking systems are undergoing their own structural shift. Four distinct models have emerged, each aligned to different parts of the new financial landscape:

1. Composable SaaS Cores – Led by players like Oradian and Mambu, these systems strip the core down to ledgers, accounts, and product factories, allowing banks to plug in best-of-breed services via APIs. It’s ideal for focused neobanks serving a single segment in mature tech ecosystems, where value is created outside the core, in credit decisioning, user experience, or payments. Whilst Mambu has a simple core, Oradian has built more capabilities with the insight that African digital banks have unique requirements around pricing that may not come out the box from a Mambu.

2. Self-Built Cores – Neobanks like Monzo, Nubank, and WeBank built their own infrastructure to solve for flexibility, reliability, and high transaction throughput, needs that legacy vendors couldn’t meet. This model suits digital banks serving high-volume markets like payments or mobile-first economies, but comes with high engineering complexity. Moreover, a number of these players started their journeys at a time where Neo-Core platforms hadn’t yet emerged at scale, they had no option but to build their own core banking systems.

3. Modernised Traditional Vendors – Giants like Temenos, Finacle, and Oracle Flexcube now offer cloud-native upgrades with rich product sets, API marketplaces, and multi-deployment options. But their platforms still carry legacy design assumptions, built for “standard banks” that may no longer exist. Their strength lies in scale, stability, longstanding enterprise relationships and the inertia baked into core banking transformations for large banks.

4. Next-Gen Cloud-Native Cores – Firms like Thought Machine and 10x offer cloud-native, microservice-based platforms that combine core ledgers with treasury, payments, and PaaS offerings. These are built for banks that want full-stack control and flexibility, especially those targeting platform integration and high scalability. However, many are still early in their deployment lifecycle.

In essence, core banking is fragmenting to match the industry’s new extremes. Infrastructure-heavy platforms need scalable, composable cores that integrate across ecosystems. Neobanks need lightweight, cloud-native stacks optimised for speed and iteration.

Implications

There are a number of implications that have emerged for the broader Core Banking industry;

1. The combination of higher market share by large banks and a fragmentation of the Core Banking industry with the entry of neo-core providers means that large banks have more bargaining power. Subsequently, large core banking incumbents can’t run roughshod over banks like they used to. There’s tighter pricing;