EVANSVILLE – Evansville-based Old National Bank is suing financial technology firm Backbase over what Indiana’s largest local bank describes as Backbase’s “absolute failure” to fulfill $18 million in software contracts for a Chicago bank that Old National has acquired.
The situation dates back to late 2019, when Chicago-based First Midwest Bank began talking to Backbase about replacing First Midwest’s decades-old systems with enterprise resource planning, or ERP, software. The facility, which was due to have been completed in July 2021, was left unfinished when Old National and First Midwest merged early last year.
Now that Old National has inherited the problem, and after First Midwest paid $7.5 million to Backbase and “millions more” to other vendors related to the project, the lawsuit alleges, Old National says it wants to get out of the contract and recoup the money. paid to Backbase.
Old National filed its lawsuit in November against Backbase Services USA Inc. and Backbase USA Inc. in the US District Court for the Southern District of New York.
Before the merger, Old National had $23.7 billion in assets, with a network of branches in Indiana (including branches in Columbus), Illinois, Kentucky, Michigan, Minnesota, and Wisconsin. First Midwest had $21 billion in assets, with an operating footprint covering the Chicago metropolitan area, northwestern Indiana, and parts of Wisconsin, Illinois, and Iowa.
The all-stock merger, a $6.5 billion deal, closed in February 2022. The combined bank now operates as Old National and currently has $46 billion in assets, making it the sixth-largest bank Midwest in terms of assets.
The defendants are Backbase Services USA Inc. and Backbase USA Inc., both listed with the same Atlanta address. Backbase USA Inc. is a subsidiary of Backbase BV, based in the Netherlands.
Backbase specializes in serving banks and credit unions. Its website describes the Backbase software platform, which it calls the Participation Banking Platform, as a “unified participation layer” that can connect with a bank’s other systems.
“Backbase helps retail banks redesign their banking services around their customers with a powerful platform that covers the entire customer lifecycle, from acquisition to retention,” the website says.
“By working with us, you will empower your employees and customers with completely seamless and truly exceptional user journeys,” Backbase says on its website.
Old National’s complaint, however, paints quite a different picture.
The complaint says that Backbase’s software did not have the promised out-of-the-box functionality, and that Backbase’s initial attempt to implement the software was an “absolute failure” failing to meet at least 161 of First Midwest’s requirements. Even after First Midwest slashed its requirements for the project, Backbase was unable to deliver, the lawsuit alleges.
The allegations made in a lawsuit are one side of the case and can be challenged in a later court action. Backbase declined to comment on Old National’s allegations, instead sending an emailed statement to IBJ that did not address the plaintiff’s claims.
“Simply put, Backbase succeeds when our customers succeed,” the statement said. “We are and have always been committed to helping our customers better serve their customers. However, we will not comment on ongoing legal matters.”
Old National also alleges that the software failed to comply with federal banking regulatory requirements. As an example, the lawsuit alleges, the software could not correctly display interest rate and annual percentage yield information to customers who were using the software’s digital sales tool to open a certificate of deposit.
In its complaint, Old National makes accusations that contain colorful details. Describes a December 10, 2019 meeting in which Backbase officials demonstrated their software to First Midwest officials. The complaint claims that a Backbase vice president stated that “’all you’re going to see is real software on real servers bringing it out into the real world. Everything is real. There are no models here.’”
The complaint says “this was not true. The demo was a high-tech parlor trick with Backbase largely demonstrating “vaporware,” which is a computer industry term for software or hardware that is advertised but not yet brought to market.
The lawsuit also alleges that Backbase was unfamiliar with banking industry basics, such as health savings accounts, or HSAs.
“In order to get Backbase to provide a software solution that would enable First Midwest to offer HSAs to its customers,” the lawsuit states, “First Midwest was forced to write a five-page synopsis of how HSAs for Backbase worked to educate Backbase. about the basics of the account.
“Even with First Midwest’s continued efforts to educate Backbase so that it could offer a viable software solution, Backbase was still unable to offer anything like it,” the lawsuit states.
Backbase also missed several project deadlines, the complaint says.
Representatives from First Midwest and Backbase met eight times in October and November 2020 to discuss project requirements, the lawsuit says. On January 1, 2021, First Midwest officially contracted with Backbase for the project. Backbase said it would have the new software system capable of “substantially performing” as required within six months, the lawsuit says.
But Backbase missed that deadline, the lawsuit says, along with five more from September 2021 to April 2022.
Along the way, Old National alleges, Backbase claimed the project was on track, “thus hiding the true status of the project from First Midwest, and intentionally depriving it of the opportunity to decide whether it wanted to dedicate more resources to the project, pause the project, or finish the project.”
First Midwest sent Backbase a notice of breach of warranty in late September 2021, the lawsuit says, but Backbase refused to honor its warranty obligations. The bank decided to continue working with Backbase in the hope of obtaining “a minimally viable product,” the lawsuit says.
‘On board’, at the beginning
In June 2021, Old National and First Midwest announced their planned merger. Old National “was clearly okay with continuing the relationship with Backbase,” the bank says in its complaint, because it was excited about the prospect of being able to use Backbase’s new software after the merger closed.
In response to a query from the IBJ, Old National said via email that he had been “genuinely excited about the opportunity to partner with Backbase…. The excitement continued through the merger and we were all looking forward to working with Backbase as a combined organization. Unfortunately, time and time again, Backbase failed to meet expectations or meet its obligations.”
The lawsuit alleges that, after a meeting between Old National and Backbase in May 2022, Backbase said it would need another $3 million and 14 months to complete the software project. After this meeting, Old National said in its complaint, the bank decided that “the only real solution was to break up due to Backbase’s repeated failures, misrepresentations and infringements.”
So instead of switching what was now Old National’s First Midwest division to a Backbase system, Old National switched First Midwest to its own system, Old National told IBJ.
According to the Old National complaint, First Midwest had begun the search for a new software system by hiring a consultant. The consulting firm helped First Midwest define its software requirements and then sent out a request for information to about 20 software vendors. First Midwest narrowed that list down to four potential providers, including Backbase, and then chose Backbase after its December 2019 software demo.
These steps are standard protocol for a company looking to replace its software systems, said Bill Baumann, who runs the expert witness practice at Denver-based Panorama Consulting Solutions.
But assuming Old National’s claim is correct, Baumann said, the promise to complete a software implementation in six months should have been a “red flag” for First Midwest.
A more realistic time frame for a project like this, he said, would have been 18 to 24 months. “Six months would be incredibly aggressive,” she said.
Panorama has provided expert witness services in hundreds of cases involving failed implementations of software systems, but the firm is not involved in the Old National/Backbase dispute.
An initial pretrial conference in the case is scheduled for February 13.