Core Banking System: what is it?🔎

The financial sector is undergoing a technological transformation that offers great potential for improvement. So, it's no surprise that core banking is now central to financial institutions' digital transformation. A quick look at the core banking system is needed to understand this phenomenon!

What is a Core Banking System? 🔎

Core Banking System: Definition

Core Banking refers to the computer system (software) used to process and manage the operations of a bank or financial institution. It consists of several modules: account management, payments, loans, accounting, onboarding (KYC/KYB) and anti-money laundering (AML-CFT). Core Banking is the technological heart of financial institutions. It plays a crucial role in managing operations efficiently while ensuring a reliable and secure environment.

Today, there are several types of core banking. One of them is the core banking system. The term "system" refers to the legacy. In other words, a core banking system is a core banking technology solution inherited from the 1980s and 1990s.

Core Banking System: Architecture

Traditional core banking systems are mainly built on a monolithic architecture, i.e., they consist of a single, autonomous, and independent technological block based on a single code base. The evolution of this type of software is, therefore, particularly complex, costly, and time-consuming: the entire technology must be updated.

In addition, most components of monolithic architectures are developed in COBOL. This computer language, created in 1959, is still widely used in critical infrastructures such as banks and financial institutions, although fewer and fewer developers master it.

Core Banking System: Infrastructure

Most traditional core banking systems have an on-site or "on-premises" infrastructure hosted on a mainframe. This infrastructure requires the solution installed on the bank's servers, responsible for maintenance, updates, backup, security, and system refresh. As a result, it generates high maintenance costs and is difficult to upgrade.

In short, although the Core Banking System can satisfactorily handle the historical activities of financial institutions, it is now proving inadequate, as it cannot claim the scalability that today's environment demands. With legacy systems, meeting new customer expectations (fluidity, personalization, innovation, etc.) and regulatory requirements (monitoring and production of real-time information, among others) is impossible. It's also challenging to keep up with the competition and catch up with the fintechs introducing new practices, standards, and business models.

Core banking system: an outdated model? 🥀

Core Banking System: the limitations of legacy

Due to its architecture and infrastructure, the core banking system hinders the scalability of services offered by financial institutions. While stable (for the most part), monolithic technologies remain inflexible and slow to change. As a result, financial institutions face significant challenges in complying with new regulations, developing new products/services, and enriching the customer experience. Product offerings developed on core banking systems are mature and generic but challenging to adapt to new use cases.

Core banking systems also lack performance in terms of data storage and utilization. In addition, legacy systems contain strong business logic and store data in silos. These characteristics make creating relationships between customers and products demanding and lead to data duplication within the system.

In short, while the core banking system may have satisfactorily handled the historical activities of financial institutions, it is now proving inadequate because it cannot claim the scalability that today's environment demands. With legacy systems, meeting new customer expectations (fluidity, personalization, innovation, etc.) and regulatory requirements (monitoring and production of real-time information, among others) is impossible. It's also challenging to keep up with the competition and the fintechs introducing new practices, standards, and business models.

Many financial institutions are aware of the need to modernize their systems. However, several factors have prevented them from taking the plunge. Costs, delays, service disruptions, technical migration issues... As a result, banks and financial institutions have often preferred to stick with their legacy platforms to manage their day-to-day operations. But today, technological innovation is reshuffling the deck.

Core Banking Platform: New possibilities 🚀

Things have changed since the 80s and 90s! A new type of core banking has emerged in the financial ecosystem: the core banking platform.

Today, financial institutions are experiencing a pivotal moment as they realize the limitations of legacy core banking. They can now turn to a new generation of solutions. This is the ideal way to eliminate technical debt, gain flexibility, unleash the full potential of data, rapidly launch new products, and foster innovation to meet customer needs better.

Modular Core Banking and Microservices

Core banking platforms are modular in design, meaning that transaction management functions are independent of banking services such as new account creation, loan management, deposit and withdrawal management, and other administrative activities.

In contrast to monolithic architectures, today's core banking platforms favor architectures made up of microservices: independent, autonomous pieces of code. This approach provides greater configurability, scalability, and robustness, enabling financial institutions to orchestrate different services to introduce new products.

Moreover, the modular architecture of core banking platforms makes localized changes faster, easier to test, and easier to deploy. It also enhances configurability and scalability by enabling financial institutions to provide additional services through APIs.

APIs: Definition and Challenges for Core Banking

An API (or Application Programming Interface) is a significant innovation for the financial industry. These programming interfaces act as intermediaries between different applications within core banking. They act as gateways that allow different modules to connect and work together. In other words, APIs allow technological building blocks to be coordinated like Legos. They offer infinite possibilities for building a customized ecosystem that can adapt to market developments.

To differentiate themselves and build customer loyalty in a highly competitive sector, financial institutions must focus on creating banking services that respond precisely to new expectations. Extended functional coverage, fluid experience, innovative and differentiating financial services... Thanks to their orchestration and API layers, core banking platforms can now connect to the software and functionality institutions need to meet these challenges.

The role of APIs is to facilitate the coordination and integration of components while connecting them to the bank accounts of the core banking platform.

Core Banking: The Benefits of the Orchestrator Approach

The term orchestrator describes an actor that designs or aggregates products or services to offer a complete, differentiating solution. For example, giants like Apple and Meta have built their success by orchestrating their ecosystems. Orchestrators rely on multiple contributors and create a cohesive environment by establishing rules and standards that must be followed.

The Core Banking Platform's orchestrator approach also allows new, modern digital capabilities to be developed without the constraints of the core banking system. This new approach accelerates the transition and reduces risk. The Core Banking Platform's real-time data hub and routing layer are based on an event-driven architecture (EDA). This enables intelligent routing of data transactions and choreographed management of APIs while preserving data from core banking systems and ensuring its integrity. This provides the development of modern digital experiences and innovative applications in all areas: retail banking, payment cards, loans, and credit...

Read also: Core Banking Systems vs. Core Banking Platforms: Why Move to a New Generation Solution?

Cloud-oriented core banking

Maintaining a data center can be costly and complex for financial institutions, not least because they must comply with very strict standards (PCI-DSS, among others). To remedy this situation, adopting the cloud is now commonplace! Financial institutions can free themselves from this burden by relying on a cloud provider.

Cloud-native solutions are the way to take advantage of a scalable environment. Unlike on-premises solutions that run on mainframes, these solutions are built from the ground up to run in the cloud. They offer several benefits:

- It takes a longer time to market new products and services.

- Better data management and security with automated backups.

- A controlled budget based on global offerings that include data hosting, maintenance, updates, etc.

- A scalable and extensible model that can adapt as your business grows.

Beyond the native cloud approach, a cloud-agnostic core banking platform ensures data sovereignty and reduces risk. Because it can be hosted on any cloud infrastructure, this type of core banking is entirely vendor-agnostic. Cloud-agnostic platforms can, therefore, be moved from one cloud environment to another as needed.

The benefits of SaaS

In parallel, SaaS (or Software as a Service) is a model that allows an institution to rely on a qualified service provider for access to services. This approach offers several advantages over in-house solutions, including

- Lower upfront costs by eliminating the need to invest in heavy infrastructure and maintain expensive servers.

- Reduced hardware constraints: The SaaS mode offers greater flexibility and easier maintenance by relying on an editor to manage updates and installations. As a result, companies can focus on value-added tasks for their customers, such as designing new products. 

- Accessibility and Availability: SaaS platforms require only an Internet connection to be accessed from anywhere! On the other hand, publishers must guarantee the availability of their services.

Core banking system: How can we replace it?

Many financial institutions focus on developing front ends such as websites, mobile applications, and multi-channel solutions when planning their technology investments. While this has enabled them to extend the life of their core banking system, it is not a long-term solution.

Modernizing core banking systems, including the integration of a core banking platform, must be rethought. This rethink is more obvious as the cost of running and maintaining core banking systems is becoming increasingly high, in some cases as high as the cost of implementing a new generation core banking platform. The next logical step is to migrate to a core banking platform that offers speed, agility, and scalability.

However, any migration is a significant project that will be long and costly. To meet this challenge, financial institutions must take both a strategic and a technical approach, decommissioning their existing core banking system while testing multiple core banking platforms on parts of their product portfolio. This process can be tricky, and the return on investment is often difficult to measure, but it is undoubtedly the best option.

Read also: 7 Tips for Choosing Your New Core Banking System

Skaleet supports this complex but strategic transition by allowing you to experiment with its core banking platform as part of a project or product launch using a test-and-learn approach. This way, you can test this platform solution while acquiring new customers and gradually migrating.

Skaleet: the most configurable SaaS core banking platform

Built for speed and control, our platform enables you to unleash your full innovation potential through a modular, API-first approach. It offers unrivaled configurability, allowing you to quickly launch new products and services and capitalize on market opportunities. 

Experience seamless reliability and security with Skaleet's SaaS core banking platform that ensures business continuity with 99.99% uptime and expert compliance management.

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