The Evolution of Core Banking System Architecture 👨‍💻

The banking sector is constantly evolving. Customers have higher expectations, the digital revolution is ongoing, regulations are increasingly strict, processes constantly need to be streamlined, and maintenance is costly. Banks are navigating this changing environment relying on banking technology that isn’t up to the task at hand. Financial institutions have to reinvent themselves for broad, continuous change, and quickly. Long-lasting success depends fundamentally on the following: a new culture, a global strategy, new operational models, new technologies, and the willingness to change for good. 

In spite of this, financial institutions are optimistic and many plan to execute transformation programs in 2021. Unfortunately, banks have been talking about transformation for over a decade and very little has changed. Resistant to real change, financial institutions remain stuck in the planning stages and don’t bring their transformative ideas to fruition for a variety of reasons: 

  • Legacy Core Banking Systems in need of key updates. A number of institutions rely on decades-old programs written in COBOL and Fortran. These systems lack flexibility and the complex legacy systems built up over years have become a major obstacle. 
  • A lack of qualified, competent personnel. COBOL and Fortran developers are increasingly scarce and expensive. 
  • Fear of failure. A number of transformation strategies suffer from delays and increasingly exorbitant costs. However, the perceived risk of failure is higher than the actual risk, which has caused a number of key decision-makers to abandon their transformation efforts.  

A New Solution to Drive Change 👨‍💻

A digital IT architecture promotes change. This is a layered architecture designed to evolve, featuring internal APIs to permit flexibility and external APIs to operate in an ecosystem. This new architecture adopts a domain-based approach by which it can create functionality (such as customer accounts) while decoupling data management. Ultimately, this architecture allows financial institutions to adopt new capabilities more quickly. 

This overlay of interconnected layers allows banks to harmonize business processes or any business capabilities they need from partners. The neo-bank Starling Bank is using this approach to enrich its product portfolio while harmonizing its application landscape.

These new, next-generation Core Banking Systems mitigate the risks associated with transformation by allowing legacy and cutting-edge applications to coexist. A tech team will no longer need to continuously modernize legacy applications. 

These Core Banking Systems allow banks to access client and commercial data stored in legacy databases. By uncovering legacy data, next-generation Core Banking Systems can access this data and create their own data stores. Data thus becomes more accessible and available. 

Next-Generation Core Banking Systems Drive Innovation 🚀

The players offering these new solutions, like TagPay, are leveraging new technological developments to drive innovation while supporting digital experiences, operations, and ecosystems. Monolithic system architectures are becoming the biggest obstacle to innovation, and the layering of new systems must allow for the elimination of outdated ones. There’s an opportunity here for financial institutions:

  • The banks that stand out are the ones that choose the “Purchase and Development” option. They outsource complex operations that don’t help them to differentiate to a tech partner equipped with internal APIs, these partners’ IT architecture offers the expected flexibility with dissociated layers that allow for better management of business capabilities, processes, data flow, and stored data. Equally equipped with external APIs, the connectors provided by the partner allow the financial institution to integrate partners, develop their own products, and build value-added experiences for their customers. 

Adopting a Lean Core Philosophy 💡

This consists of separating what is traditionally considered Core Banking into two decoupled but interconnected elements: digitized Core Banking and Lean Core. Lean Core focuses on the availability and consistency of data. Digitized Core Banking, on the other hand, offers business competencies, processes, and even operational flows. These two applications can coexist with traditional applications/features at the time of transformation or even operate in banking ecosystems. Next-generation Core Banking Systems have evolved towards Lean Core to become increasingly flexible and, most importantly, scalable. 

Towards an Ecosystem Strategy? 

One of the goals of these next-generation Core Banking Systems is to enable collaboration between banking applications that rely on different technologies. In banking ecosystems, applications and features can belong to different companies or partners. Transformational coexistence becomes necessary and often requires networks of ecosystems of applications. This ecosystem strategy allows connections between multiple Core Systems, software (SaaS), or other banking application ecosystems to assemble a hybrid solution that meets the needs of your end customers.

  • innovation

  • banking

  • corebanking

  • digitaltransformation

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