What Does Core Banking Technology Mean Today?
Before the 1970s, and this is actually very hard to imagine today, it took at least a day for a transaction to register in a bank account, because each bank branch had its own servers. The data from each branch wasn’t synched until the end of the day, after all transactions had been completed. As mainframes and telecommunication capabilities became more available, banks were among the early adopters of these technologies, revolutionizing that paradigm.
These changes created what we now refer to as core banking. Core (centralized online real-time exchange) banking is a banking service that enables a group of networked bank branches to share data between bank branches quickly. This allows customers to access their bank accounts and perform basic transactions from any member branch office.
Core banking is frequently associated with retail or consumer banking. That means that it provides banking services to the general public, not to companies, corporations, or other banks. Retail banking typically refers to providing savings and transactional (checking) accounts, mortgages, personal loans, debit cards, and credit cards. The software and network technology available today allows banks and credit unions to centralize record keeping and provide access to the same account information regardless of location via physical bank branches, ATMs, banking websites, mobile banking apps, and even Alexa and Siri.
Source: Modernizing Legacy Systems at Financial Institutions, protiviti
Has Core Banking Technology Kept Up?
In approximately 80% of cases, financial institutions run core banking systems they built themselves. These banking institutions use software designed in the pre-internet era for physical branch banking (yes, going into the bank and conducting banking transactions through the human teller). Naturally they’ve made many adjustments over time based on the available technology and growing needs and demands from their customer base. This approach has worked to some extent, but there are several underlying issues.
Complexity and Risk
A typical universal bank is one that participates in many kinds of banking activities; it operates as both a commercial bank and an investment bank while also providing other financial services, such as insurance. Universal banks often have more than 180 applications, which are frequently undocumented. This multitude of apps restricts flexibility when banks try to move their applications to a more portable deployment model, but they also create many points of failure that are hard to track down and resolve. When something goes wrong, it’s difficult to discover which application it originated in—and even harder to find useful documentation outlining how to resolve the issue.
Scalability and Flexibility
As banking has become digitized there’s been exponential growth in the volume of transactions and inquiries. Banking systems can't keep up. They simply weren’t built to handle the pressures created by the modern, digital front-end that their customers required and they deployed. Even banking via an app on a smartphone wasn’t possible just two decades ago. And as the Internet of Things continues to grow and evolve, we expect it will expand to how we—and our wearables, biometric environments, cars, and homes—interact with banks. We already need core banking to be scalable and flexible in a way never dreamed of fifty years ago, and that need is only increasing.
Customer Experience… and Expectations
Customers today expect an entirely different experience, not restricted to the hours and locations offered by a human bank teller in a branch office. Customers want their financial institutions to help them to make better financial decisions and provide visibility into loan decision processes. To deliver on these customer expectations, banks need real-time, integrated systems. The legacy systems that banks have been relying on have a complex and inflexible IT architecture. Worse still, this architecture is expensive to run and maintain, and this problem is compounded when mergers and acquisitions result in multiple legacy systems that don’t play well together. To deliver a customer experience that meets today’s expectations, core banking needs restructuring.
High Operational and Opportunity Costs
The programs and programming languages that power legacy core banking infrastructure are primarily COBOL, a language you may remember last hearing about during Y2K hype. Today, 95% of ATM transactions pass through COBOL programs, 80% of in-person transactions rely on COBOL programs, and over 40% of banks still use COBOL as the foundation of their systems. In fact, many companies have used COBOL reliably for high-volume transaction processing for many decades, but these legacy applications weren’t designed to support modern business requirements. Just maintaining these applications requires skill from a shrinking pool of COBOL programmers.
While these platforms usually perform the functions they were created to support, each layer comes with technical debt, and the monolithic design of the systems and processes aren’t suited to today’s fast paced digital world. This makes it challenging for organizations dependent on legacy core banking architecture to respond to market opportunities or adopt emerging technologies quickly. Another complicating factor is that these platforms and their integrations may create security risks and challenges when it comes to compliance reporting in a time when banking regulations are becoming more prescriptive around the world.
Delivering on Digital Innovation with Core Banking
While banks were quick to adopt technology 50 years ago, costs, regulations, and complexity have slowed that adoption. Modernizing the external facets of core banking functionality has been easier to address, but it also still relies on the same aging architecture. Not so long ago you couldn’t check your account balance at 2 AM on your phone or computer, withdraw money from an automated teller machine (ATM) around the corner or in your grocery store, or pay your friend back for drinks instantaneously using an app such as Venmo as we do today. Core banking functionality needs more than a facelift—the time for updating outdated back end core and support systems is now.
Temenos provides core banking solutions to the banking industry to help them migrate to the cloud, without struggling to update and convert their legacy applications. Cloud-native, cloud-agnostic technology will help banks innovate and create new products at speeds they can’t imagine with the legacy architecture they’re using today. Temenos and NuoDB have been at the forefront of cloud innovation, building new ways to respond to the variable demands of scale in the cloud. Together they make it significantly easier for banks to migrate their critical applications to the cloud, satisfying evolving customer needs while benefiting from significant operational cost savings.