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Core Banking Systems: How to Choose the Right Software?

10/04/2024
(12 min)
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Banking software is highly complex, with its core functionality responsible for lots of sensitive data storage, financial transactions, and account update operations on a daily basis. At the heart of these mission-critical processes are the core banking systems. They are defined as back-end systems processing all banking transactions and managing user and administrator accounts within the banking database. In other words, the core system of any bank links its multiple aspects of operations into a single network with full regard to security and functionality. 

It is hard to overestimate the importance of having a safe, robust, and modern core banking system for any modern banking project, be it a digital extension of a brick-and-mortar bank or a fully digital banking platform. The global market for core banking software has reached $14.5 billion in 2023, and it’s expected to exceed $62 billion by 2032 as the demand for digital banking services continues to grow. 

A core banking system’s failure may cause large-scale operational disruptions, critical fund and data losses, and a permanent stain on the brand’s reputation. Therefore, it is critical to choose only proven core banking system solutions or develop your own from scratch during your project’s setup or modernization. 

Here is a definitive guide from RNDpoint experts on selecting core banking software to supercharge your banking project’s performance and safety. 

Understanding the Fundamentals of Core Banking 

So, what does core banking represent in practice? It looks like an all-in-one platform responsible for centralized management of all banking functions and transactions. The core banking platform functions as a repository where all customer data, account details, and transaction records are stored safely and systematically. 

customer front end layer

This system is reasonably called ‘banking core’ because no operations with loans, new and existing accounts, deposits, withdrawals, payments, and interest calculations can occur without it. Besides, the core banking system sets and monitors users’ compliance with a specific list of standards and minimal requirements, which allow using banking services and accessing particular individual offerings. 

As the pressure for modernization and digitalization increases, banks are facing the need to adopt more robust core architectures. Additional drivers of change are the rising compliance standards and maturing financial regulation in the banking sector. However, various banks are at different stages of this evolution, and the modern core systems banking comes in three forms today: 

  • Legacy software. These are comprehensive, rigid, and often isolated systems that function as monolithic software without integration or interoperability opportunities. This software takes much time to implement and is typically owned on a license-only basis. Therefore, banks are gradually abandoning this core banking option for the sake of more flexible solutions. 
  • Service-oriented platforms. The service-oriented architecture (SOA) of banking systems mostly comes in the form of a SaaS solution that can be used on a subscription or with a license purchase. They are more robust than legacy software, enabling real-time processing of multiple servicing operations. 
  • Cloud-native solutions. This bank operating software is hosted in the cloud, so it doesn’t require extensive server capacity and on-site hardware installation. It offers a microservices-based infrastructure and enables broad API connectivity with third-party services. Therefore, it is fast and flexible, with real-time transaction processing and impressive system scalability benefits. 

With so many modernization options available to banks today, every financial institution should plan a transition to more innovative and functional corebanking. It’s important to set realistic goals by taking into account the urgency of change, the state of the existing core system, and the place of this change in the broader service or product innovation strategy. 

genesis of core banking systems

How Does Core Banking Software Work? 

Let’s take a closer look at how this financial technology operates in day-to-day banking operations. 

First, you should note that it’s a complex piece of software with a dispersed, modular structure. Multiple function-specific modules are flexibly linked to the core, which allows every digital bank to customize the software to its specific needs. 

At the basic level of core functionality, your banking application software will have a transaction ledger with client data. This way, every client’s transaction first passes through the core to be validated and processed. 

Some banks operate as a closed mono-service, and their core systems are relatively simple. Yet, there are many innovative digital banks that provide a much broader ecosystem of services via API connectivity to third-party providers. In this case, the core banking system should also have a separate module responsible for integration and third-party transaction monitoring for every client. 

With the modern drive to better regulatory compliance, the core banking system should also incorporate modules responsible for KYC procedures and analytics. 

Why Is It Important to Modernize Core Banking? 

Despite the rapid digital evolution observed in the global financial sector, the majority of the world’s top banks still operate on the legacy systems created in the 1980s or the 1990s. These systems are too slow and rigid for the modern digital landscape, so many banks of all sizes and scales are considering core banking modernization today. Though the change is costly and technically complex, there are many reasons for embarking on the project right now. 

Technical Consolidation after Restructuring 

The banking world is full of mergers and acquisitions, as many large-scale banks tend to expand their functionality and reach out to new markets and user categories by acquiring smaller businesses of interest. Once a new service is acquired, the challenge of smooth system integration becomes pronounced. By transforming the core banking functionality, banks can make such integrations easier, faster, and much more frictionless. These changes are sure to turn into better customer experiences, greater business cohesion, and sustainable growth opportunities. 

Risk and Compliance Management 

The regulatory compliance standards have evolved dramatically within the past couple of decades, especially after the financial crisis of 2008. Today, banks face many requirements regarding transparency, transaction monitoring, and user data protection. Naturally, the old legacy systems are too rigid to incorporate the new, quickly changing regulatory frameworks. This task is attainable with new, flexible core banking providers that can help banks respond to new compliance challenges without downtime, reputational damage, or penalties. 

FinTech Competition 

FinTechs have entered the global financial market recently, and their competitive pressure on traditional banks is getting more pronounced year by year. They are technologically superior, agile, and flexible in many operational and service aspects. Therefore, banks that wish to preserve their competitive advantage need to modernize their core banking operations and reach the same level of agility and efficiency that FinTech products currently offer to users.

core banking systems

Factors to Consider When Choosing Core Banking Software 

There are several paths for core banking modernization. On the one hand, you can hire Java developers and create your own core banking system from scratch. This option is costly and slow, but it will be a totally custom-tailored solution for your banking product. 

On the other hand, you can go for the ready-made core banking software offered on a license-based or subscription-based ownership model. But how can you choose the best-performing product that will meet your needs and will be smooth in implementation? Here are a couple of factors to keep in mind. 

  • Essential functionality. The set of functions your provider should be exhaustive and diverse, covering all your operational needs.  
  • Ease of transition. Moving from one core system to another is a huge headache, so the vendor of new solutions should offer optimal solutions to make the process as seamless for you as possible. 
  • Maximizing ROI. Always weigh the cost of the new core banking system with the expected operational improvements it will bring. There’s no sense in buying a super costly system that will make only subtle changes in your bank’s performance. 
  • Customization. Ready-made software should be fully customizable to match your business needs and integrate into your daily operations. 
  • User-friendliness. The core banking system should be intuitive and usable; otherwise, your staff may find it hard to operate the new software. 
  • Reliability and stability. Banking operations are sensitive, and your chosen software should be able to guarantee uninterrupted, stable work under any conditions. It should effectively deal with high transaction volumes, multiple request processing, and other aspects without security or service interruptions. 
  • Data analytics. Data is the key asset of modern businesses, and your core banking system should have an advanced analytical system in place. This way, you will analyze your client data in real-time, making data-backed decisions.  
  • Scalability and integrations. Regardless of your bank’s current size, it should be ready for sustainable growth. This feature is attainable with a scalable, flexible architecture of the core system ready to adapt to changing market conditions. 
  • Vendor support. The software provider should be ready to engage in a long-term partnership with your business, providing training, technical support, and upgrades to keep the core system at the top of its performance. 

Criteria for Evaluating Core Banking Software 

Once you find several product options and get down to their comparison, we recommend focusing on the following criteria. 

  • Customer-centric design. Digital banks have to compete for users in the increasingly saturated market, and building a solution with the user’s needs in mind is a winning strategy. 
  • Technology sustainability. Your core banking software should be built with innovative technologies so that it doesn’t become obsolete in a couple of years. 
  • Cloud-native solutions. Cloud-based core banking systems are cheaper, more efficient, and safer, thus giving unrivaled benefits to business owners. 
  • Compliance. The software should incorporate all compliance requirements to enable legal operations. 
  • Scalability. You should choose software products that are ready to scale up together with your business growth and expansion. 
  • Modular architecture. Microservices are much more flexible and responsive, giving you a competitive advantage in the banking industry. 
  • Cost. It’s vital to balance quality and cost, as the transition may be too expensive for your business. 

It is also vital to take a closer look at the following system features. Without them, your banking service won’t meet the needs of modern, tech-savvy, demanding end users. The key functionality distinguishing a superior digital bank is as follows. 

  • Open banking architecture
  • AI integration 
  • Rigorous user authentication 
  • RegTech and compliance
  • Mobile and contactless payment systems 
  • FX and international money transfers
  • API integrations
  • Card payments
  • Penetration testing
  • Digital and cryptocurrency integration
  • Product development roadmap 
  • Innovative tech stack 

Real-World Examples of Successful Implementations 

Here are a couple of cases that may illustrate the way effective core banking system modernization works. 

  • The State Bank of India initiated the shift to the TCS BaNCS core banking system in 2002. This innovative software was provided by Tata Consultancy Services Ltd. The project took 6 years and was successfully completed in 2008. 
  • The National Australia Bank Ltd. initiated the core banking system transition in 2008. Though the process is not yet completed, the bank has already reported numerous business benefits reaped at various stages of project implementation. It currently provides the personal banking origination platform (PBOP), which has reduced the median time of loan disbursal by over 50%. 

Tips to Choose the Right Core Banking Software 

Still finding it hard to choose the best core banking software? Look through these tips to make the final selection. 

  • Focus on your business needs. You should begin the process of software selection only after making a list of your needs. Choose only the software that checks all boxes; otherwise, it won’t aid your business. 
  • Prioritize requirements. Make sure the selected software meets your banking domain requirements and addresses all technical needs at the unit level. 
  • Determine the vendor selection model. You may either opt for the prime vendor – an all-in-one solution that will cover all needs of your core banking system or follow the “best of breed” scheme. The latter means that you work with several providers by picking specific services from each of them and compiling the core on your side. 
  • Make a list of evaluation criteria. Follow your plan and never agree to less than you have included in the list of requirements. 
  • Negotiate contractual terms and details. It’s important to read the contract inside out (fine print included). Vendors often drop some points or include self-protective clauses that will result in your extra expenses. 

Future Trends in Core Banking Software 

Digital banking is moving fast forward, with new projects readily incorporating innovation and state-of-the-art technology. Thus, we may expect the following trends to become the reality of core banking software in the near future. 

  • Open banking. The innovative open banking models of financial service provision ensure data sharing and simplify expense tracking, credit scoring, and account consolidation in one place. The all-in-one banking space creates a seamless user experience and enables informed decision-making. 
  • Generative AI. The recent advancements in GPT technology and other generative AI tools have made it possible for banks to analyze big data and generate uniquely tailored analytical insights, recommendations, and personalized responses with its help. Core banking systems are sure to benefit from AI-enabled predictive modeling, anomaly detection, and hyper-personalized user experiences. 
  • Advanced cybersecurity. Digital banks face the increasing pressure of protecting user data and funds from hackers. Thus, the future of banking is in robust encryption, security audits, and fraud prevention measures. 
  • Cloud-based solutions. Using cloud-based core banking systems is the next-gen solution for the scalability, flexibility, and cost-effectiveness of a banking service. More market players resort to this option for the sake of saving costs and enjoying robust security that cloud providers keep under tight control. 

Blockchain. Due to the benefits of immutability and transparency, blockchain is enjoying steadily rising popularity in the banking sector. Blockchain-powered banking projects come with minimal risk of fraud and offer low commissions without central banking authority oversight.

Conclusion 

Whether you rely on IT outsourcing for banks to create your customized core banking system or opt for a pre-configured solution, the time to innovate is now. Monolithic, rigid solutions don’t work in the new world of innovation, and only forward-looking banking businesses investing in flexible, modular architectures can survive the fast pace of change in the global financial industry. Contact RNDpoint to get comprehensive consulting on the core banking system’s modernization and order the next-gen core that will let your product stand apart from the competition.

How are core banking systems different from traditional banking systems?
What are the key features of a core banking system?
Why is choosing the right core banking software important?
What factors should I consider when selecting a core banking system?
Why choose RNDpoint to build a core banking platform?

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Andrew Klesov
Andrew Klesov
CEO
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