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The Next Generation of Core Banking Systems


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What lies ahead in Core Banking Transformations?

Will conservative and prudent banks simply keep their current solutions or at the most replace them with a similar monolithic system? Is it possible that some of them are going to start embracing recent innovations in software development – decoupling, CI/CD and automation?

We try to predict what is likely to happen in the complex and slow-moving world of CBSs.

The status of Core Banking System renewal projects in 2021

For some time, banks have been considering the renewal of their core banking architecture. The reasons include the perceived burning platform due to digitalization and fintech challenges. But they also fear falling behind competitor banks in their modernization efforts.

The vendors of the incumbent core banking systems are also actively working on modernizing their CBS product portfolio. Many of them have already successfully decoupled the payment hub functionality of their solution, while some have started separating their treasury, trade finance, liquidity management, or even customer master data management functionalities.

They are also reacting to a recognized competition from next generation core banking vendors (like 10X, Mambu or Thought Machine) and trying to monetize smaller exciting capabilities in an otherwise saturated market.

Andras Breuer

András Breuer

Head of Banking Transformation

András has gained 15+ years of experience in the Financial Sector as a Core Banking Systems implementation expert and project manager.

He is currently leading the Core Banking Transformation Services at MINDSPIRE, while supporting our key implementation projects as lead expert and QA.

He also spent 4 years as a line manager at K&H Bank having been responsible for e-channels, front-end, cards, treasury and investment system analysts.

His main strengths are Core Banking platforms, business and IT architecture design and vendor side communication.

Architectural challenges of a Core Banking System renewal

Universal banks offer a large number of services to their clients, and a typical banking architecture is an intricate IT system with hundreds of applications and thousands of integrations interlinked. Banks can’t simply reduce the complexity of their CBS by cutting services without losing their clients.

Most of the core banking functions of universal banks are currently served by monolithic systems, and renewing these will be difficult, costly projects lasting for several years.

The majority of banks have already started on this journey by splitting off functions one by one from their core banking systems. Some have successfully separated certain functions from the rest of the monolithic core banking application, such as customer master data management, statement- advice- slip-templating, storage and retrieval, payment initiation, payment execution, collateral master data management, cash pool and liquidity management, trade finance or treasury.

These separations have come with their pains, however. For example, creating a separate customer master data management application increases complexity in handling statements, supporting customer onboarding processes, propagating customer master data to all the relevant applications. The sheer complexity of managing the lifecycle of the customer master data publication interface with all its subscribers can be overwhelming.

Why would any bank want to go down this painful path? I think the answer is simple: they want to be flexible and able to change quickly.

Reducing the complexity of CBS with decoupling

In order to simplify a CBS, one have to be able to clearly identify elements of the architecture that can be made independent from the rest. This separation process is called decoupling. The identification of what needs to “stick together” and change simultaneously requires the tight cooperation of business and IT and is far from being a trivial exercise.

Our suggested approach to this is to introduce abstract modeling into the planning and work preparation phase, that can help handling the complexities mentioned above. TOGAF, an enterprise architecture methodology and framework, or more recently Archimate, an enterprise architecture modeling language contain several good practices.

The most important elements of this approach are:

  • an application inventory,
  • an integration inventory (most banks already have these two),
  • aiming for a common data dictionary/data model, and
  • preparing an enterprise architecture governance, including the lifecycle management of its elements.

For banking, BIAN seems to be a good starting point for a complete business capability landscape, that can be used to identify the required IT capabilities served by the actual applications in the bank’s architecture.

BIAN in recent years also introduced a service model (called semantic APIs) and a data model, and integrated ACTUS’ open standards.

What can banks learn from recent software development good practices?

For the last 5-6 years a revolution has been going on in software development, marked by the emergence of devops, CI-CD, containerization, REST integration patterns and microservice architectures among others. Since core banking systems are software applications, this surge of innovation also affected the existing transformation plans and possibilities of universal banks.

These are complex technical concepts but closely related to decoupling. Let’s take a high-level look at some of them.

For decoupling, segments of the system need to be identified, where the changes within the unit will be more frequent than in the connections required for the separated component. If the decoupling of functional units is done properly, separate applications can be created for each.

Later on, within these decoupled applications separate modules can be identified following the same logic.

Advancing further, smaller pieces of the previously monolithic application, the so-called microservices will emerge in the modules.

Successful IT companies have collected significant experience with continuous integration, continuous delivery and continuous deployment in the last couple of years. For example, Atlassian and Red Hat have short summaries on CI and CD.

Continuous integration, continuous delivery, continuous deployment

I think that to speed up the development cycle, the process has to be standardized, with specific and interconnected tools supporting the automation where possible. This can be called the “digitalization” of development.

Looking at a periodic table of devops support tools, the immense complexity of the topic is clearly visible.

Periodic table of devops support tools

Source: https://digital.ai/periodic-table-of-devops-tools

Having most of these tools in place will help to speed up development cycles, reduce mean time to resolution of production issues, catching bugs earlier in the development cycle, and reduce manual testing costs due to automation.

With only a smaller subset in place, using more tools for the same purpose, or not integrating the toolset and processes makes it difficult to achieve clear business benefits.

What do we currently see on the Core Banking System market?

The institutions currently implementing next generation core banking systems are typically digital-only neobanks or financial institutions with very clear focus points.

Most concentrate on enabling cross-border payments or multi-currency account management. The systems serving them do not need to support complex financial products that are typical in a big universal commercial bank (e.g., cash-pooling, liquidity management, treasury, trade finance or corporate lending).

These products are inherently more complex and require sophisticated solutions. Moreover, the challenger vendors tend to focus on the simpler, most profitable problems first – which is completely understandable.

In each of the universal banks’ core banking replacement projects in the region that we have recently witnessed, monolithic systems have been replaced by monolithic systems.

In fact, even some of the neobanks opt for monolithic core banking systems – they apparently do not see the need to be on the bleeding edge at their back-end. We believe these are valid choices – these are also high-risk, high-cost, time consuming endeavors, but not as risky as chopping up the core system in a big bang.

Our expectations and approach regarding the next generation of CBSs

How far are we from the next generation of core banking systems? Since the most valuable asset of banks is their credibility, they are conservative organizations. Due to this, it is unlikely that incumbent banks will replace their monolithic core banking systems with some completely new technology in the next couple of years.

They will likely wait until some smaller or greenfield banks have success in implementing something innovative. On the other hand, the vendors of the incumbent core banking systems are also actively working on modernizing their product portfolios.

This means that in your next core banking upgrade project, you are likely to see a smaller footprint of monolithic core banking system with a couple of functions being outsourced to separate applications. These will possibly be offered by the same vendor “pre-integrated”, some of which may even be containerized and developed in a “cloud-ready” microservices manner.

We suggest a multi-step transformation, that may be more expensive and slower than a big bang, but we believe this approach better fits the risk-appetite of banks.

In our approach, this journey starts with introducing modeling and some new software development practices on the channels and reaching the core only at a later stage.

How can MINDSPIRE support a Core Banking System renewal process?

The complexity of the issue is overwhelming and it is easy to lose focus during the process.

MINDSPIRE have participated in several Core Banking System renewal projects and created guidelines to ensure success. Our team of experts has solid experience with CI/CD projects in financial institutions. This enables us to combine these two areas and utilize recent software development good practices in CBS renewal planning efforts.

Our approach starts with a roadmap to transform software delivery practices, while keeping in line with the rigid administrative structures required from banks.

If you would like to know more about how MINDSPIRE can assist you with planning and executing a Core Banking System renewal project, contact us and our experts will call you back!

In the next post, you can read more about the aspects that proved to be key issues during the selection of a financial institution’s account management system.

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