I’m just saying… What is core banking?
Having spent 30 years in banking technology wondering what core banking is seems like a strange question, doesn’t it? According to Acronym Finder, core stands for “real-time online centralized exchange”.
When my wife asked me this question, I said that core banking is the software that manages accounts whether it is your current account, deposit or loans. Every time money is withdrawn, core banking debits your account and when money is deposited, a credit is applied. Depending on the account, Basic Banking will apply certain fees and interest based on the terms you agreed to when opening the account. This satisfied my wife, but not me.
When I worked at tier 1 banks in the UK in the 1990s, we had already separated client and product records into separate platforms. The notion of client was very simple in core banking where the product was managed. However, by separating the customer from the heart, banks were able to simplify customer management in one place and begin to introduce basic relationship management functionality. The main problem this solved was that they didn’t have to duplicate customer records with each product. From a bank’s perspective, core banking was basically product management, a simple definition of core that fit my own thinking.
It wasn’t until I worked for a core banking software company that I saw a “vendor view” of core banking services, a view that combined both product management and customers in one platform. For smaller banks, of course, they needed both customer management and product management. The problem for many is that not all of their products are on one platform, often mortgages, credit cards and loans are in separate core banking solutions. This meant that they ended up with managing customers in different places, making the simple request for a change of customer name (eg after marriage) or address much more complex as the bank had to identify all customer holdings. and update various systems.
Under my role as Chief Digital Officer, the most significant change I introduced was to separate “product management” from “customer management”. Creation of a digital banking platform that manages customer data and interfaces and has a separate standalone banking product platform. One was managing the customer lifecycle: onboarding, service/sales, release. The other managed the product lifecycle: origination, service, closure.
Simple, right? Well not entirely because there are many other things banks need and sometimes these peripheral needs are bundled together to be part of core banking services as additional “modules” when often they should be considered as distinct and autonomous functions, for example, anti-money laundering and credit risk management. Both are necessary, but should they be part of core banking?
I’ve seen Request for Information (RFI) documents from banks that have thousands of features/capabilities, and some with only a few hundred. The Banking Industry Architecture Network (BIAN) defines the entire banking industry into 321 service areas (currently supported by 243 APIs).
Why is this important is a question you can ask now. Most banks have/are/will consider upgrading to newer technology for their core banking services. With all players in the market, both incumbents and new nascent technology vendors, this is truly a warning case.
Big banks will want a lot more scalability/security/performance and flexibility. Their kernel definition tends to be very narrow in functionality and headless in access. This is suitable for new players catching up with feature holders. However, there are far fewer “big banks” with such needs, although transaction sizes will also be larger.
While smaller banks want and need the breadth of functionality with simplicity for product configuration. This suits the incumbents, as over the years of development and acquisitions, they have accumulated the breadth that these banks need. Here there are many other banks without the rush of modern technology that often also require coding to configure the products. Most incumbents allow banking products to be configured through a user interface (UI), making them accessible to the business without relying on scarce IT resources.
Many neobanks have also chosen incumbent solutions over newer technology platforms to get all of their banking needs from a single vendor. This is a short-term gain to get to market faster, but it compromises the flexibility, efficiency and availability of increased skills that new technology-based solutions offer.
I guess I’m just saying that the definition of what core banking really is depends on the eye of the buyer. The banking software market is not a “winner takes all” opportunity as the needs and demands of banks vary depending on their size and available resources.
For small banks and neo-banks, it is essential to move to an architecture that separates the product and the customer, especially as customer relationship management moves from batch to real time (more on this soon) .
About the Author
Dharmesh Mistry has been in banking for 30 years and has been at the forefront of banking technology and innovation. From the very first internet and mobile banking applications to artificial intelligence (AI) and virtual reality (VR).
He’s been on both sides of the fence and he’s not afraid to share his opinions.
He is CEO of AskHomeywho focuses on experience for households, and an investor and mentor in proptech and fintech.
Read all of his “I’m just saying” thoughts here.