What Is Core Banking Architecture?
Core banking systems facilitate vital banking operations, including deposit and loan products, accounts management, payments and transfers, digital banking services, and other essential activities. It also consists of a key banking platform and supporting technologies that enable banks to provide customers with improved digital banking experiences. Simply put, your financial institution will be more appealing to the 85% of people (and growing) who prefer online banking.
Understanding Legacy Core Banking Systems and Its History Among Financial Institutions
Legacy core banking systems were the standard core banking architecture used by financial institutions in the past. These systems were characterized by their rigid structure, lack of customization, and inability to keep pace with changing customer needs.
Unfortunately, but not surprisingly, legacy core banking systems have become outdated as new analytics and digital technologies have emerged. As a result, many banks are now transitioning to modern core banking systems architecture for better performance.
To get a better picture as to why you should steer clear of this option, let’s dive into more detail.
Limitations of Legacy Systems
Legacy core banking systems have several limitations that make them unable to keep pace with modern customer needs and technological advancement.
They need to be more flexible in structure, meaning banks cannot easily customize them for specific customer needs or integrate new technologies into their core banking architecture. Additionally, legacy core banking systems need more scalability; they cannot support large volumes of transactions at once and can easily become overwhelmed. That equals slow load times, and possible system crashes for customers.
Also, legacy core banking systems are not secure, making them vulnerable to cyber threats and data breaches. Banks cannot rely on these outdated core banking architectures to remain competitive in the financial services industry.
What Are the Elements of a Good Core Banking Business Case?
A core banking system is an essential component of any successful business in the banking industry. For financial institutions, this system provides the structure and capabilities necessary to ensure the efficient and secure delivery of services.
However, core banking architecture is more than just a technical platform—it must support a strong business case demonstrating its value. A good core banking business case should include the following elements.
Digital Agility
Core banking systems enable financial institutions to quickly adapt to changes in customer needs, technologies, and business models. You can deploy digital banking initiatives more easily by leveraging customer relationship management (CRM) systems, cloud services, and new business models.
Business Automation
Banks need greater control and better processes to be efficient. This helps reduce operational costs by streamlining core banking activities such as loan origination, deposits, payments, etc., allowing you to focus on core competencies and value-added services.
Analytical Insights
Core banking systems give banks real-time insights into customer behavior, allowing them to understand their customers better and develop targeted marketing campaigns. With core banking architecture, banks can also gain deeper insights into processes and identify areas for improvement. As a result, you can take on the heavy hitters in the banking industry.
What Are the Four Types of System Architecture?
Now that we have a better lay of the land, you’ll need to know your options. Below are the four types of core banking system architecture.
Cloud-Native Core Banking System Architecture
The cloud-native core banking system sounds just like its namesake—it’s built on cloud-based technology. It’s scalable and built for maximum performance and flexibility.
You can optimize costs, respond quickly to customer demands, and utilize microservices. Unlike legacy systems, you won’t rely on hardware.
Integration-Ready Core Banking System Architecture
Legacy systems caused headaches because of their incapability with new systems and vendors. This system architecture allows you to add new core banking integrations seamlessly. You can easily launch new products and features without thinking about the repercussions.
Open Banking-Ready Core Banking System Architecture
The open banking-ready core banking system architecture enables the rapid deployment and development of APIs, which allow third-party developers to access core data and services. This opens the door to collaboration with other financial and non-financial entities. It provides personalized assistance with products and services, all while enhancing the client experience.
Embedded Finance and BaaS-Ready Core Banking System Architecture
This API-first architecture enables the quick deployment of embedded financial services and banking as a service (BaaS) solutions. No longer do you need to bundle products into several layers.
You can embed services without needing to build stacks on your own. You can also connect to services from other providers (in the fintech space or not). The use of white-label solutions assists in the creation of new revenue streams.
What Are the Different Layers in the Architecture of a Core Banking System?
The core banking system architecture comprises several layers that enable financial institutions to deploy core banking initiatives. These include core banking, interface, integration, security, and analytics.
The core banking layer contains applications and processes banks use to manage accounts, deposits, and payments. The interface layer sounds exactly how it is—it provides a helpful user interface, allowing customers to access services through the web or mobile.
The integration layer enables banks to securely combine systems with third-party applications, such as customer relationship management (CRM) and accounting. The security layer provides adequate protection measures, such as encryption and authentication. The analytics layer provides analytical tools that can be used to identify patterns in customer behavior and core banking activities.
By leveraging this technology, financial institutions can more quickly develop and deploy core banking initiatives while ensuring compliance with industry regulations. This results in increased customer satisfaction and operational efficiency. If you're interested in seeing how Cotribute can help your financial institution leverage these core banking system layers to deliver a better customer experience, contact us to schedule a demo today.
