What Is a Core Banking System?

What Is a Core Banking System? 

When it comes to managing, prioritizing, and adopting new banking technologies, there’s an awful lot to consider lately. From endlessly evolving digital transformation strategies that may include complex cloud migration initiatives and API-based integrations, banks, credit unions, and other financial institutions are tirelessly confronting a rapidly changing financial services landscape. While exploring new opportunities around cloud technologies and other financial innovations is essential to modernizing—and critical to reimagining the consumer banking experience for the future—there’s one element of a financial institution’s infrastructure that remains stubbornly central to its business operations: the core banking system.

A core banking system is a backend software system that financial institutions use to maintain customer accounts, process daily banking transactions, manage investments and deposits, process loans and mortgages, perform interest rate calculations, and post transactional updates to an internal accounting system’s general ledger. With the ability to connect to multiple banking channels, a core banking system provides the technology for financial institutions to offer financial services and products through a network of branches, brokers, ATMs, online banking, and mobile banking apps.

As the central underlying component of a wider core banking platform, this type of legacy banking system is generally built on a monolithic architecture, where the entire banking application uses one code base and combines all its functionality into a single, cohesive software package.

Due to the inherent restrictions in this type of design, a core banking system is particularly complex and generally not configurable, making it challenging for financial institutions to launch innovative products and costly for them to update. Since its different components are closely dependent on one another, changes to one area will often have wider impacts and implications across the rest of the system. With this level of interdependency and lack of flexibility, any necessary changes to underlying code—whether it’s bug fixes, system updates, or regulatory changes—generally requires the entire system to be updated and redeployed as a new version.

That’s not exactly ideal. While core financial technology is notorious for being cumbersome, complex, and costly to update, the level of technological complacency that was once a staple of the heavily regulated financial industry is simply no longer acceptable. New technology, new competition, new models, new frameworks, and new ways of banking are all driving innovation and change, for a better personal banking experience that is rooted in putting consumers first.

Modern banking technologies need to be flexible, and the ideal core banking system should promote integration and interoperability, particularly as the industry begins its slow shift toward open banking—a framework where financial institutions may soon be required to connect with important third parties, like account information service providers (AISPs) and payment initiation service providers (PISPs).

While it may seem logical to simply replace these core systems with more modern platforms, there are some challenges. With higher complexity comes higher risk, and when it comes to replacing a core banking system that’s been in place for thirty years or more, there’s no shortage of risks—operational risks, business risks, reputational risks, legacy dependency risks, data security risks, and compliance and regulatory risks. As a result, many financial institutions are not turning away from their core—they’re embracing it.

How Are Banks Modernizing Core Banking Systems? 

In an attempt to modernize core banking systems, many banks are embracing their trusted core and balancing legacy system dependencies with modern technologies to create their own unique solutions, blending the old with the new in order to refactor or restructure their trusted solutions with an adaptable underlying framework that preserves the stability and functionality of their systems and prepares them for the future of banking.

With many core banking systems dating back to the 1980s and 1990s—and with underlying code and programs that predate even those systems, sometimes by another two decades—the technology that remains foundational to banking operations is incredibly rigid, cumbersome, and intractable. It’s why banks and financial institutions have been focused on strategic legacy modernization, adopting new technologies, and prioritizing the inclusion of a cloud-native infrastructure that supports agile development methodologies. Application programming interfaces (APIs), DevOps processes, continuous integration and continuous delivery (CI/CD) practices, containerization tools, and microservices are all providing a new way to restructure the core banking system into a highly flexible, adaptable, and scalable cloud-based foundation.

While every financial institution is different and there are many different applications, systems, architectures, and approaches used to effectively manage a financial institution’s core banking operations, there are generally three types of core banking systems today: monolithic core banking systems, modular core banking platforms, and cloud-native core banking solutions.

Before we explore the nuances of these different types of core banking systems and technologies, we’ll briefly look at the history of core banking to better understand how a decades-long evolution of banking technology has created a complex mix of core banking solutions and periphery functionality that can often make a core solution indistinguishable from one institution to another.

A Brief History of COBOL and Core Banking Solutions

Many of the first core banking systems were developed based on a programming language that was created in 1959 by computer scientist, mathematician, and U.S. navy admiral Grace Hopper. An inventor of the first English-like data processing language, known as FLOW-MATIC, Hopper was a key contributor at the Conference of Data Systems Languages (CODASYL) in 1959 where she joined a consortium of industry professionals and government representatives involved in data processing to help develop what became known as Common Business-Oriented Language or COBOL.

A portable programming language that was both hardware independent and, for its time, easy to read, COBOL was quickly adopted for its performance capabilities, standardization efforts, and its compatibility with mainframes—large computers with powerful processing capabilities often used by banks or government organizations for mission-critical applications. Throughout the 1960s and 1970s, COBOL was widely used in the development of key government and financial systems around the world, and it has ultimately become the backbone of not only the computer software industry, but also the global economy.

COBOL is everywhere. Even today, it’s considered the code that controls money.

Surprisingly, many banking leaders view the language as strategic and critical to their businesses today, even though COBOL developers are getting harder and harder to find and more flexible systems, architectures, languages, and technologies are available.

In 2017, a report by Reuters estimated that there were over 200 billion lines of COBOL still in use. According to that same report, 43 percent of banking systems are built on COBOL, 80 percent of in-person transactions use COBOL, and 95 percent of ATM swipes rely on COBOL.

More recent research suggests that study may have underestimated the real figures and prevalence of COBOL, suggesting that approximately 800 billion lines of COBOL are still in use today.

Many core banking systems were originally programmed in COBOL because of its large-scale batch processing capabilities, transaction processing capabilities, and mathematical precision—everything a core banking system needs. It was also extremely fast. Paired with mainframe computers, COBOL was—and somehow remains—incredibly powerful.

Unfortunately, it’s also obsolete. Most university or college curriculums don’t offer it. That alone makes it hard to find developers, making its programs hard to change or update.

Today, COBOL is behind some of the industry’s most important mission-critical systems, each one like an immovable mind-boggling monolith mysteriously erected in the middle of an alien environment. While it may be impossible to remove it, there are ways to modernize the mission-critical systems that rely on it.

Core Banking Systems: Monolithic, Modular, and Cloud-Native

While the terms core banking platform and core banking system are often used synonymously, there are arguably three different types of core banking systems used today: monolithic core banking systems, modular core banking platforms, and cloud-native core banking solutions. While there are notable differences between all of them, each one is an iterative, evolutionary form of its earlier version. In any given financial institution, it wouldn’t be unusual to find all three solutions carefully integrated and indistinguishable, intelligently pieced together through different languages, programs, and technologies over years of investment in core stability and performance.

A monolithic core banking system is the original core banking solution. This backend system capable of large-scale batch and transaction processing is designed to maintain customer accounts, process payments and daily banking transactions, perform interest rate calculations, and process credits and debits, posting updates to a general ledger. Again, while it’s incredibly efficient, the underlying core banking functionality is interdependent and combined into one uncompromising design and code base.

A modular core banking platform is a core banking solution that’s more adaptable and flexible, offering a collection of core banking modules that handle specific banking functions and are not dependent on one another. Often configurable through a system administration component, these modules or subsystems can be independently implemented, updated, and modified with relative ease. Modular core banking platforms allow banks to launch new products, services, or features without compromising other components or introducing unnecessary risk to other areas of the core system. While core banking modules may be deployed over a preexisting monolithic core banking system to offer additional functionality, this kind of system will often also include key core banking modules that provide the equivalent functionality of a monolithic core system. Core modules include retail banking, allowing banks to offer chequing and savings accounts, term deposit and GIC processing, loans and mortgages, investment management, accounting, and integrated customer relationship management. In addition to its core modules, these platforms will also offer add-on functionality as well as periphery products, including regulatory and compliance solutions, reporting and analytics features, arrears management functionality, credit facilities, and other add-on financial products, like high-interest savings accounts, anti-money laundering and anti-terrorism financing (AML/ATF), and reverse mortgages.

A cloud-native core banking solution is the culmination of decades of core banking system technology converted into a modern, flexible, scalable, and highly adaptable public cloud-based infrastructure—one that promotes financial innovation, third-party API integrations, and interoperability. Leveraging an underlying microservices architecture where traditional core banking systems and modular core functionality are refactored into smaller services, cloud-native core banking solutions offer a loosely connected, highly elastic core system of independent banking functionality. This makes it easier to maintain, develop, and deploy new financial products and services quickly and efficiently. The elastic infrastructure also allows banks to dynamically scale in response to increasing or decreasing demand, while providing an unparalleled level of security and conforming to strict financial industry compliance requirements, like PCI-DSS. Cloud containerization tools paired with automated application deployment, delivery, and management technologies also allow for the integration of mission-critical legacy systems, including preexisting core banking platforms or even monolithic core banking applications. Banks and financial institutions operating core banking on a cloud-native design also benefit from collaborative DevOps practices along with a continuous integration and continuous delivery (CI/CD) model that automates building, testing, and deployment, aligning a financial institutuion’s software development initiatives with its internal IT operations.

Ultimately, a cloud-native core banking solution also prepares banks for the future by allowing them to quickly adapt to changes in business, changes in technology, and changes in banking.

Moving from Monolithic Banking Systems to Microservices  

When we think about financial technology and the future of banking, we tend to consider the things that symbolize progress. It’s easy to look to the recent rise of neo banks and other popular fintechs or even turn to Banking-as-a-Service and embedded finance to gain new perspectives on how emerging models and technological innovations are disrupting traditional finance by leveraging modern systems to create entirely new personal banking experiences.

Many financial institutions now look to innovative fintechs to gain inspiration for what’s possible, but they also know that launching new banking experiences designed on entirely new platforms is not always realistic. Core banking systems can’t be replaced overnight, and in many cases they’re far too valuable and central to an organization’s operations to be replaced at all.

After all, old code isn’t necessarily bad code.

A financial institution’s core banking system is deeply ingrained in its daily operations and has often provided a secure and trusted foundation for banking in modern times, while meeting demanding processing and strict compliance, regulatory, and reporting requirements.

This can be hard to accept: Sometimes the technology that tends to hold us back may be just as important as the technology that promises to move us forward.

Are You Looking for a Banking System? 

Portfolio+ is used by some of the best banks in Canada and has a long history working with successful financial institutions and Canadian credit unions. As a trusted provider of core banking and cloud-based financial technology, we understand the unique technological challenges facing financial institutions and nonprofit financial cooperatives.

If you’re interested in updating a pre-existing core banking systems, starting a bank in Canada, modernizing credit union technology, or simply learning more about open banking, cloud banking migrations, and how a Portfolio+ cloud-native core banking solution can help make your organization more efficient, contact us today.

Sources: 

https://en.wikipedia.org/wiki/Core_banking (Retrieved June 8, 2023)

https://en.wikipedia.org/wiki/FLOW-MATIC (Retrieved June 8, 2023)

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https://fingfx.thomsonreuters.com/gfx/rngs/USA-BANKS-COBOL/010040KH18J/ (Retrieved June 14, 2023)

https://www.wealthsimple.com/en-ca/magazine/cobol-controls-your-money (Retrieved June 14, 2023)

https://www.microfocus.com/en-us/press-room/press-releases/2022/cobol-market-shown-to-be-three-times-larger-than-previously-estimated-in-new-independent-survey (Retrieved June 14, 2023)

https://www.howtogeek.com/667596/what-is-cobol-and-why-do-so-many-institutions-rely-on-it/ (Retrieved June 14, 2023)

https://en.wikipedia.org/wiki/COBOL (Retrieved June 13, 2023)

https://americanhistory.si.edu/cobol/proposing-cobol (Retrieved June 14, 2023)

https://www.ibm.com/downloads/cas/WZVPAYWL (Retrieved June 12, 2023)