Core Banking:
Considering How Your Next Core Solution Should Look
Banking, especially customer facing components, has changed dramatically since the mid 1970s when ATMs were widely introduced. Prior to that time, for centuries, customers actually went to their bank to access their accounts (yes, it is true!). In the decades following the introduction of ATMs, technology has progressed steadily to provide additional methods of remote access. In turn, customers have embraced this technology and used it extensively.
What remains largely unchanged, however, is the "back-end" piece of banking technology. The so-called "core" systems that process and store transactions and provide reporting ranging from statements to remote customer inquiries. One of the reasons these systems have not changed is that they work. Reliably and consistently. Much of the focus has been on the customer facing solutions, including Internet Banking, Mobile Banking, and debit/credit card solutions. As these transaction types have exploded, the pressure to process and reflect those transactions in real time has increased, moving many vendors to develop their own digital and payment solutions, or to tightly integrate their systems with third parties.
Beginning in the late 1990s, we have seen a wave of consolidation in the bank software industry, which mirrored the consolidation we saw among banks. Today, a handful of vendors control virtually all the core processing systems that are available. Technically, we call this an oligopoly - a market whereby a handful of firms control a majority of the business. In recent years (and see my article from 2015 for more background) there has been a lot of discussion about “new core” solutions. I continue to believe that the existing core providers can and will be the core providers of the future. That doesn’t mean they shouldn’t change – and they will. But in a shrinking industry, where existing software meets much of our functional needs, the opportunity for new entries into the market remains low. In economics we call this a high barrier to entry.
Summary
Vendors who operate in the community bank space are not typically building software for specific segments. Instead, they are focused on scalability, allowing institutions to use more features and functions as they grow and need them, along with a hardware platform that is not restrained by growth.
Banking at the core level continues to be about accurately posting and reporting transactions. Each of the products manages to do that well, and for this reason, it is difficult to consider a core vendor change, due to the tremendous impact on both employees and customers. Change is difficult and there are many moving parts in today's environment that require attention during a core conversion. Interestingly, many banks that make such a change do so for service and support issues, rather than software functionality.
The Future of Core
Rather than re-inventing or changing core, banks to be successful must provide an improved customer experience across all delivery channels. Digital banking (nee Internet) leads the way here, with EFT (debit cards and digital wallets) a close second. Finding superior solutions that interface well to your core solution is critical.
However, it is appropriate to consider what your next core system will look like. Ideally, your current core provider's development efforts will provide this for you, allowing you to migrate along the way rather than convert to a completely different system. Here are key factors that I believe you should consider for your "next" core system:
Architecture
Providing a secure environment that provides stable and scalable processing. This will likely be "outsourced" so that your primary core solutions are hosted by your vendor. Potentially a "cloud based" solution but more on that in a bit.
Infrastructure
An environment that provides secure, but easy access to your systems for both employees and customers is also needed. Leveraging new remote access technologies, your core solution should provide full access to the bank's systems so that business can be done at the most convenient time and place.
Data Driven
Your next core should be built with an eye toward aggregating, managing, and providing dashboard-like access to real time information as well as historical reporting. The ability to access bank and customer information in a useable context will be increasingly important to all banks.
Real Time / Straight Thru Processing - individual transactions are evaluated, posted, or rejected in real time across all channels. Beyond memo-posting, this is a process that provides for final posting of accurate transactions as soon as they are presented. Inaccurate transactions will continue to flow through exception channels. Such an environment will greatly improve customer service and internal efficiency.
Seamless Integration
Interacting with customer facing applications (digital, debit, platform) and continuing evolution (for example, begin using the same platform for on-line applications and branch applications) are examples of matters you should look to your vendor to provide. Expect robust interaction with third parties through secure, standardized channels.
Finally, a word about cloud computing. Most outsourcing providers have already moved to a cloud environment, often called a private cloud, meaning they reserve their systems only for their customers. Technically, they moved from hosted to cloud environments when they began to consolidate both program and customer data across their hardware environment.
Individual banks were not processed on components reserved just for them, but rather processed together. Public cloud means sharing resources in a similar way, but with a variety of non-related entities, requiring more attention to security and control. However, the larger the cloud environment, the lower the costs. The concept of shared cloud resources to improve per unit cost, and improve backup/recovery capabilities is extremely important, whether public or private. All that to say, the next iteration of your core will very likely be outsourced to a cloud environment.
My work around core vendors includes reviewing and renegotiating existing relationships, as well as assisting banks in evaluating other core systems. Please text, call, or email to discuss how I can assist you.
Trent Fleming
Trent Fleming Consulting
trent@trentfleming.com