With the introduction of favourable regulatory initiatives and policies such as open banking, the banking sector has experienced a major shift towards innovation. The leading banking industry players are increasingly adopting advanced technology to boost their operations and offer rewarding experiences to their customers.

One of the most critical aspects of digital transformation is switching from legacy software to the new generation of core banking systems. What is a core banking system? What are its benefits? What are the challenges of upgrading a legacy system? Read on to find out the answers.

What is a core banking system?

Simply put, a core banking system is a back-end system designed to process the fundamental operations of banks and financial institutions, including account management, deposits, withdrawals, loan processing, customer relationship management activities, regulatory reporting, and other standard features of banking software.

The architecture of the core banking systems

A core banking system can be based on several different types of architecture:

Monolithic architecture

In this architecture, the core banking system is built as a single, self-contained unit with all components tightly integrated and deployed together. While monolithic architectures are relatively simple and easy to develop and test, such core banking applications may be challenging to maintain and scale.

Service-oriented architecture (SOA)

SOA focuses on creating reusable services that can be shared across multiple applications within an organisation. This type of core banking architecture enables easier integration with additional services and third-party applications, offering a higher level of flexibility than monolithic architecture.

Microservices architecture

The microservices architecture is when a core banking application is segmented into small, independent services, each responsible for a specific business function. Each service can be independently developed, deployed, and scaled. These services communicate with each other through APIs. While microservices architectures promote flexibility, scalability, and maintainability, they may be complex in terms of managing inter-service communication and coordination.

A core banking system: a legacy perspective

A core banking system isn’t a novel term — core banking software has been around for about four decades. While the technologies have dramatically evolved since the 1980s-1990s, many banks are still using legacy software.

One serious challenge associated with using legacy systems is the lack of flexibility and scalability that result from their monolithic nature. In most cases, tightly integrated components make it difficult to modify or upgrade individual parts without affecting the entire system. This enormously complicates adapting to changing business needs, introducing new banking services, and even catching up with new regulations.

Furthermore, legacy core banking software lacks performance in terms of data storage. It stores data on-premises, i.e., within the organisation’s physical infrastructure, which makes it difficult to establish smooth connections between customers and financial products, often leading to duplicate data within the system.

Security is another concern with legacy core banking systems. Many of these systems were built in an era when cyber threats were less sophisticated and security requirements were less stringent. As a result, they may lack the security features necessary to shield banks and their customers against modern cyber threats.

Despite these challenges, many banks continue to rely on legacy software due to the high cost of replacing it. However, technological advancements and growing customer expectations encourage more banks to undergo digital transformation and modernise their core platforms.

Benefits of a core banking system

Banks are exploring options such as cloud-based solutions, microservices architecture, and modular platforms to replace traditional core banking systems. While the transition may be daunting, switching to modern core banking systems is virtually inevitable for institutions that want to survive in the digital era. Modernising legacy platforms offers multiple advantages. Let’s explore the key benefits of core banking systems.

Improved customer experience

A core banking system enables highly personalised and efficient service that precisely caters to the needs of bank customers. Fast transaction processing and 24/7 access to banking services translate into rewarding customer experiences.

Greater operational efficiency

Core banking software helps streamline a broad range of banking processes, taking operational efficiency to the next level. Advanced automation tools and cloud data storage minimise errors and ensure consistency across departments, ultimately leading to greater efficiency of standard operations and reduced operational costs.

Stronger data security

With a robust core banking solution, banking institutions can access advanced security features such as encryption protocols and multi-factor authentication, which help ensure that sensitive financial information remains protected from unauthorised access.

Streamlined regulatory compliance

Unlike traditional bank systems, modern core banking platforms are built with compliance in mind. They include automated compliance checks and reporting tools, enabling banks to meet regulatory requirements without manual intervention.

Hassle-free product innovations

Core banking systems provide a flexible infrastructure that lets banking institutions rapidly develop and deploy new products and services. Moreover, modern core banking solutions offer advanced data processing and analytics tools that help banks better understand customer needs and create innovative offerings tailored to different client segments. 

Upgrading a legacy core banking system: some challenges to keep in mind

While modern banking solutions offer a host of decisive advantages over legacy systems, switching to them can present several challenges for banking institutions, including:

• Cost. Upgrading or replacing legacy systems means considerable expenses for banks.
• Integration issues. Integrating new solutions with existing systems can be complex, leading to potential disruptions to operations.
• Data migration. Ensuring data integrity, consistency, and accuracy when migrating data from the old system to the new one can be complex.
• Business disruption. Implementing a new core banking system often involves downtime for system upgrades, testing, and training, which can disrupt business operations.
• Legacy culture. Upgrading a core banking system can introduce an issue in terms of changing established processes and workflows.

Ways to optimise a core banking system

While upgrading a legacy system is unavoidable to stay competitive in the financial market, switching to a modern core banking solution is a complex process requiring specialist knowledge and expertise. There are several ways in which banks can upgrade their core banking systems, including:

• Replatforming to a PaaS model, i.e., migrating the code with minor updates to a new platform or architecture while retaining its existing functionality and data.
• Refactoring, which entails restructuring the existing codebase to improve its maintainability, scalability, and performance.
• Augmenting, which suggests deploying a parallel core to address the needs not covered by the existing core.
• Completely replacing the legacy platform with a modern cloud-native solution.

How DeepInspire can help

Compared to traditional on-premises systems, modern core banking solutions offer enhanced scalability, advanced data analytics capabilities, greater flexibility, agility, and security, streamlined regulatory compliance, and cost-effectiveness. Moreover, modern core banking systems can seamlessly integrate with third-party fintech solutions, which enables banks to deliver innovative offerings that cater to the needs of today’s fast-evolving market.

As industry experts with decades of experience in banking software development, the team at DeepInspire has the necessary expertise to help banks switch to a modern banking system.

If you’re looking to upgrade your bank operating system, contact us. We’ll analyse your existing infrastructure to assess your system’s potential for improvement and offer a transformation strategy to suit your needs and goals.