What is core banking?

With modernisation ever at the forefront of financial professionals’ minds, core banking is the buzz phrase that just won’t go away.  But what exactly do we mean by core banking? And why does it need updating? In this latest article of Finextra’s explainer series, we’ll dive deep into the history and transformation of core banking.

A short history of core banking

By the 1970s, Automated Teller Machines (ATMs) had begun to be rolled out across the UK. Between these and the in-branch banking service, the need arose to devise a back-end system that could handle customers’ financial information in one place, in real time. Once created, this system began to be referred to as ‘CORE banking’ (which stands for Centralisation Online Real-time Environment) and enabled customers to seamlessly access all their retail-related financial services from not just their local branch, but any other branch or ATM – as well as via the internet, once it emerged in the 90s.

In classic business terms, the phrase ‘core banking’ simply points to the software a financial institution deploys to sustain all of its key processes. It can be thought of as the central nervous system of the bank – delivering seamlessly, from the back end to the front, vital customer services, like transactions, deposits, account management, account onboarding, the extension of credit, customer relationship management (CRM), and so on. It is the IT system’s responsibility to deliver each of these functionalities and calculations, as well as to interface with other domains, such as the general ledger function – a record–keeping system for all financial data used in regulatory reports, et cetera.

Across the 70s, 80s, and 90s, credit cards and debit payments began to emerge and develop. These were built on mainframes or IBM servers, often written in Common Business-Oriented Language (COBOL), which soon became less-than-ideal to handle the increased traffic and data of modernity. Initially, however, banks remained reluctant to rip and replace their systems, and instead chose to bolt on the new channels, as online and mobile payments landed, in the early noughties. While these were built on more modern stacks and can cache customer data from the core banking domain, by 1999 – with the invention of the smartphone and unparalleled mobile payment adoption –  banking architectures were becoming strained.

Entering the second decade of the 21^st century, core banking had the data of innumerable monolith channels to uphold, as well as legacy options, such as call centers and brick-and-mortar branches. This does not even mention banks’ other business lines, for investment or commercial operations. Such a complex setup is a recipe for soaring systemic risk.

Core banking transformation

Today, many banks around the world still labor under these dated, siloed architectures. Exacerbating the issue is the fact that the coders of the 70s, 80s, and 90s are reaching retirement age and leaving the workforce – and with them, knowledge of how to maintain the systems.

In order for banks to adapt to technological change and enable growth, they need to revolutionise their approach to core banking. One option is a cloud-based setup, whereby a third-party provider hosts the services. This offers cutting-edge technology, flexibility of choice, and circumvents the need for the institution to maintain its own servers and systems on premises.

 The challenges of implementation

There are three main factors holding back banks from updating their core banking architecture in this way:

1. Complexity – Core banking systems are multi-faceted, siloed, sprawling and knotty. Banks may even be running separate systems for each of their business functions. The process of migrating or replacing elements is tricky, time consuming, and requires considerable IT expertise.
2. Integration – Simply updating various elements of the core banking system is not good enough. There needs to be communication between the CRM, risk management, Know-Your-Customer, Anti-Money Laundering, regulatory siloes, etc. This is a tough project when tackled piecemeal.
3. Cost – The previous two factors go toward justifying the sheer amount of capital required to update a core banking system. Such a project demands resources, time, skill, and an intimate knowledge of the institution’s needs.

The global outlook for core banking

In the near-term future, core bank transformations will increasingly be characterised by the employment of generative AI which, the 2024 Global Outlook for Banking and Financial Markets report claims, will “redefine a bank’s competitive edge in client relationships, evolve and streamline operations, and bolster cybersecurity.”

For more on the impact of generative AI, see Finextra’s long read: “Generative AI and AI outlook 2024: Customer journeys, fraud and legislation”.