At the Core: The Evolution of Technology Architecture for Retail Banks


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Author: Daniel Mayo, Senior Analyst at Celent

Daniel Mayo, senior analyst at CelentThe core banking system (CBS) has been at the center of the hub-and-spoke technology architecture of the branch-based banking model since the move to computerization in the 1960s. Mainframe-based systems facilitated the automation of the primary banking workload, allowing scaling beyond the physical restrictions of branch-based banking models.

Today, technology systems span all business functions within banks, enabling everything from automation and scalability to capabilities impacting information, decisions, and insight. As services increased, so did systems, often resulting in a siloed approach. The resulting piecemeal enterprise architecture needs to be more coherent and purposefully designed.

As banks modernize and embark on digital transformation, legacy core banking systems can hinder rather than facilitate innovation. More than just allowing retail banks to scale or deliver a strong front-end experience, next-generation core banking systems can support the digital end-to-end product and service proposition that meets contemporary demands for customer experience (CX), product and service delivery, and the productivity of bank staff.

A new core is necessary. Modern digital banks need a new technology architecture that enables end-to-end digital business services. Cloud-native, micro-services-based, and application programming interface (API)-driven architecture all participate in the movement toward core transformation. Retail banks must consider their core needs and architectural trends to evaluate their futures.

“Core” for modern digital banks

What is the “core” of the modern digital bank? One minimum definition used in the Celent report Toward a New Retail Banking Architecture is “the system of record responsible for maintaining accounts and processing transactions.” The CBS tracks each customer’s current account balance and ensures that transactions (deposits, interest, payments, and transfers) are applied to the account. At the heart of the bank, the CBS is the primary mission-critical system; its failure could be life-threatening to the bank.

A CBS may encompass much more comprehensive functionality. There needs to be a sector-wide standard about what a core banking system includes. Most agree that the “core” concept incorporates primary back-office techniques critical to the bank’s direct business operation outside payment engines. Variables such as the financial institution’s age, geography, system portfolio, tier, or type may all influence the definition.

Banks can now choose a CBS that is far more than just an updated version of the legacy core. Options include

  • Next-generation core banking systems, which provide specific pieces of overall requirements;
  • Systems designed to operate in a broader ecosystem; and
  • Banking platform providers offer more complete platforms spanning the bank.

Also Read: Reasons why Cognitive Technology is a Game-Changer in Financial Services

Evolution Of Core Banking Systems

New calculations about the value of core migration

A vital recognition is now widespread: maintaining legacy platforms is an unsustainable long-term position in the digital banking world. A product-centric architecture worked well when banks focused their go-to-market strategy around individual products. But introducing new products created duplicate functionality around lines of business, leading to dead code or inconsistent data. The result: 2/3 of the IT budget goes to maintenance rather than innovation. Old systems limit progress through outdated architecture, scalability issues, difficulties introducing new or customized products, operational resilience challenges, and more.

Project costs, the risk of project failure, and prolonged project timeframes proved to be inhibitors for core migrations in the past.

The difference between the “risk to maintain” perspective (operational risks and technical debt, competitive risks, cost to maintain) and the “risk to migrating” perspective (transformation effort, conversion cost, conversion risk) has shifted, with a net positive move toward migration. Key to this tipping point is cloud-led migration options, which speed deployments while lowering risk and expenses for data and applications. 

Stress on legacy systems

With the shift from traditional to digital channels, pressure on core systems could be more sustainable. Its demands on bank platforms are at a volume never seen before. Customers expect innovative experiences with functionality that lives up to what they get from other non-banking providers. They want real-time information, 24x7x365 access, and streamlined immediate digital experiences—for everything from onboarding to customer servicing.

Open ecosystems

As the evolving market presents new options for the banking industry, Banks are moving away from insular, closed ecosystems in which they aim to control the entire value chain. The growth of banking-as-a-service (BaaS), FinTechs, and specific services offered through APIs allow banks to rapidly add new products and services by relying on third-party capabilities. This open ecosystem approach provides comprehensive options for banks while helping banks mitigate risks and buy time to address underlying systems.

Cloud-enabled architecture

No longer is cloud computing seen as simply an IT cost play. It’s a fundamental component of modern application development approaches. Architecture trends enabled by the cloud—including containerization, distributed databases, continuous integration/continuous delivery (CI/CD), micro-services, and stateless processes—fundamentally change applications’ architecture, development, and deployment. The resulting shift to agile DevOps development provides cost benefits in addition to platform agility, elasticity, and resilience.

Innovation from next-gen core systems and platform incumbents 

Developments on the supply side are changing market dynamics. At least a dozen next-generation, cloud-native core banking system providers entered the market in the 2010s; by the decade’s end, many reached market maturity (e.g., reference clients, platform capability), making them viable options in the mainstream market. These players leverage cutting-edge technologies to offer innovative, flexible, adaptable, and cost-effective solutions.

Most modern traditional cores are also on transformation journeys, becoming cloud-enabled. Leaders in this space are shifting away from conventional annual upgrade approaches toward CI/CD approaches and cloud-native architectures. The vendor landscape includes cloud-agnostic and cloud-native systems, helping banks avoid the challenges associated with cloud lock-in. Most providers offer multiple deployment choices—on-premises, private cloud, public cloud, hybrid cloud, and software-as-a-service (SaaS)—potentially lowering the transformation effort and conversion costs typically associated with traditional approaches.

New platforms, new approaches

As banks shift to new architectures, they can embrace a new approach to creating and deploying banking services and designing and orchestrating digital processes across the whole value chain. Banks considering a CBS migration should consider the current and future functional capabilities of a new platform (ability to support the business requirements), the non-functional capabilities (the underlying capacity of the platform to deliver effective performance), and the execution capabilities (how the vendor and platform can support successful project delivery).

Daniel Mayo
Daniel Mayo
Daniel Mayo is a senior analyst in the banking practice at Celent, a global research and advisory firm focused on technology and business strategies in the financial services industry.


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