Gartner defines a core banking system as a back-end system that processes daily banking transactions and posts updates to accounts and other financial records.
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Core banking system providers working in the digital economy are a central distinguishing feature separating the banks that are leading in the transition over to modern services from the rest of the more traditional banks.
Internet banks are serving customers at around one third of the cost-per-transaction of traditional banks and so are winning a much larger share of the market. Being able to launch software for banks’ core banking activities quickly is a critical competitive advantage for the types of core banking systems in the current marketplace because customers increasingly expect personalized service and want it in real-time.
Competition in the banking industry is intensifying. Fintechs are working best by targeting weaknesses in the portfolio of services provided by the conventional banks. As a result, even though having been in operation for only a few years, some of the big fintech entities have already accumulated large customer bases, and pose a real threat to the balance of the sector.
The fintechs are growing their businesses and attracting customers with the help of modern core banking solutions, which enables them to innovate faster and operate more efficiently.
Cost and speed of application development for core banking system architecture providers is probably more important than anything else. For conventional banking systems banks may be spending as much as two-thirds of their system upgrade budgets on catch-up alone. Dealing with older legacy systems associated with manual deployment and traditional manual operational processes combine to keep costs high.
For the banks, there is some light at the end of the tunnel. A new generation of cloud-native core banking platforms is emerging, such as Mambu, 10X, Thought Machine, and FinXact, as well as products from the traditional core platform vendors.
These promise to help banks radically modernize and accelerate the benefits through higher developer productivity and removal of technical hurdles. They can achieve further efficiencies by leveraging cloud-based services, which enable them to deploy new products and scale infrastructure quickly, and use development tools that support automation.
- Modern platforms support integrated data sets and single sources of information, which in turn create the ability, in real-time, to offer personalized experiences to the customers in the user interface, at the same time as running advanced artificial intelligence analytics for more accurate decision-making.
- Conventional banks are following this course of action because they urgently need to replace their core platforms due to obsolescence and because of changed regulatory standards. One strategy being adopted by some banks is to retain their legacy platforms but progressively minimizing their importance, while developing or acquiring replacement systems that will eventually take over full functionality.
This is seen as a safer and less expensive option rather than investing heavily in upgrading the legacy systems.
Spending on core banking systems over the current year or two is going to be substantial. Most banks have earmarked substantial budgets of the order of $10 million or more for 2022, with around a fifth planning to invest as much as $40 million,as reported in a survey.
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