Core banking refers to the essential systems that support the day-to-day operations of the world’s financial institutions. They are the backbone that enable banks to manage transactions, customer accounts, deposits, loans, and more. Essentially, if you’re making a bank transfer, checking your balance, or taking out a mortgage, you’re interacting with a core banking system.
The term “core banking” first emerged from the acronym “Centralised Online Real-time Exchange.” This definition is a little old now, and the term “core” has come instead to indicate the mission critical nature of these systems.
Through centralised databases and digital processes, banks can offer seamless, real-time services to customers, whether they’re visiting a branch, using an ATM, or logging into mobile banking.
Core banking systems are undergoing a transformation, with some institutions moving from older legacy systems to cloud-based platforms. This shift can not only make banking more efficient but also could prepare institutions to handle the growing expectations of customers who want personalised, fast, and accessible services.
What are core banking systems?
Core banking systems are the technological infrastructure that allows financial institutions to handle a range of essential functions. Whether it’s processing customer transactions or supporting financial products like loans and savings accounts, core banking systems form the operational heartbeat of a bank.
The key functions of a core banking system:
Customer account management
At the centre of any bank is the ability to manage customer accounts. Core banking systems allow banks to maintain real-time records of savings accounts, checking accounts, and other customer financial products. This functionality allows the tracking of account balances, interest rates, and transaction histories.
Transaction processing
Whether it’s payments, fund transfers, or loan disbursements, transaction processing is a central aspect of core banking. Modern systems can process millions of transactions daily, 24×7, in real time. This not only improves customer experience by ensuring faster processing but can also reduce operational costs for banks.
Loan management
Core banking systems support a wide range of lending activities, from consumer loans to large commercial financings. These systems can calculate interest, track repayment schedules, and handle complex credit agreements.
Deposit management
Banks rely heavily on deposit products like fixed-term deposits and savings accounts. Core banking systems manage these deposits, ensuring that they’re accurately reflected in the bank’s balance sheet and that interest is calculated and paid correctly. Real-time visibility into deposits also allows banks to make better financial forecasts.
Regulatory compliance
Compliance is a critical part of banking, and core help financial institutions meet the regulatory standards set by governing bodies. These systems generate reports, connect with anti-money laundering (AML) processes according to the features set up by the financial institution, and allow data accuracy across the board.
In essence, core banking systems enable the smooth and secure operation of the bank’s critical processes. But as customer expectations evolve, so too must the technology supporting these processes.
What is cloud core banking? Is it the future?
In recent years, Pismo has seen a shift towards cloud core banking, a development that’s changing the way financial institutions operate. While many traditional banks still rely on legacy systems, the advantages of cloud-based platforms could be making it hard to ignore these new winds of change.
So, what exactly is cloud core banking? It enables banks to host, manage, and scale their operations in an arguably more agile, cost-effective, and secure environment.
Want to know how to break the core banking mould?
Why is cloud core banking important?
Cloud core banking can offer several advantages over legacy systems:
Innovation and agility:
Cloud core banking platforms are built to support modern banking needs, such as open banking and real-time payments. Cloud-native and microservice based solutions can make it easier to integrate components, develop new features, and react quickly to market changes. This makes financial institutions more agile, creating real upside in today’s competitive environment.
Scalability:
Unlike on-premises systems, which require hardware investment to expand, cloud-based solutions can be scaled up or down based on demand. This means banks can grow their customer base or roll out new services without being hampered by infrastructure limitations.
Cost-efficiency:
Maintaining and upgrading legacy systems is expensive. Banks have to deal with hardware, software licenses, and a team of specialists to ensure everything runs smoothly. Cloud solutions, on the other hand, are typically offered on a pay-as-you-go basis, reducing both upfront and ongoing costs.
Security:
While security concerns initially held some institutions back from adopting cloud banking, advancements in cloud technology have made it a highly secure option. Cloud providers can now offer advanced encryption, multi-factor authentication, and real-time monitoring.
Disaster recovery and business continuity:
The cloud offers rapid disaster recovery options. With data mirrored across multiple locations, banks are better equipped to handle outages or data loss, ensuring business continuity even in worst-case scenarios.
The future of core banking: What’s next?
The future of core banking is evolving rapidly, driven by customer expectations, technological advancements, and the need for banks to stay competitive.
Open banking and APIs
As regulators push for open banking, core banking systems will increasingly rely on Application Programming Interfaces (APIs) to facilitate data sharing between institutions and third-party providers. This will enable customers to access more services and products through a single banking platform, enhancing the user experience.
By embracing APIs, banks can also improve their own service offerings, creating ecosystems of apps that provide more value to customers. Open banking is a game-changer in terms of flexibility and innovation.
Embedded finance
Embedded finance allows non-financial companies access the wider fintech and banking ecosystem. Using APIs, they gain access to specialised tools by piggybacking on regulated providers. These tools can build financial products without needing compliance or development costs, where regulation permits such access.
A perfect embedded finance marketplace means every brand and app can provide a form of financial service to users. Providing effective embedded finance requires retooling existing business models. Instead of building and pushing products, it involves providing core functions at the point of acquisition. It is a servicing of high-volume, low-cost interactions.
Cloud-first approaches
More banks could adopt a cloud-first approach in the future, designing systems with cloud infrastructure at the forefront of their architecture. Pismo expects to see a growing number of financial institutions fully transition from legacy systems to cloud-native core banking solutions, unlocking greater flexibility and the ability to adapt to a rapidly changing marketplace.
Generative AI and machine learning
Artificial intelligence (AI) and machine learning (ML) look set to play a big part in banking. From fraud detection to personalized customer services, AI and ML could process vast amounts of data more efficiently than manual processes. These technologies could be integrated with core banking platforms to make faster data-driven decisions while improving customer experiences.
AI-driven chatbots are already helping banks manage customer inquiries more efficiently. Meanwhile, ML algorithms could detect patterns in transactional data, allowing banks to spot fraudulent activity in real-time.
A2A and real-time payments
Next-gen core banking platforms are better prepared to enable real-time, 24×7, processing and settlement of transactions, which is crucial for A2A and real-time payments. This reduces delays and improves the overall customer experience.
From the core to beyond
Core banking is the engine room of financial institutions, powering a multitude of functions from customer account management to transaction processing. As customer expectations grow and the industry continues to embrace digital transformation, core banking systems must evolve too.
The shift towards cloud core banking represents a key milestone in that journey, offering scalability, cost-efficiency, and the agility needed to compete in today’s market. And with AI, open banking, and blockchain all on the horizon, the future of core banking promises to be more innovative, secure, and customer-centric than ever before.
