What is core banking?
Having spent 30 years in banking technology asking what core banking is seems a strange question, right? According to Acronym Finder, core stands for “centralised online real-time exchange”.
When I was asked this question by my wife, I said that core banking is the software that manages accounts be that your current account, deposit or loans. Each time money is taken out core banking debits your account and when money is put in a credit is applied. Depending on the account core banking will apply certain charges and interest based on terms you agreed to when you opened the account. This satisfied my wife, but not me.
When I worked at tier 1 banks in the UK, back in the 1990s, we had already separated customer and product records into separate platforms. The notion of customer was very simple in core banking where the product was managed. However, by separating customer from the core, banks were able to simplify customer management in one place and start to introduce basic relationship management features. The key problem this was solving was that they didn’t have to duplicate customer records with every product. Through the lens of a bank, core banking was essentially product management, a simple definition of core that aligned with my own thinking.
It was not until I had worked for a core banking software company that I saw a “vendors view” of core banking, one that combined both product management and customer management into one platform. For small banks, of course, they needed both customer and product management. The issue for many though is that not all their products are in one platform, often mortgages, credit cards and loans are in separate core banking solutions. This meant that they ended up with customer management in different places making the simple request of changing a customer name (e.g. after marriage) or address much more complex as the bank had to identify all the customer holdings and make updates to different systems.
Under my hat as chief digital officer, the largest change I introduced was to separate “product management” from “customer management”. Creating a digital banking platform that managed the customer data and interfaces and having a separate standalone banking product platform. One managed the customer lifecycle: onboarding, servicing/selling, exiting. The other managed the product lifecycle: origination, servicing, closing.
Simple, right? Well not entirely because there are many other things that banks require and sometimes these periphery needs get bundled in to be part of core banking as additional “modules”, when often they should be seen as separate, standalone functions, for example, anti-money laundering and credit risk management. Both are necessary, but should they be part of “core banking”?
I’ve seen request for information (RFI) documents from banks that run into thousands of features/capabilities, and some with only a few hundred. The Banking Industry Architecture Network (BIAN) defines the whole of banking into 321 service domains (currently supported by 243 APIs).
Why does this matter is a question you may ask now. Most banks have/are/will consider moving to newer technology for their core banking. With all the players in the market both incumbents and the nascent new tech vendors it really is a case of caveat emptor.
Bigger banks will want much more scalability/security/performance and flexibility. Their definition of core tends to be very narrow in functionality and headless from an access perspective. This suits newer players who are playing catch-up with incumbents on features. However, there are far fewer “big banks” with such needs, although deal sizes will also be bigger.
Whereas smaller banks want and need the breadth of functionality with simplicity for product configuration. This suits incumbents because through years of development and acquisitions they have accumulated the breadth these banks need. Here, there are many more banks without the urgency for modern tech that often also require coding to configure products. Most incumbents allow configuration of banking products through a user interface (UI), making this accessible to the business without a dependency on scarce IT resources.
Many neobanks have also chosen incumbent solutions over newer tech platforms to get the full breadth of banking needs from a single vendor. This is a short-term gain to get to market quicker but compromises on the increased flexibility, efficiency and skills availability that solutions based on newer tech offer.
I guess I’m just saying that the definition of what core banking actually is depends on the eye of the buyer. The market for banking software is not “a winner takes all” opportunity as the needs and demands of banks vary by their size and available resources.
For smaller banks and neo-banks moving to an architecture that separates product and customer is a must, especially as customer relationship management moves from batch to real-time (more on this topic soon).
About the author
Dharmesh Mistry has been in banking for 30 years and has been at the forefront of banking technology and innovation. From the very first internet and mobile banking apps to artificial intelligence (AI) and virtual reality (VR).
He has been on both sides of the fence and he’s not afraid to share his opinions.
He is CEO of AskHomey, which focuses on the experience for households, and an investor and mentor in proptech and fintech.
Read all his “I’m just saying” musings here.