Is core banking easy?
Most banking products are essentially based on an account.
For example, you could say a mortgage is an account with a very big overdraft and a loan is an account with a smaller one, while both have charges related to the “overdraft” being used.
The basics of a system managing an account are simple: either money is going in or it’s going out and there is always a balance showing how much money is in the account or owed.
This is the simple part. What makes things difficult are regulatory reporting requirements and the behaviours of the account, typically sold as a product. A mortgage has behaviours such that you do not have easy access to the balance, you pay an agreed interest rate on money owed, and so on.
As I wrote recently here, banks have not really innovated on products in over 20 years. By this I mean aside from basic features like interest rates, charges, accessibility, or bundling offers like free mobile phone protection, the core products have not been too different. Therefore, it’s been possible to run core banking systems to easily support a bank’s products.
In the past, when greater flexibility or scalability was required or the product was created as a separate division of the bank, products were built on separate core banking systems. Typically, cards and mortgages were on separate core banking platforms to deposits, current accounts, and loans.
With hindsight of bank product evolution, many incumbent core banking solutions will claim to support all products within one core banking system by allowing greater flexibility in how products are defined (including any supported/required workflows and reporting).
This is really where core banking becomes hard. In the past, vendors have allowed banks to define products using parameters like interest rate, charges, access channels, and so on and then provide the ability to create behaviours on those parameters. For example, allowing an account to have access to telephone banking or limiting how many withdrawals a customer can make.
You can see this can get quite complex, so it’s the flexibility of the parameters and the ease of implementing the behaviours that either limits or enhances a bank to be able to launch products quickly.
However, over time, more and more templates and preconfigured behaviours enabled banks to accelerate the launch of products. This is all good in a world where there has actually been little product innovation from banks.
Again, as I’ve previously written, rewriting core banking to be truly cloud native can address many scalability issues. However, the ability to define new products and launch them quickly is the new battleground. Here, the incumbents typically use their older, parameterised approach with a “wizard-style user interface” to show how easy it is to define new products from a library of predefined features and behaviours. Some will allow you to extend these with your own code.
Modern cloud-native core vendors like 10X and Thought Machine offer a different approach to product flexibility based on smart contracts. Smart contracts allow banks to define a set of product features and attach code to orchestrate specific behaviours. This enables “unlimited” flexibility for new features or behaviours because anything not predefined can be coded (or created by low/no-code configuration).
For me, core banking is about managing the product lifecycle: planning products, defining them, onboarding customers, running products, and eventually closing them down. We have seen great improvements in the customer experience of onboarding and serving customers, but we have not seen as much in the creation of new products. However, newer platforms are starting to change that, and we are starting to some true innovation. This presents a huge threat to banks. For example, when the offset mortgage was first created by Virgin over 20 years ago, a similar product from another bank took over 18 months to launch, which gave Virgin a significant head start.
It’s impossible for a vendor to provide “everything out of the box”, so having the flexibility to be able to do whatever you want without reliance on the core vendor is a significant step forward. We are already seeing trends like open banking and Web3 enabling new kinds of products to be developed. Open finance will create further new opportunities, as will open data initiatives in other sectors like utilities, telecoms, and property. Every new data source will enable new products to be defined, such as loans tied into energy efficiency improvements, for example.
While the current economic climate will naturally force banks to focus on operational efficiency and cost savings, we have the new tools for banks to support customers better with modern products while also creating new revenue streams.
I remember having the privilege of discussing banking with a previous Lloyds banking legend, Sir Brian Pitman, who said quite clearly to me that “I’d rather generate an extra pound for every one spent than save 50p per pound.”
This week, I’m just saying that there are now solutions with greater flexibility as well as market developments like open data that make it much more possible to create innovative new products. As the saying goes, “Fortune favours the brave.” I believe this is especially true now. Banks could look at the economy and think the glass is half empty, or seek to expand products and see the glass as half full. Which way will your bank go?
About the author
Dharmesh Mistry has been in banking for more than 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.