Core banking systems are the backbone of modern financial institutions, and as technology evolves, so do the solutions available. In this article, we will compare traditional and microservices-based core banking platforms, highlighting their features, benefits, and drawbacks. We will also provide guidance on which solution may be the best fit for your organization.
Legacy Core Banking Systems Functionalities
- Architecture – Legacy core banking systems are designed with a centralized architecture, featuring a single database and instance of the software. Traditional Core Banking Systems (CBS) typically have a monolithic architecture built from COBOL-based legacy components.
- The Infrastructure- The majority of CBS have a strong, on-premise infrastructure that is expensive to maintain and extremely challenging to change over time.
- Data and Information Processing- Data is stored in silos in Core Banking Systems. Because of this, it is more challenging to use fully integrated business logic to establish connections between clients and goods.
- Processing- Traditional CBS use batch processing
- Integrations – Legacy core banking systems are not easily integrated with new technologies. Integrating components are complicated and difficult to customize
- Configurability– Legacy core banking systems have a centralized architecture, which makes it difficult to add new functionality and users. All code modifications and new releases need to be approved before a CBS can introduce a new feature.
- The Client Base- Customer databases are primarily used in Core Banking Systems to address the complex needs of financial institutions.
- The Revenue Model – Variable and one-time deployment costs are incurred by CBS (with additional expense for system maintenance, changes, and upgrades).
Microservices-Based Core Banking Platforms Functionalities
- The Architecture –A containerized microservices architecture, mostly open-source programming languages, contemporary coding standards, integration, and continuous deployment (CI/CD) are all used in the development of Core Banking Platforms (CBP).
- The Infrastructure – With CBP, you can have automatic updates and fully cloud-native functionality for both horizontal and vertical applications.
- Data and Information Processing – The data sources are seamlessly integrated into each repository for Core Banking Platforms. The definition of object layers enables the association of additional individual properties with a fundamental account.
- Processing – CBP carry out processing and transactions in real-time.
- Integrations -. Core Banking Platforms enable a modular EDA deployment with an extended API layer and predefined connectivity.
- Configurability – With a CBP, deployments and integrations are seamless (CI/CD), and the low-code configuration lowers development and maintenance costs while facilitating simple changes.
- The Client Base – Core Banking Platforms help greenfield Neo-banks and fintech companies by meeting their needs for greater simplicity.
- The Revenue Model – With CBP, financial institutions use a pay-as-you-go model and only pay for what they use.
Overview of Legacy Core Banking Systems
Legacy core banking systems are known for their reliability and scalability, but they were designed in an era when hardware was expensive and software was less advanced. As a result, they tend to be hardware-intensive and inflexible compared to modern software solutions.
Their centralized architecture means that all users must work off the same database and core software, making them inefficient and vulnerable to data breaches. These systems are also difficult to upgrade and integrate with modern technologies like AI, machine learning, and blockchain. While legacy systems have proven their worth over time, their drawbacks make them unsustainable for the future.
Overview of Core Banking Platforms
The modularity of the Core Banking Platform, which separates transaction management from banking services like new account creation, loan management, deposit and withdrawal processing, and other related management activities, is its key component.
Localized changes can be tested and implemented quickly and easily thanks to the modular architecture. By combining their logic and data into a single point that can be connected to any other endpoint, associated services can be added using APIs. Greater configurability is the outcome.
The Four Generations of Core Banking System Digitization
Transitioning to next-generation platforms in banking is a process. Although not all organizations go through all the levels of transition, the oldest institutions have had no choice but to go through all of the four generations. Depending on where your organization lies, it will determine the next step of digitization.
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The First-Generation
Organizations with a monolithic legacy system add a middleware layer between the core and the ESB in an effort to reduce latency. However, at this level of digitization, the organization still endures:
- Limited digital interface and limited features.
- Heavy-code proprietary digital calls to the ESB.
- Long ledger latency updates for many digital calls
- Excessive embedded legacy cost.
The Second-Generation
At this level of digital transformation, financial institutions adopt a service-oriented architecture. They move from a monolithic core to a service-oriented core. The benefits include:
- They can also add digital functions easily compared to the first generation; less limited and less costly.
- They can develop and deploy service-oriented “fat applications”.
This is not enough because new challenges arise:
- Enhancements do not scale, although abstracted development improves efficiency.
- “Fat Application calls” replace the many ESB calls.
- High embedded legacy costs.
The Third-Generation
The above challenges push most organizations into the third phase of core digitization. This is a transition from a service-oriented to a microservices API-enabled architecture. The benefits of this move include:
- Easier integration.
- Increased real-time transactions.
- Moderate embedded legacy costs.
- More scalable application development.
The Fourth-Generation
This is the next-generation core banking solution. It becomes a platform rather than a system. It is often fully cloud-native and highly configurable. The benefits are endless and include:
- Very lean development layers that are configurable.
- Easy addition of digital features.
- Templated APIs defined as Data
- Each microservice is reusable, traceable, and accessed via APIs.
- Zero embedded legacy costs.
Which Core Banking Solution Is Right for Your Organization?
Choosing the right core banking solution for your organization is critical for enhancing customer experience, increasing operational efficiency, reducing costs, and improving risk management. To ensure that you select the best solution for your organization’s needs, it is important to clearly define your goals and objectives. The right core banking solution will support and enable your organization to achieve its goals and objectives.
When choosing a core banking solution, it is important to consider its flexibility, scalability, and cost of implementation and operation. A solution that is easily customizable and integrates well with third-party applications is ideal. It is also important to consider the solution’s capacity for scale and its long-term operating costs.
Conclusion
In summary, the legacy system has been a key part of the banking industry for decades. However, with the advancement of technology and the need for customer experience improvement and cost reduction, banks are migrating to the core banking platform.
The legacy system was not able to provide a seamless customer experience due to its limitations in terms of scalability, security and integration with other systems. The core banking platform is geared towards providing a better customer experience with increased efficiency and lower costs of operations. Start banking smarter with a better core banking solution!
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