Sandeep Sood

5MF Issue 2: The Core Banking System

Featured image for 5MF Issue 2: The Core Banking System

The year is 1968.  You need to make a cash deposit. You put on your fancy 1968 outfit, complete with a stylish hat, and head to your local bank branch. The teller puffs on a cigarette and informs you that your account will reflect the deposit at all branches in 24 hours...if you're lucky.

This is life before 1970: awesome clothes, stylish vibes, no core banking.

What does the ‘core’ stand for?

This is the rare occasion in which an acronym works as a word and abbreviation.

Abbreviation: Centralized Online Real-Time Exchange

Word: Core banking systems enable the core services a bank provides.

What happened in the 70s?

Innovations in computing and telecommunication technology made data available in real time.

This is the essential ingredient of a core banking system: a centralized data center that distributed bank branches can access via software applications, in order to get real-time (or close to real-time) account information.

Technologists built these systems on mainframe computers using early programming languages like COBOL.  Fun fact: many of today's largest banks still run a significant portion of their systems on code that was written in the 70s (this is the exact opposite of a fun fact if it is your job to maintain these systems).

What are ‘core’ bank functions?

The definition of core banking varies depending on who you ask. Let’s start with what seems to be the most widely accepted list:

  • Deposits (checking, savings)
  • Lending
  • Payments
  • Credit Cards

The above list includes a general ledger by implication and applies to both retail and commercial banking. Some banks include CRM (customer relationship management), regulatory reporting, and risk management in their definition of core banking, and others include specifically institutional functionality such as wealth management and money markets.

The Core Banking System Landscape

Most banks implemented their core banking systems years ago. These legacy systems, clearly an inferior choice in the era of cloud computing, cost the banks hundreds of millions of dollars over the years to develop and maintain. They are bloated and integrated with other systems in ways that sometimes only a handful of people at the bank still understand.  Yet, they more or less work, which makes it even more difficult to make the tough decision to migrate towards a modern, cloud-native solution.

‍Third party core banking solutions are dominated by a small group of vendors in the United States:

Fiserv: 38% Market Share

Jack Henry: 16%

FIS: 12% (high concentration of large banks)

Finastra: 4%

(source: AITE Group LLC, 2019)

Neobanks started during the past few years don’t have legacy systems or bank branches. They are helping to support a new set of core banking startups that are built for the world of cloud-based APIs. Companies like Neocova, Finxact, Nymbus, and Temenos are enabling forward-thinking banks to leverage modern application architecture.