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Core Banking: The Foundation of Digital Banking

6 Mins read

It’s not a secret that the financial services industry is continuously changing and evolving, so there is an expectation for the banking industry to keep up. Today`s banking customers expect the latest in digital financial services and products, and meeting these needs is the key to success. Here is where the strong core banking solution is a must. Without it, banks are struggling to compete with younger and stronger competitors.

What is Core Banking?

According to Gartner Glossary, a core banking system is a back-end system that processes daily banking transactions and posts updates to accounts and other financial records. Core banking systems typically include deposit, loan, and credit processing capabilities, with interfaces to general ledger systems and reporting tools.

The term CORE stands for Centralized Online Real-time Environment, meaning that customers, regardless of location, can experience the bank as a single unit. It allows the existing and probable customers to have more independence in terms of using their accounts and conducting transactions from any location in the world. 

With technological evolutions, transactions are now safer, faster, and less cumbersome. The fact that these transactions can be done remotely, no matter the user’s location, has made core banking systems a significant aspect of banking these days.

As was already mentioned, core banking is a back-end computer system used to support an array of the most common day-to-day banking transactions. These transactions include:

  • Opening and managing accounts.
  • Managing deposits and savings.
  • Managing payments and cards.
  • Calculating interest.
  • Conducting customer relationship management (CRM) activities.
  • Setting criteria, such as minimum balance, interest rates, or the number of permitted withdrawals.
  • Lending, generating, and managing loans.
  • Managing the recording of all banking transactions, regulatory reporting, and data processing.

What are the types of core banking systems?

On-premise legacy solution

This system works on a locally hosted infrastructure, providing the bank administration with several customization options.

Many banks still rely on legacy core banking systems that were developed many decades ago. These systems may have outdated technology, making it challenging to incorporate modern features and adapt to changing market demands.

Due to legacy technology, proprietary data models, and limited ability to interface with other systems, legacy systems can restrict a bank’s ability to deliver new experiences, products, and services rapidly.

To address these limitations, many financial institutions are investing in modernizing their core banking systems, opting for cloud-native solutions and digital platforms that offer greater flexibility, scalability, security, and customer-centric features. 

Cloud-based solution

SaaS banking software (Cloud-based core banking software) is deployed in the cloud and therefore does not require hardware infrastructure as that of a traditional banking software suite. Sometimes, a cloud vendor offers the application as a Cloud as a Service (CaaS) on a pay-per-use basis. Other times, companies can move their local servers to the cloud to enjoy more flexibility.

While transitioning away from legacy systems can be challenging and costly, the long-term benefits in terms of competitiveness, customer satisfaction, and operational efficiency can outweigh the drawbacks.

What are the benefits of using cloud-based core banking for customers?

Cloud-based core banking systems offer several benefits for customers, enhancing their banking experience and providing greater convenience and flexibility. Here are the key advantages of cloud-based core banking for customers:

24/7 Accessibility

Cloud-based systems allow customers to access their accounts and conduct banking transactions 24/7 from anywhere with an internet connection. Clients can also contact customer support for assistance at any time. 

Multi-Channel Banking

Customers can perform banking activities through various channels, including web browsers, mobile apps, and smart devices. This flexibility enables customers to choose the most convenient method for their needs.

Faster Transaction Processing

Cloud-based systems often offer faster transaction processing times, reducing the time it takes for funds to be transferred and making services more efficient.

Real-Time Updates

Customers can receive real-time updates on their account balances and transaction history, providing accurate and up-to-date financial information.

Enhanced Security

Core banking systems use advanced encryption modules to protect the infrastructure from hackers and malware. Customers can benefit from the advanced security features provided by cloud-based core banking systems.

Innovation

Cloud-based core banking systems can quickly integrate new features and services, enabling banks to offer innovative products and functionalities to customers. This includes features like budgeting tools, financial planning, and AI-driven insights.

Customization

Banks can customize their cloud-based core banking systems to meet the specific needs of different customer segments. This can lead to more personalized and tailored banking experiences.

Global Access

Cloud-based systems make it easier for customers to access banking services when traveling internationally, reducing the need for currency exchange and providing a consistent banking experience across borders.

What are the benefits of using cloud-based core banking for business?

Cloud-based core banking systems can offer a range of benefits for businesses as well, including financial institutions and other organizations that use these systems to manage their banking operations. Here are the key advantages of cloud-based core banking for businesses:

Cost Efficiency

Cloud-based core banking eliminates the need for businesses to invest in and maintain expensive on-premises hardware and infrastructure. They can pay for cloud services on a subscription or pay-as-you-go basis, reducing capital expenditures.

Scalability

Cloud solutions are highly scalable, allowing businesses to adjust their computing resources and capacity as needed. This scalability is particularly beneficial for banks and financial institutions that need to accommodate growing customer bases and increased transaction volumes.

Faster Implementation

Cloud-based core banking systems can be implemented more quickly compared to traditional on-premises solutions. This accelerated deployment allows businesses to bring new banking services and products to market faster.

Accessibility and Mobility

Cloud-based systems can be accessed from anywhere with an internet connection. This accessibility enables remote work, which has become increasingly important in today’s business environment.

Data Security and Compliance

Cloud providers typically invest heavily in security measures and compliance certifications. Businesses can benefit from the advanced security features and expertise provided by cloud vendors, helping them meet regulatory requirements and protect customer data.

Innovation and Agility 

Cloud-based systems can quickly adopt new technologies and innovations. This enables businesses to stay competitive by offering innovative financial products, services, and features to customers.

Environmental Sustainability 

Cloud data centers are often more energy-efficient than traditional on-premises data centers. By using cloud-based solutions, businesses can reduce their environmental footprint and contribute to sustainability goals.

Do core banking systems have limitations?

Cloud-based core banking systems offer many advantages, however, they also come with their own set of limitations and challenges, including:

Downtime and Availability

While cloud providers generally offer high availability, downtime can still occur due to maintenance or unexpected outages. Banks need to have contingency plans in place to ensure uninterrupted banking operations and customer service during such events.

Integration Challenges

Integrating cloud-based core banking systems with legacy on-premises systems can be challenging. Ensuring seamless data flow and interoperability may require substantial effort and investment.

Data Migration 

Migrating existing data from legacy systems to the cloud can be a complex and time-consuming process. Data quality and integrity must be maintained during migration.

Cost Management

While cloud solutions can be cost-effective in the long run, costs can spiral if not managed effectively. Banks need to monitor usage and optimize their cloud infrastructure to avoid unexpected expenses.

Challenging Software Implementation

Considering the impressive scale of banking system logic, the complexity of processing transactions, required investments, and tight regulations, when a deal gets to core banking software implementation different challenges arise.

How to minimize the effect of those limitations?

To mitigate these limitations, banks must carefully assess their specific needs and risk tolerance when considering cloud-based core banking solutions. Implementing a robust security and compliance strategy, as well as contingency plans for downtime and data migration, is essential to successfully leveraging the benefits of cloud technology in the banking sector.

If you are looking for a way to reduce the cost of your product and to speed up your launch, you can also consider a white-label solution for your core banking. In partnership with SDK Finance, Kindgeek offers a customer-centric, cloud-based SaaS fintech solution to serve as a foundation for digital finance products. The customizable white-label core allows you to build on top of it and create a unique customer experience. No need to start from scratch – go to market quickly and cost-effectively.

Kindgeek is a fintech software development company, that has been providing core fintech banking and payment solutions to serve as a software shortcut for businesses looking to launch their fintech products, from digital wallets to neobanks, accommodating startups and enterprise-level customers, since its launch.

We are also well-versed in conducting effective product discovery phase. If you think we can help you in making your vision a digital reality, contact us

Conclusions

Core banking systems play a vital role in modern digital banking. It gives the perfect base to enhance the customer experience by providing convenience, efficiency, security, and a wide range of services. They enable customers to manage their finances more effectively and access banking services whenever and wherever they need them.

Cloud-based core banking systems also provide businesses with cost savings, scalability, agility, security, and access to advanced features and innovations. These benefits enable businesses to streamline their banking operations, improve customer service, and stay competitive in a rapidly evolving financial landscape.

Why do I need to upgrade the core banking system?

Systems that have not been updated for a long time do not have the opportunity to develop in the way that modern banking systems do. Due to technology, proprietary data models, and limited ability to interface with other systems, outdated systems can restrict a bank’s ability to deliver new experiences, products, and services rapidly.

What are the top core banking software companies?

According to SDK.finance, Temenos, SDK.finance, Mambu, Backbase, Oracle FLEXCUBE, Finacle, Finastra are the top core banking software companies to start with.

What are the essential IT core banking features?

According to the Kindgeek`s partner, SDK Finance, the core banking features indispensable in a decent solution are: centralized dashboard, onboarding (with KYC features), two-factor authentication, push notifications, loan management, interest calculators, live chat and transaction management.

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