Core Banking System Explained

Today’s banks are relying on technology to a greater degree than ever before. At the heart of what each bank provides is a core banking system. Since they hit the market in the 1970s, core banking systems have been at the heart of the banking industry. Today, they face significant changes which financial institutions must embrace to move forward in the digital age.

History of Core Banking Systems

Before the 1970s, bank branches each operated on their servers. When a customer came to the bank to put money in an account or take money out, it took at least a day for that transaction to show up in the account. Data was synced at the end of each day when all of the transactions were completed. In the 1970s, telecommunications and computer mainframes took significant leaps forward, and core banking hit the market.

Core banking allows a group of bank branches connected on a network to share data without much delay. While data transfer times have gotten faster with the rise of the Internet, the technology came to the market before the Internet’s wide-spread adoption. With a core banking system, customers could access bank account information and perform transactions in any branch. That information would instantly be available across the rest of the banks in that network.

Today, banks continue to use core banking systems to interface with their branches and multiple systems spread across geographic areas. They must handle high transaction volumes without interruption, and interruption causes problems not only with customers but also with regulatory bodies.

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Legacy Core Banking Systems Provide Trusted Reliability

The core banking systems that were developed in the 1970s and decades after are known as legacy systems. These are reliable and trusted resources for banks, and they rarely suffer outages. Many banks and credit unions have continued to use these systems because of their reliability and long history of success.

Banking Industry Shifting Away from Legacy Systems

Though legacy systems are reliable, they are starting to have problems. The addition of online and digital banking, cloud-based technology, and APIs has created a new way of interacting with bank accounts and banking products. Customers expect banks to be able to update account data quickly and process transactions in real-time. They must present new customer-facing products and payment processing systems to keep up with the competition.

While banks have been trying to continue with their legacy core banking systems, just tweaking them to adapt to this new digital world has created some issues. The engineering talent that understands these older systems is starting to dwindle. The customization needed to make them work often leads to complicated coding that not all technology providers understand. Vendors, such as credit card processors, may not provide adequate support when problems arise because of this.

New Core Banking Systems Hitting the Market

Legacy core banking systems are working to adapt to the new digital world and bring out new technology to make them relevant in this changing market. Still, a new type of core banking system has also risen in the past decade. These systems are cloud-ready or cloud-based, making them more scalable and customizable for the banks that adopt them. They are also open-banking compliant.

Many new core banking systems use advanced architecture to make releasing new features simple. This flexibility allows them to be more adaptable as banking technology and customer demand evolve and change. Many smaller community banks find these new cloud-ready systems more affordable, especially with the option to configure services to what their customers need and want.

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Does Your Legacy Core Banking System Still Meet Your Needs

Today’s banks and credit unions must evaluate whether their existing core banking system meets their needs. Whether it is a legacy system or not, it needs to have a large amount of flexibility and adapt to the changing digital world.

If yours does not, it may be time to either replace it or transform it. Both options have merit, and working with an advisor is the best way to determine which option is ideal for your financial institution. Our firm can help you analyze your needs, compare those needs to what your current system offers, and determine how you can embrace the digital transformation while continuing to deliver the customer experience your clients demand. Reach out to discuss your core banking system with our advisory team to see what options you have to move forward into the digital banking world.