Core banking and Digital: Two Sides of the Same Coin

Core banking and Digital: Two Sides of the Same Coin

Luke Casey
by Luke Casey

When you consider a bank’s core banking and digital departments, the two evoke very different thoughts.  Core banking can often be seen as the dinosaurs of banking technology, specialising in legacy mainframe systems with complex batch based architecture and slow change processes.  Digital are seen as the cool kids on the block: specialising in agile, developing with new technologies and evading slow and painful governance processes.  Being diametrically opposed, it is often a challenge for these two departments to work together. However, for an established bank it is imperative that core banking and digital cooperate effectively. 

In an ideal world, a bank would embark on a wholesale core banking migration to a new digitally enabled core banking platform such as Flexcube or Temenos.  However, these projects aren’t just horrifically expensive and long, they’re also fraught with danger – just ask TSB.  Therefore the prudent approach is to modernise existing core banking systems through a combination of platform simplification and re-factoring using microservices and APIs.  Digital departments can then focus on creating a feature rich user experience layer which is seamlessly connected to the back end platforms, managed by the core banking teams.  The core banking and digital teams need to be closely aligned to ensure universal banks have a good chance of competing with the likes of the true digital banks.

We have recently facilitated a series of workshops for a global, universal bank to bring the core banking and digital teams together.  The objective was to strengthen both teams’ understanding of each other’s business objectives and deepen their working relationships.  We quickly realised that the challenges are shared across the industry and the learnings that were garnered could be applicable to many similar financial services firms.

Take a domain based approach

Modern core banking systems take a domain based approach to classify functionality by what it delivers, rather than by the process which the code supports.  This enables code to be re-used across many processes and allows for common capabilities to be combined into domains.  APIs should also be domain driven rather than building multiple very specific System APIs.  This will allow the underlying platforms to be re-factored into microservices without affecting the APIs which are already built.

Traditional core banking systems are usually built as part of a monolithic architecture.  This means that they’re composed all in one piece and are self-contained: if any program component must be updated, the whole application has to be rewritten.  Modern core banking systems take a domain based approach where functionality is grouped by what it delivers (in a module or microservice).  Each separate module can be changed without affecting other parts of the program.  Code can then be re-used across many processes which allow for common capabilities to be combined into domains.  APIs should also be domain driven to support reuse and limit a large number of very specific System APIs.

This approach intrinsically links back end functionality with customer experience.  It’s imperative to understand how the customer interacts with the bank and the outcomes they’re trying to achieve.  The technical functional model can be mapped to the business domain model; this can be utilised when re-factoring legacy platforms to ensure any changes are focussed upon enhancing the customer journey.

Mobile first is the present, API first is the future

In recent years banks have focussed on simplifying the mobile banking experience in order to gain market share and keep pace with new entrants.  This is still vitally important and ensuring that any mobile offering is cutting edge is vital in maintaining and growing the customer base.

With the dawn of PSD2 and Open Banking, the focus will inevitably shift towards creating open APIs.  In response to PSD2 banks face a crucial decision: to become a simple utility provider, or to become a central hub to facilitate customers, services, providers and payments.  If a bank chooses the latter then its APIs can become a commercial proposition and need to be developed as such.  Creating a suite of high quality Open APIs is no small feat and becomes more challenging for banks hamstrung by legacy platforms.  Indeed, the March PSD2 deadline for exposing APIs was met by only 41% of banks.

The journey towards building out performant, useful APIs, that would serve the market as a whole, starts with data. Having an accurate, consistent and well understood data model helps simplify the challenge of creating high quality APIs.  Once the underlying data is in order, Digital and Core Banking teams can work together to identify, prioritise and build out APIs that bring the greatest customer and commercial benefit.

BBVA has shown the value that can be delivered if the hard work upfront is completed.  By focussing on data, BBVA have been able to demonstrate their commitment to Open Banking by creating their Banking as a Service solution.  This allows companies to connect into a core digital banking platform through which they can access the whole suite of bankwide APIs.  BBVA believes that their platform has the potential to significantly change the way people and businesses bank and it certainly seems to be a key differentiator.

Decouple core back end components from a standardised configurable user experience layer

If the Core Banking teams can decouple the back end systems from a user experience layer, via microservices and APIs, new functionality can be rapidly deployed to customers without the need for hefty, time and resource intensive back end changes. Since the front and back end will be loosely connected, development can be carried out independently of each other.  This provides a number of benefits such as: speedy development and testing, agility and reduced complexity of infrastructure.

Of course, these three learnings need to be supported by all of the softer elements associated with collaboration.  Constant communication, harmonious development practices and consistent standards are all a necessity to ensure a fruitful partnership between core banking and digital. 

Putting all of this into practice is certainly easier said than done.  The organisations who traditionally own legacy platforms tend to be large universal banks who like to speak about Agile and implementing modern technologies but struggle to make this a reality.  However, it’s important that these organisations don’t throw in the towel; modernisation can be achieved with end to end communication and multiple departments working together as one.  If this nirvana state can be attained then it will enable banks with complex legacy mainframes to compete with the purely digital challenger banks. 

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