Choosing a Core Banking System: Choose With These 4 Selection Criteria

New core software can clean up the mess currently made from outdated tech - this is the year to migrate and select a new core banking system.

Simply put, legacy systems are outdated and ineffective when compared to modern platforms. Banking technology services have evolved at breakneck speeds, and advanced software solutions offer far more benefits than the rigid architecture of days past. 

To complicate the matter, some legacy systems still use core software built over thirty years ago. The patchwork of API designations and data silos spread across several different programming languages makes for a haphazard core system.

Yes, core migration and software build-ups take time and effort. But for financial businesses, the cost-saving opportunities, integration possibilities, and overall resilience to economic movements that core banking software provides cannot be ignored. As Financial Brand stated: the banks who refuse to migrate away from limited technology will fall behind. 

Switching core banking systems is a difficult task, but now is the time to make the shift.

Key Components of Core Banking Systems

At the heart of every bank is its core banking system that records and manages customer accounts and transactions. Components of a typical core banking architecture include:

Database Environment 

The database stores critical customer information and financial transaction data. Banks utilize high-capacity relational databases from vendors like Oracle, DB2, and SQL Server, which can securely handle millions of accounts. Database administration aims for maximum uptime, fast performance for queries and updates, scalability to accommodate growth, and resilience with backup/recovery procedures.

Application Environment 

The core banking software suite handles the business logic and workflows for various banking functions:

• Maintaining savings and checking accounts; 
• Processing loans; 
• Calculating interest; 
• Moving money between accounts; 
• Producing customer statements; 
• Facilitating payments; 
• Transferring funds. 

Leading packaged applications provide robust capabilities out of the box. Banks can customize and extend functionality if needed. 

Enterprise Security

Security is paramount for the highly confidential customer information and high-value financial transactions in banking systems. Banks deploy measures like access controls, network segmentation, data encryption, multifactor authentication, fraud monitoring, and cybersecurity tools to harden their environments against external and insider threats.

Connectivity 

Seamless and secure connectivity enables convenient access to banking services for customers and employees. Core banking solutions provide adaptable integration mechanisms to link with internal systems and external networks, software, services, and data sources. APIs facilitate innovation and digital transformation. 

Data Center & Disaster Recovery Center

Resilience against outages gets addressed through measures like redundant infrastructure, uninterrupted power supplies, active-active data center configurations, data replication, backups, and offsite disaster recovery systems. Business continuity plans aim for near-zero downtown even in adverse events.

Transaction Monitoring

Banks monitor transactions in real time to detect fraudulent patterns. Alert rules engine and machine learning models trained on known fraud typologies protect customers and the bank from financial crime. Security analytics and visualization provide actionable intelligence.

A robust core banking system with these well-architected components empowers a bank to securely and efficiently serve consumers and businesses today and position them for the innovations of tomorrow. Pay attention to these features when comparing various banking technology system selections.

Cloud-Based Core Banking System Architecture

Traditional bank infrastructure relied on legacy on-premise systems to handle core banking functions like deposits, loans, and account management. However, banks are increasingly transitioning to cloud-based core banking to leverage the benefits of scalability, cost savings, faster deployment, and accessibility. 

Cloud core banking offers significant advantages, but also has limitations that banks should consider.

Benefits of Cloud-Based Core Banking

Advantages of cloud-based core banking for businesses:

• Cost Efficiency. By eliminating the need for on-premise hardware and maintenance costs, businesses can significantly reduce operational expenses.
• Scalability. Cloud-based core banking solutions provide the flexibility to scale resources up or down based on demand. This scalability feature enables banks to adapt to changing customer needs and market dynamics more effectively.
• Faster Implementation. Cloud solutions do not require physical installations, so banks can launch new capabilities faster. Rather than wait months for hardware delivery and setup, cloud services can be deployed in weeks or days.
• Accessibility and Mobility. Cloud-based core banking systems offer enhanced accessibility and mobility, enabling staff and customers to access banking services anytime, anywhere.
• Data Security and Compliance. Cloud platforms often come with robust security measures and compliance certifications, ensuring that sensitive customer data is protected. Cloud services also readily enable compliance with regulations like PCI DSS and GDPR.
• Innovation and Agility. The automated updates of cloud platforms allow banks to seamlessly add new features. Banks can leverage advanced capabilities like AI, machine learning, and API integration to enable innovation.
• Environmental Sustainability. Cloud data centers are more energy efficient than traditional bank infrastructure due to server virtualization and renewable energy use. Cloud core banking therefore supports banks' environmental goals.

While a cloud-based core banking architecture provides substantial benefits, financial institutions must go into the decision with their eyes open to the potential challenges and limitations of the cloud.

Limitations of Core Banking Systems

Banks should be aware of the following potential limitations of cloud-based core banking systems:

• Downtime and Availability. Cloud platforms can sometimes experience outages that make banking services temporarily unavailable. Banks must ensure providers have adequate redundancy to minimize downtime.
• Integration Challenges. Integrating cloud-based core banking systems with existing legacy infrastructure can be complex and time-consuming. Banks need to plan and execute integration strategies to ensure seamless operation.
• Data Migration. Migrating large volumes of banking data to the cloud while maintaining integrity requires careful planning and execution.
• Cost Management. Variable cloud costs related to data storage, network usage, and transactions can sometimes lead to unexpected expenses. Banks should optimize cloud spending through close monitoring and governance.

Cloud-based core banking enables key benefits like scalability and accessibility but also introduces new challenges around integration, migration, and availability.

Innovative Technologies Shaping Core Banking System Architecture

Several emerging technologies show strong promise to transform core banking infrastructure:

Artificial Intelligence (AI) and Machine Learning

Banks generate massive amounts of customer data that can be used to train AI models. These models can then:

• Automate tasks;
• Predict customer needs;
• Detect fraud;
• Personalize offerings.

For example, machine learning algorithms can review loan applications, predicting risk and creditworthiness. AI virtual assistants can handle customer inquiries without human intervention.

As AI capabilities grow more advanced, core banking systems will need to be optimized to support integrated AI across critical functions.

Blockchain

Here are a few points why this trend could be beneficial for core banking:

• Blockchain-based ledgers can enable secure information sharing between banks, enhancing transparency and audibility.
• Smart contracts can automate complex financial transactions and processes.
• Cryptocurrency support allows faster, more efficient cross-border payments.

Blockchain offers a decentralized, distributed ledger that can transform core banking in areas like payments, contracts, and data sharing. Transactions are recorded chronologically and transparently on a shared ledger, verified through consensus mechanisms. It disintermediates third parties and reduces reconciliation.

Consortium models allow groups of banks to collaborate on blockchain networks. At the same time, integration will be a challenge as blockchain represents a decentralized approach compared to the centralized nature of core banking architectures.

Robotic Process Automation (RPA)

In a bank, RPA can be applied to processes such as:

• New account opening
• Loan processing
• Record updates

RPA improves efficiency, speed, and accuracy. Bots also free up human workers to focus on higher-level tasks.

Many back-office functions like transaction processing and report generation involve repetitive data entry and validation steps ripe for automation. RPA robots can interact with banking IT systems to complete these mundane tasks quickly and accurately.

Banks can build agile, future-proof core banking systems by harnessing the capabilities of emerging technologies. AI, blockchain, and RPA are the innovations that will shape the next-generation architecture of core banking.

Core Banking Service Criterion

Not all core banking systems are the same. Each service provides different application solutions, so you need a checklist that notates the best selection features. 

The core system you adopt affects all aspects of your business, so the structure needs to implement smoothly in order to avoid business delays and any extra expenses. 

We made this checklist to help you with your search. Use the following four selection criteria to locate the most optimal core system for your business: 

1. Functionality 

Each core banking service needs proper built-in functions to meet user demand. 

Client preference can shift without notice, and the increase in fintech solutions puts pressure on digital applications to handle any market variance. Select a core service that comes with the functionality to meet your business needs.

Standard Bank Function

The basic bank controls must work without flaw. Look for platforms that manage seamless bank operations such as card issues, account openings and retrievals, transfers, payment processing, and IBAN Generation.

Ledger Operations

Reporting is an oft-overlooked process. Any financial institution needs detailed ledger accounts and generalized balances for compliance and stable economic growth. 

Visualization is also crucial - ensure that the service you choose can generate reports that export digitally.  

Front End White Label Platforms

The available software integrations are countless, and each program offers an enhanced customer experience. 

The UX of the front end application is crucial. To limit the time spent rolling out software solutions to market, select a white label service. A system that offers customized software can save up to six months of development time when compared to custom-built API’s. 

Save yourself the hassle, and gain marketing flexibility with white label systems. 

2. Componentization

Componentization splits the coded software into manageable pieces, which can help improve product development speeds. 

Having well-designed segments of software promotes technical reliability, and it encourages collaboration with developers. 

A bank can make rapid changes to market demand by switching out component pieces. Look for these componentization elements from your core banking service. 

Component Transfer

Core migrations used to take years to implement. Now, the transfer can occur within a business year. 

To help streamline that process, a high-level core banking system will transfer the software in component pieces. 

You can incorporate segments over time, which lowers training time and reduces error. A component transfer limits current disruptions to any banking services. 

Solution Simplicity

Software built from modules reduces overall complexity. While functionality must be present, a core banking system with a focus on component simplicity streamlines all integrations. 

Many core systems need overlaid stacks to work, and without a simplified structure, the entire process can break apart. 

Search for a banking system solution that can swap software partners with ease. 

Component Automation

KPMG released a survey that outlined the increase of manual labour in IT services, a move up to twenty-five percent of total staff. 

A core banking system that incorporates automation can reduce that expense. 

Automation also accelerates update times on stable programs, and component-based developers can program software performance improvements in real-time across different servers. 

3. Microservice Architecture

The technical parameters of each core banking service are central to your selection criteria. How well the back end of any application functions will drastically improve company efficiency. 

The programming language and the original source code props up the entire system - finding a healthy architecture supports cost-effective system operation. 

Open Source Tech

Legacy technology cannot subsume programs outside its program language. 

To sidestep this problem, outdated systems layer new coding language on top of the old, making a convoluted and slow program. 

Some core banking systems use language that date back to the ‘50s, such as COBOL or stand JAVA. Select a core banking system that uses up to date, user-friendly coding language.

Integrations

Open source tech offers base code that can include a variety of API’s. A core banking system should be able to integrate with a wide variety of third-party digital solutions.

With easy integrations, any manner of application can connect directly into the core service. Take advantage of digital solutions and custom features with no system issues. Integrations also keep back end interfaces clean and usable.  

Cloud-Native

A core banking service built on-premise is static in nature. Moving server function into cloud-ready applications never translates as it should. 

Find a service built with a cloud-native architecture that can shift into cloud computing with ease. As more businesses move into cloud-based server storage, this is a significant aspect that your core banking service should support. 

4. Technical Support and Price 

Price

Price points for core banking services can vary to an immense degree. 

Additionally, some pricing plans may seem attractive at face value, but they often include several in-app fees. Take note of the following hidden fees that can show up within a core banking service: 

Hidden Fees to Watch For In Your Core Banking Service: 

• Initial Setup Fees
• System Transfer Fees
• Third-Party Integration Costs
• In-house API Development Costs
• Customization Costs
• Monthly Fees for Saas Platforms
• Monthly Fees for Core Program Function
• Maintenance Fees
• Server Storage and Data Costs

Each core banking service has its own pricing and fee plans. Many services will adjust in price based on the included functionality. 

Select a core banking service that fits your business strategy, then ensure that all fees and payment plans are disclosed. Since migration is such a difficult task, you do not want to shackle yourself with an expense-ridden platform. 

Technical Support

You might need extended technical support to implement the core banking system. 

Service systems are complex, and most businesses need in-depth backing to scale. Ask yourself if the hired service supports aggressive growth. 

Look for update schedules given out by the provider, and double-check that they include all necessary security features. 

Compliance and data protection are a requirement, so ensure that the core banking service includes high-level encryption. Customers expect continuous access to services, and they desire data privacy. A core banking service that presents a high level of technical support can decrease bugs and test malfunctions.

How Much Does а Core Banking System Cost?

The total costs can vary significantly depending on the vendor, features, and customizability of the software. Generally speaking, there are three main categories of core banking system costs:

Low-Priced, Basic Software

The most budget-friendly options are basic core banking architecture with limited features and customization. This type of software typically ranges from $11,000 per month as a SaaS model without any setup fees to around $55,000 for a software license purchase. The low monthly fees appeal to smaller fintechs or companies looking to provide basic payment accounts to a limited customer base without plans to scale up or offer expanded services.

Mid-Range, Customizable Software

For fintechs looking for more flexibility and the ability to customize, mid-range core banking technology system selections are a better fit. Prices in this range can vary but typically start around $11,000-$16,000 per month for a SaaS option, either with no setup fee or a setup fee up to $55,000. 

Software license purchases usually fall between $160,000 and $270,000. This middle category allows for more configuration and is optimal for startups that want to continuously improve and expand their product offerings.

High-End Systems

At the top end, larger financial institutions can invest in advanced core banking systems with extensive capabilities. The monthly fees for SaaS start around $32,000, with setup fees of $270,000 or higher. 

Perpetual license purchases start at approximately $1.2 million. This expensive, high-capability tier is for fintechs managing hundreds of thousands of customers with plans to move toward a full banking license.

The wide range of core banking system costs allows companies to select an option aligned with their business needs, growth plans, and budget. Carefully evaluating features, vendor reputation, and long-term goals will enable fintechs to choose a system that provides value and positions them for future success.

Ask The Experts On Core Banking Services

Core banking service migration can feel like a stressful affair. 

Search for system functionality, componentization, high-level system architecture, and provider support pricing when selecting the core banking service that is right for you. 

For more information, we would be happy to provide more details throughout the selection process. If you need direct guidance, click here to access our consultancy page - we will contact you shortly.