We live in an era in which the world is increasingly connected, and digital media directly influences the transformation of all sectors of the banking industry. Frequent innovations are why people see a future where we are served by robots in retail stores and make payments using only retinal scanners. In fact, the future promises a lot in this regard and some of it is already in the current market, although we may not always notice it easily. This is certainly the case for core banking, a system that helps banking institutions with the task of integrating services and creating a simplified and practical infrastructure for financial operations.
Today, the banking sector has grown significantly, and it is no longer just a system for granting loans. It has become an area that offers a wide range of products and services for the personal and business economy. Core banking integrates precisely all the activities inherent to the banking system.
In addition to banking clients in the retail area, central banking is also the main alternative for creating innovative solutions capable of satisfying the demands of corporate clients as it allows the provision of complete banking services.
Given the relevance of this concept for the financial market, it is important to know what a core banking system is, how it works, its characteristics and benefits, as well as other important details for managers who want to participate in this new era.
If you’re interested in learning more, continue reading our publication and get answers to all your questions on the subject!
What is Core Banking?
According to Gartner, core banking can be defined as a back-end system which processes bank transactions and publishes their updates to accounts and other financial records.
In addition, a core banking system typically has deposit, loan, and credit processing capabilities, and interfaces for accounting applications and reporting tools.
Therefore, it is software that plays a pivotal role in the mission of facilitating and processing various types of transactions that are important to banks and their various branches.
It is also worth mentioning that consumers around the world have embraced the capabilities of the digital banking environment. Bank customers expect continuous service through multiple channels at all stages of interaction and negotiation with the company.
In this way, central bank executives are always looking to develop business models that create experiences that please their customers, can be used as new sources of revenue, and that build long-term relationships with customers.
A bespoke core banking infrastructure is capable of providing all the safety, security and robustness upon which banks have built their reputation. However, considering the high demand for scalability and flexibility for such systems in today’s market, traditional banking institutions do not have yet the right access to an agile, state-of-the-art architecture capable of integrating with other systems.
Because of this and the wave of digital transformation in the sector, this concept has quickly gained momentum and has encouraged the replacement of outdated architectures with new core banking platforms.
How Does a Core Banking System Work?
Advanced technology, growing market demand, and a range of competitors with modern resources have challenged traditional financial services, forcing banks to face a publicly-documented reality with significant structural changes.
A More Detailed Definition
As mentioned, a core banking system is capable of essentially supporting deposit, loan and credit processing functions. But this back-end functionality goes further and also processes activities such as new account administration, interest calculation, and customer relationship activity management.
It is also worth mentioning that such a system is intended to allow existing and potential customers greater freedom in transactions on their accounts. Due to the technological evolution that we are experiencing today, transactions are now safer, faster, and simpler.
The fact that these operations can be carried out remotely from anywhere in the world, has also made core banking systems important in today’s industry.
Facilities For Customers And Companies
The implementation of central banking systems helps to considerably reduce operating costs, ensuring a lower need for labor for its execution.
It also allows customers more freedom and control, as software-based platforms of this type make major banking systems easier to use and more efficient.
Therefore, the benefits of a central banking implementation meet several priorities, following the rapid evolution of the market, simplifying banking processes and making them more convenient for customers, as well as extending the reach of banks to remote locations.
The Use of the Cloud
Today, only a small number of banks make their functionality available on cloud-based platforms. Meanwhile, banks that do not have core banking systems often outsource their data to private clouds.
However, analysts and industry experts expect more banks to migrate to core banking structures as they modernize their systems. In this scenario, the advantages for institutions are undeniable, as this change simplifies banking automation, helps to implement new services for clients more quickly and allows installations that can optimize results.
Given the importance of this process, IT leaders within banks must educate themselves, find the right technology partners, and be open to a new way of doing business to make a successful transition to cloud-based core banking.
Need for Dedicated Infrastructure
The traditional techniques applied by agencies and banks to manage their online functionality are being abandoned in favor of large partnerships, where banks become orchestrators and relationship managers facilitating access to the most innovative and useful services, regardless of how they originate.
As a result, a dedicated on-premises infrastructure is required to seamlessly integrate with public and private cloud systems to maintain core bank functionality, as well as support new business models in the financial sector.
Many of the existing banking systems are designed, operated and maintained as a platform for developing and delivering products and services. However, as banks try to add Industry 4.0 features, customer communication channels and external connections, they are hampered by issues related to the old structure, the rigidity of the data model, the inflexibility of the application, IT redundancy and duplication of work.
Core banking includes replacing, upgrading or outsourcing major banking systems from traditional platforms to more digital ones. Banking platform transformation has come a long way in the past decade and has, in fact, become a company-wide activity, covering the upgrade or replacement of various products and functional operations.
However, the old banking systems that connect the institution network, that allow for mutual settlement and credit transfer between financial institutions, as well as regulatory reporting are rigidly structured and cannot handle decoupling, deactivation, and deactivation.
Successful Implementation of Core Banking
The replacement of the technological architecture of a banking institution is not instantaneous. Innovative business processes must accompany the new platform providing substantial efficiency gains.
Additionally, relying on best practices and combining them with well-aligned team models well in advance of full implementation will ensure optimal return on investment.
When a bank decides to implement a core banking system, the right partners and the right strategic direction can make a fundamental difference. Banking teams should not be afraid to seek advice from experts who have the necessary skills, experience, and perspective to handle the transaction objectively and efficiently.
In fact, considering all the internal and external pressures involved, core banking implementation requires the support of partners with a proven track record of strategic excellence and flawless execution, as successful implementation requires focus, adaptability, and commitment from all stakeholders.
The Foundation of a Successful Deployment
A core banking platform must be underpinned by principles that ensure flexibility, maintainability, scalability, and openness.
Therefore, it is necessary to consider the adoption of a complete solution instead of an attempt to adapt legacy architecture. Central banking must be flexible and at the same time consistent, so that the bank can offer its clients different resources while staying aligned with the objectives of the business.
In addition, it is necessary to:
- Maintain an implementation based on open standards to facilitate integration with other tools and technologies;
- Invest in the private cloud, fast platforms and advanced security features;
- Have a horizontally and vertically scalable solution that supports new data and customers without creating problems.
Risk Mitigation Through Alignment and Communication
The implementation of a core banking system requires good management of changes in processes, events, rules and regulations, controls, functions, service levels and in the business model.
A sensitive aspect of this process is the human factor (and its potential resistance to change). Therefore, it is essential to have clear, consistent, and continuous communication.
Bank executives and employees must understand and make the decision to transform banks. Everyone needs to understand the reasons and the benefits associated with the new system.
The participation of the interested parties begins with the definition of the basic banking requirements until the end of their implementation. However, this is only possible if everyone is encouraged to actively participate in the transformation journey and stay proactively informed along the way.
For this, it is essential to:
- Empower trusted employees and resources to achieve results;
- Create teams focused on the implementation of core banking resources with clear responsibilities and no overlap;
- Focus on ensuring prompt and timely delivery of results;
- Take an incremental, iterative , right-to-left approach to provide early visibility;
- Keep the focus on the results and benefits of implementing the system;
- Ensure a correct adaptation of the company’s culture.
A core banking system has some basic features
, which must be common to all implementations, including:
- Focus on the client;
- Management of deposits and withdrawals;
- Transaction management;
- Payment processing: cash, checks and others;
- Dedication to customer relationship management;
- Projection of new banking products;
- Availability and management of loans;
- Account management;
- Establishment of criteria for minimum balances, interest rates, number of withdrawals allowed and issues of this type.
What are the Benefits of Central Banking?
An infrastructure based on central banking offers several advantages, both for the company and for its customers. Below we list some of the benefits central banking offers:.
For The Company
For the institution, the main advantages are:
- Improved operations that meet customer demands and industry standards;
- Ability to introduce new financial products and manage changes to existing products;
- Continuous data fusion of back office and self-service operations;
- Standardization of processes within banks and branches;
- Customer retention through better service;
- Accuracy in transactions and minimization of errors;
- Improved documentation and records management: having centralized databases helps you quickly gather information and reports;
- Ease of submitting multiple reports to government and regulatory bodies, such as the central bank;
- Convenience to open accounts, process cash, maintain loans, calculate interest, implement policy changes (such as interest rate changes), among other operations.
For The Client
The customer also wins:
- The full range of banking products, including savings, deposit accounts, etc.;
- Accessibility through various channels, including internet banking in browsers and cross-platform mobile applications;
- Accurate, well-placed, and useful information about your relationship with the institution;
- Visibility that improves the relationship between the bank and the client;
- Practical application of the concept of a bank available anywhere, at any time;
- Faster services at bank counters for routine transactions such as cash deposits, withdrawals, bank books, bank statements, cash withdrawals and the like;
- Provision of banking services 24 hours a day, 7 days a week, anytime, anywhere through ATMs.
It is also worth noting that since all branches access the applications from the central servers, deposits made at any branch are immediately reflected in the system. The customer can, for example, make withdrawals anywhere in the world.
Finally, with the growth of technologies for agribusiness, it is worth mentioning how useful this technology is for farmers. Through it, it is possible to receive and track digital payments directly and practically in the account. Banking transactions between different locations and customers around the world take place in an easier, more transparent and convenient way.
Are you excited about potential of central and core banking for financial companies today? Do you want to know more about Stefanini’s role in this market? Then meet Topaz , our solution focused on core banking!