When you walk into a bank, you may be there to get cash out of an ATM, deposit a check or speak with a banker about a loan. You’re probably not thinking about the core banking system that underpins the bank’s operations.
Gartner defines a core banking system, as “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.” Basically, core systems are the mission-critical systems that facilitate almost every major transaction for banks.
Currently, only a small percentage of banks have transitioned their core banking systems to cloud-based platforms. Other banks without on-premises core systems often outsource their data to private clouds through their core provider. However, industry analysts and experts expect more banks to migrate as they modernize the systems. Cloud-based core banking lets banks automate processes, deploy new services for customers in a timelier fashion and gain efficiencies that can redound the bottom line.
To successfully make a transition to cloud-based core banking, bank IT leaders need to educate themselves, find the right technology partners and be open to a new way of doing business.
How Cloud-Based Core Banking Helps Banks
Cloud-based core banking is still relatively new, and has only been prevalent in the U.S. for about three years. According to Adobe’s 2018 Digital Marketing Study, only seven percent of financial institutions have implemented a cloud-based technology stack.
Christopher McClinton, senior vice president of payments and operations at the American Bankers Association, said earlier this year that ABA’s “Core Provider Survey” found that banks are generally receptive to cloud-based core banking.
As BizTech reported earlier this year: “According to the survey, 29 percent said they would consider it, 50 percent said they were unsure and 21 percent said they would not consider it. While that obviously reveals a great deal of uncertainty, McClinton said one way to look at the results is that nearly 80 percent of bank respondents are at least open to the idea of cloud-based core banking.”
Still, experts and analysts who are steeped in the world of core banking solutions, or CBS, think cloud-based core banking will soon become more mainstream. John Schlesinger, chief enterprise architect at CBS provider Temenos, told Computerworld UK last year that he thinks the majority of new core banking projects launched by 2020 will be in the cloud.
James O’Neill, formerly an analyst at financial technology research and advisory firm Celent and now a managing partner at fintech investment firm Motive Partners, wrote in June 2017 that by 2019, cloud-based CBS platforms “will have gained enough market traction to become a regular part of a bank’s RFP process.”
“Banks and their IT service providers ought to start now in formulating their competitive response to the coming age of banking in the cloud,” he wrote.
“The migration of CBS platforms to the public cloud presents a rare opportunity to achieve two conflicting objectives at once: reducing costs and capital requirements while increasing agility in the building and running new digital services,” O’Neill noted.
According to David Mitchell, president of core banking modernization company Nymbus, the cloud “is a business asset that no modern bank — regardless of size — can afford to bypass.”
“It’s become clear that any financial institution relying on a legacy infrastructure cannot compete against faster and more innovative digital competitors,” he tells BizTech.
Cloud-based CBSs enable financial institutions to accelerate their growth in unparalleled ways, Mitchell says.
“Modernizing their existing technology environments enables them to automate operations and workflows, resulting in increased efficiency, security and cost savings,” he says. “With the right digital partner, these organizations are set up to rapidly respond to new digital products and services for serving their current and future consumers.”
Best Practices for Adopting Cloud-Based Core Banking
If you are an IT leader at a bank and are considering adopting a cloud-based CBS, what do you need to think about?
Mitchell advises IT leaders gather as much information as possible and immerse themselves in the trend. “Even if they are not going to pursue those opportunities, having educational conversations is a great way to get to know what options they have when they’re finally ready to transition,” he says.
A critical element of any transition is finding the right partners with which to build meaningful relationships, Mitchell says. “We put our clients and prospects at the heart of everything we do, and we always act with honesty and integrity,” he says. “We also stress the importance of communication and being transparent. Not only does it make the entire experience better for both parties, but it also creates the foundation needed to be successful.”
Banks need to have the right people and tools in place to make a migration successful, especially leaders who can adapt to changing technologies, says Mitchell. “They must also ditch the mindset of ‘this is the way it’s always been done,’” he adds. “Having training materials in place and a developed implementation plan will ultimately provide them with the resources they need to succeed.”
Another consideration is whether to go with a public or private provider for a cloud-based CBS. Some cloud-based core providers, like Mambu, work with public cloud providers. Last year, Finastra, the company formed by the merger of the bank-technology vendors D+H and Misys, announced it would run a digital banking and core processing platform in IBM’s cloud. Public cloud providers can provide scale and security for banks.
Nymbus’s platform dedicates a private cloud to each client, “ensuring high levels of security that cannot be accessed by other clients in the same data center,” Mitchell says. In doing so, “the hardware, storage and network configuration is ultimately dedicated to each client.”
That makes compliance “significantly easier, faster and cheaper to achieve,” Mitchell says. “Unlike the public cloud, the private cloud allows hardware performance, network performance and storage performance to be specified and customized to each institution’s business needs.”
Whether banks go with a public or private cloud, they must always ensure that their (and their customers’) data is as secure as possible, which is why a close partnership on cybersecurity is essential in any transition.
Cloud-based core banking may not be booming right now, but banks should take note of the trend since it can deliver clear benefits and will likely grow more prominent in the years ahead.