Core Banking: Getting to the Heart of the Matter

Antony Jenkins, the former Barclays Bank CEO, recently suggested that banks risked being “museums of technology”. Core banking is the beating heart of traditional banking and the hardest to change. Career-making and career-ending decisions are made in this difficult-to-change area of the technical landscape comparable to open-heart surgery.

The opinions expressed here are those of the authors. They do not necessarily reflect the views or positions of UK Finance or its members.

Core banking software is often the prime exhibit of a “museum of technology”. Core banking is typically a set of homegrown applications that have evolved from their origins in the 1970s, often utilising mainframes. These aged solutions tend to be reliable but over-complex and require downtime for maintenance. They’ve become difficult to enhance and develop. The banks face a ‘pension wall’ as their existing technology workforce ages and shrinks. Importantly, these same, aged applications have suffered many years of organic growth, often to address additional enterprise requirements and compliance changes but creating a highly complex landscape far beyond the original scope.

Challenger banks, by comparison, are unburdened by legacy, jumping through years of technology evolution with access to modern development methodologies, improved deployment strategies, and a vibrant resource pool of technical talent conversant in new software technologies and with specialised banking-as-a-service options available.

Today established banks are embracing the need for a digital transformation journey to ensure better customer products, improved user experiences, organisational agility, better use and understanding of data, and ultimately lower cost which are under-pinned by more efficient capable systems.

But transformation is a potentially complex high-risk journey in a complex landscape. Well-publicised major transition programs, across banking and other industries have sometimes resulted in failure.

Dramatic industry failures may discourage banks from embarking on similar ventures. CxO jobs are often short-lived, and wholesale core banking change, can be a career-defining journey. Any C-level exec who commences such a project faces the cost of the investment but may not be around to see the benefits; whilst they risk taking the blame for any failure.

With this technology inertia, the cost of change and maintenance continues to grow; as the technology arm of banks is forced to adopt to new business requirements. Changes are made by deep customisation of existing legacy systems combined with translators and adaptors.

How does a traditional bank achieve digital transformation to a next-generation core banking solution? The facetious answer is to say, “I wouldn’t start from here” but it’s necessary to find a path to success.

We consider two potential routes here which are, to an extent, contradictions of each other.

‘Strangling the monolith' is an approach that has its advocated. Specific pieces of core banking functionality are gradually removed from the legacy core and instead handled by smaller more manageable components. 

Modern next-generation banking applications are cloud-native and utilise microservices, which are minimal footprint applications that address a specific piece of functionality only; ideal for ‘strangulation’. So, for example, a bank could revolutionise its lending applications to support Buy-Now-Pay-Later, equity release, longer-terms, and other lending innovations, but leave traditional current accounts where they are. 

An alternative approach and an emerging trend in core banking focuses on preserving the ‘kernel’ of core banking functionality; decomposing into its most basic function – an Account Management Service (AMS). The approach is to separate out account-related functionality only so that business and customer services for current accounts, loans, and savings live outside but consume services from the AMS.

By embracing these principles, a bank is able to extend behaviours that are needed from the next-generation standardised core AMS, taking narrow slices of functionality from the incumbent core.

The replacement of smaller packages of technology facilitates a rapid return on investment – with demonstrable wins along the way which are immediately visible to all stakeholders, providing a better balance of risk to reward over time. These smaller applications can also potentially be run in the cloud whilst the critical element of core banking (the AMS) can remain in-house under close control of the bank. The approach of balancing between cloud and in-house may help address the concern that regulators have over potential systemic failures related to cloud concentration risk.

For traditional banks, the challenge is to avoid becoming technology museums and to adopt a successful strategy that enables them to compete with the emerging threat of challenger banks who are at a different place in their technology lifecycle.