In this article, we will look at how the core banking solutions have evolved over the last four decades – evolving from simple automation systems to lifestyle banking. We will also dig a bit deeper into what the customer as well as banks are looking for in the core banking system (CBS) in current times.
Synopsis
The Core Banking Solutions (CBS) have evolved significantly over the last four decades. The expectations of the customers as well as banks is significantly different from CBS these days. There have been four waves of evolution in the CBS space. The following table illustrates the changing asks in each of the waves.
Evolution of CBS
When we are talking of CBS here, we are using the term loosely to refer to the set of solutions that the banks use to provide services to their customers. This includes offering like demand deposits (Saving / Current accounts), fixed term deposits, loans, Payments, origination solutions.
Wave 1 - Automation
The first wave of “computerization” was simply automation. This started in 1980’s. The focus of this wave was merely moving from physical ledgers to automating the same. While this may appear to be a very basic step, it was revolutionary in nature. Suddenly, we no longer needed experts in each location for doing banking. Also, the accuracy of the computations (like interest computation) no longer depended on the expertise of the person doing it. This was a real game changer and it took banking to a new level.
As the focus was only on automation, the solutions tended to be more “branch based”. Here the customer would always go to the same branch where the customer had an account to operate the account. This was perfectly fine as the customer was used to the same – however, now he was getting much better, consistent and reliable service.
Gradually, as the branch networks increased the customers started demanding service from any branch of the bank. However, this was a challenge as often the data was stored within the branch where the account was opened. This paved the way for Wave 2 of CBS – where the focus was that the customer can operate his / her account from anywhere.
Wave 2 - Branch Independent Banking
Wave 2 started in early 1990s and a majority of the banks moved from a branch based CBS to a centralized CBS. This further increased the activity in banks as it provided the customer freedom to operate from any location. This coupled with more focus on formal banking and growing economy resulted in significant increase in banking accounts / transactions. Another change that happened was on the technology side. CBS in Wave 1 was primarily based on mainframes. In wave 2 some of the banks moved to a “client server” architecture – segregating the user interface from the business logic. However, the earlier mainframe solutions continued to provide anywhere banking and some banks continued on this.
Wave 3 - Bank in your Pocket
With increasing accounts / transactions came increased operations cost. The banks were constrained by the number of branches / staff they had to service the transactions. Advent of internet in mid 1990’s and rapid growth in usage of internet paved the way for Wave 3. Here the focus was on self service channels. This started with ATMs dispensing cash anytime of the day and quickly spread to ability of customers to do transactions on internet. The Wave 3 took center stage in early 2000 with all banks clamoring to introduce “net banking”. A trend within this generation was also change in architecture – some banks moved from client server architecture to n-tier architecture. Now, we had banks running all generations of solutions – mainframe based, client server and n-tier architecture.
Another micro trend within the Wave 3 was mobile apps. With introduction of iPhone in 2007 and first Android phone in 2008, a totally new avenue of self service opened up. Banks started offering transaction services on mobile apps. Within a decade, the transactions done on mobile apps raced ahead of transactions done on net banking or from branches.
As the mobile apps increased, the profile of transactions started to change. Till the first decade of 2000, payment transactions were restricted to being done within the working hours of banks. However, customers had the need for doing transfer across banks at any time that they wanted. This need was met by payments which were made 24*7 – and also real time. This paved the way for Wave 4 of CBS – which started around 2018 and accelerated during the pandemic.
Wave 4 - Lifestyle Banking
Introduction of 24*7 real time payments was a “behavior changing” event in banking. Earlier banking was something that you did a couple of times in a month. A customer would go to the bank and withdraw amounts that he needed for the month. With ATM this changed to once a week withdrawal – while the customers could do more withdrawals, the charges associated with ATM withdrawal was a deterrent. With payments becoming 24*7, customers started replacing cash with real time payment transfers even for very small amounts (less than INR 10 / USD 0.14). This resulted in a significant increase in transactions at the bank. Another fallout was on availability of systems. Earlier it was normal to take “planned downtime” in the middle of night. However, with payments being available 24*7, this downtime was no longer available. Advent of social media further amplified the impacts of any downtime – as people took to social media to talk about any downtime of banks leading to reputation risks. While the transaction processing cost increase, banks could not pass the entire cost to the customers. 24*7 payments added the ask for reducing processing cost per transactions (and hence TCO) as well as reducing / eliminating planned downtime.
With the advent of APIs and extensive integration in the eco system the integration is becoming more complex. Since there is no standard, each bank have their own take on the API specifications. An attempt is being made to standardize this via Open Banking. Payment Service Directive 2 (PSD2) in Europe, Account Aggregator and Open Credit Enablement Network (OCEN) in India are initiatives in this direction. The wave 4 CBS need to be enabled for Open Banking. The customers have now come to expect that they should not have to go to the self service applications of the bank – they should be able to use whatever apps they use on a day to day basis - they are now looking for banking as a service which can be called from their favourite apps. This is introduction of lifestyle banking.
Events like the “Black Friday Sale” or the “Great India Sale” used to see increasing traffic on credit cards alone. With introduction of real time payments, there is increased traffic on demand deposit accounts as well. This means that the bank need to be able to dynamically scale up without manual intervention. At the same time, the banks do not want a permanent increase in hardware cost just to handle the. Hence the need for scale on demand and pay for only what you use.
Banks are seeing increasing competition from Fintechs / challenger Banks. There are two ways that banks are tackling this – one is being more agile and second is partnering with them. The biggest advantage that fintechs have is that they are much more agile. The Wave 3 solutions were monolithic in nature and hence change required a lot of time as well as there was risk that change in one area could impact another area. In order to overcome this, banks have started looking for non monolithic applications – one of the options is a microservices based architecture. A lot of banks are also partnering with the fintechs having complementary offerings. This means that the banks need to offer APIs which are secure, which the fintechs can consume. A related ask is to have a sandbox environment with all the APIs deployed which fintechs can use to experiment and come out with new offering.
With increasing focus on privacy of data, another emerging area is protection of Personal Identification Information (PII) data as well as securing sensitive data. PCIDSS for storing of credit / debit card data, storage of AADHAAR number (in India) are prime examples of this. As this area is evolving, a number of new regulations are emerging. Wave 3 solutions have a challenge to implement these ask. A Wave 4 CBS is expected to have tokenization, redaction and encryption as part of the core offering so that as regulations evolve, setting up on how to handle the different types of data should be configuration and should not require code changes.
As the transaction volumes increase, so does the operation cost. Robotic Process Automation (RPA) is increasing being used to reduce operational cost as well as reduce operational risk. Earlier the RPA solutions had been bolted on top of CBS as an afterthought. A Wave 4 CBS should have native integration with RPA out of the box.
The banks today are sitting on a wealth of customer data. Currently this data is not mined effectively to compute profitability of the customer as well as explore options on how to provide better service to the customer or get a bigger share of wallet. Analytics using AI / machine learning is another area which is expected by banks.
Considering the significant increase in transaction volumes, impact of any downtime is very high. Further in monolithic applications, it is very difficult to figure out the area where there is a problem. Observability & Manageability has to be a significant focus area in CBS solutions.
With increasing real time transactions, comes the risk of frauds. This is becoming a big area of concern and banks are looking for solutions which offer a real time fraud detection offering so that the extent of fraud can be reduced – if not eliminated.
Another area of concern is security. Banks are facing a challenge to keep up with the increased demand of security – keeping their environment safe atleast from known vulnerability. With increasing complexity and size of deployments, managing data center is also becoming a challenge. In order to overcome this, managed solutions where the hardware as well as software is managed by external experts is an ask which is echoing across banks.
Banks traditionally have been slower in adopting technologies. With the cloud options increasingly becoming more center stage, banks have started looking at cloud options seriously. With Bring Your Own Keys (BYOK) options being provided by cloud providers, the regulators have also started giving a green signal to cloud deployments. Banks are adopting two approaches for this – Lift and Shift which is taking their existing CBS and deploying it on the cloud as a monolithic application. Second approach is to have a cloud native application deployed on a cloud. The second approach while preferred requires a significant investment by the suppliers of CBS as well as by banks. Some of the CBS suppliers have been trying to provide an interim solution where certain layers are being converted to non-monolithic applications. Some CBS suppliers have also embarked on a journey to totally rewrite the CBS ground up.
What next?
Banks need to evaluate their existing CBS and see where they stand in the evolution of CBS. They need to decide on what is their end state and how the journey will be, for moving from their existing state to the desired end state. This journey is not an easy one – however, considering the changing requirements, this is a journey which cannot be avoided.
Manish Gupta
Co-Founder, FYNDNA
