February 10, 2017

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Reimagine Core Banking Systems for a Service-Based Economy

The Componentization of Core Banking: Embracing XaaS

The increasing complexity of IT applications has influenced every industry, and banking is no exception. A traditional core banking system – even if it’s for a tier 3 or tier 4 financial institution – needs a virtual armory of support applications, which typically function in disparate, fragmented siloes. This creates a process chain that offers the service provider little visibility, and the customer little flexibility.

Take the case of debit and credit cards – in spite of being an essential for every bank, there’s no core banking application that integrates all its support functionalities well. The same operations are performed by multiple applications – the core banking system, the card management system, the treasury system, and the trade finance system. Beyond the obvious cost and effort duplication, it can also lead to missed business opportunities. With no comprehensive access to client data, financial institutions cannot provide offers that take their entire range of services, or the entire range of customer engagements, into account.

The Banking Industry Architecture Network (BIAN 5.0) seeks to address this very challenge – setting industry benchmarks for banking functionalities. It unravels an institution’s requirements into component services – which combine to form an As-a-Service Landscape. This demands the disintegration of core banking functionalities into basic functions – from which customers can then pick and choose.

As financial institutions transition from conventional core banking systems, here’s what emerge as the defining features:

Robust customer relationship management (CRM) suites – It offers a unified view of customer engagement across layers such as credit card, loan repayment, and savings accounts. This cross-linkage of data facilitates personalized product and pricing strategies. Further,banking CRM simplifies KYC compliances, and fosters deeper relationships between the bank and its customer.

Centralized payment hubs – Despite a plethora of specialized payment solutions in the market, banks struggle to adopt applications that cut across service lines and network components. As a result, industry innovators like Misys are shifting towards an autonomous offering – that works independently of its core banking functionalities.

Flexible collateral management – Instead of loan-based allocation, collateral should be approached as an asset, and accessible across various types of loans and multiple banking functionalities. Emerging collateral management applications are leveraging a service oriented architecture to create flexible, cross-service asset-models.

Integrated product management – Core banking systems must derive parameterized data from central product catalogs – and coupled with payment hubs, the specialized product component can create personalized, location-based offers. This will resolve inter-branch, or inter-level conflicts via an overarching data pool.

A stable foundation layer –In a service based economy, with every functionality reduced to a consumable component, the role of core banking will be redefined– as a black-box system whose main function is to simplify access and usage of its parts. Beyond account management, data collation and reporting needs, tasks performed by traditional core banking systems will be reassigned – significantly reducing overheads.

Plug And Play functionalities – A ‘componentized’ architecture creates a framework where modules can be added, upgraded or removed without the need for a complete solution revamp. For example, adding a module to a payment hub that’s already network-integrated is more resource-efficient than implementing a new payment system, and then incorporating it with multiple networks.

Omni-channel delivery – Today, customers expect providers to not just be available on all channels, but also ensure a uniform ‘look-and-feel’ across platforms. A componentized architecture eliminates the need for an extensive orchestration layer as services are already seamlessly integrated without being monolithic. Additionally, the provider is not bound to a single vendor – enabling a channel ecosystem which is flexible, as well as scalable.

Pan-enterprise support systems – A service-driven architecture necessitates a mediating layer when linked with a support-process repository. Deploying an Enterprise Service Bus (ESB) allows components to be moved/eliminated without affecting existing support configurations. While this model may demand additional resources in terms of computational power, the resulting landscape is simpler and, in the long run, more sustainable.

After defining the essentials of a ‘componentized’ core banking system architecture for core banking, selecting the modules/solutions comprising the landscape is the next big challenge. In an attempt to be at the cutting edge of service innovation, financial institutions usually opt for the best-of-breed solutions – without carefully considering the potential cost, harmony or conflict between these elements.

At HCL, we recommend a ‘best-fit’, as opposed to a best-of-breed, approach. An As-a-Service landscape naturally renders multiple core banking functionalities redundant – organizations must leverage this, and create a ‘stripped-down’ framework that combines service excellence with resource efficiency. A stable foundation layer, supplemented by a few, capable cloud-based components, may prove to be ideal for a modest, tier-3 financial institution.

However, there are several challenges to such a radical, infrastructure-level transformation of core banking system architecture. Independent vendors are often reluctant to adopt a componentized approach, apprehensive that the flexible service selection will reduce revenue. Initially, smaller banks may not be able to cover the transition costs. Yet, at HCL we recognize that As-a-Service frameworks are central to a customer-centric, scalable organizations – financial institutions must, therefore, harness the benefits offered by componentized architecture in order to thrive in a disruptive ecosystem.