How to build a digital bank using a cloud core banking solution
Introduction to a cloud core banking
Thinking about modernizing their core banking systems, banks are considering various options: leaving them as they are, upgrading their current core banking system or replacing it with a new competitive solution. The last option can offer the biggest advantages in the long term; however it often turns out to be the lengthiest and the most risky of them all. Would a cloud-based solution be a better option? What should be considered? What should be included in the scope and how to carry out the whole process?
What is a cloud core banking system?
Cloud core banking systems are back-end systems that process daily banking operations and post updates to accounts and other financial records (Gartner). Their main characteristic is a cloud-native architecture that enables installation in private or public clouds, and even their rental within the System as a Service model. Their functionality concentrates on highly effective operational processing with a set of connectors that allow seamless interactions with various applications (ecosystem) required to run the banking business (CRM, KYC, AML, payments, treasury, or reporting). Such implementation approach is called composable architecture. The core engine of those systems is closed for modifications and separated from the configuration layer that allows making adjustments needed for a specific bank (e.g. specific product parametrization).
Cloud core banking architecture
Why banks should consider cloud core banking systems
Cloud technology is a game-changer, it reflects a new way of working and brings a breath of fresh air to big companies. Many banks are considering or have already started the migration of their IT infrastructure to the cloud. Such a move usually starts with moving non-critical systems, with the decision about core banking being usually postponed due to its significant impact on daily operations of banks.
Functionalities of cloud core banking systems are designed to process financial events linked with various banking products, and not to manage all operations related to those products. Therefore, the cloud core banking system is just a starting point, and banks need to integrate the whole ecosystem (various systems or components) to include all the functionalities that they used to have in traditional core banking systems.
Despite its complexity, moving to the cloud core banking system may bring significant business benefits. The decision about migration to the cloud core banking system should be primarily driven by business needs and benefits. And thus, there are several aspects that banks should consider from the business point of view:
- Do you need to enhance your customers’ journey quickly with new features using integration with other systems, e.g. delivery of dedicated offerings or immediate control of suspicious transactions?
- Wouldn’t it be great to have access to the latest system features by upgrading the core banking software seamlessly without the need to run a project for several months and engage a dedicated team?
- Is the creation of processing logic for a new product in minutes or hours without substantial IT skills worth considering?
- Are you interested in making business decisions quicker and easily adjusting offers to changing client’s needs thanks to near real-time reporting instead of end of day or end of month for the bank’s portfolio?
- Does a subscription cost structure for hardware and software usage and paying just for used computing power sound more interesting than freezing money to build hardware infrastructure and keeping fully operational licenses?
If you have answered YES to any of the above questions, then definitely the cloud core banking transformation is what you need to consider.
Key cloud core banking concepts
Before a bank will jump-start the migration to a new cloud core banking system, it should understand and consider several concepts:
- Cloud core banking system focuses on parameterization of products and processing of related financial postings, which is very efficient (volume and processing time), enables cost optimization and is built with the use of the best-in-class modern IT technology
- When implementing a cloud core banking system, banks need to create a cloud-based ecosystem of software to cover all capabilities required for running business operations. Cloud-native core systems are provided with a set of event-based adapters and APIs including ready-to-use connectors to selected systems (e.g. KYC, General Ledger, Customer management) available in the vendors’ marketplaces. In such a model any software built in cloud technology can be easily replaced.
- Near real-time reporting is a tempting concept that may trigger business ideas but the existing reporting architecture in banks is built around end-of-day or monthly batch data snapshots loaded into data warehouses where more attention and resources are assigned to data cleanup and data maintenance than to speeding up the information flow. As financial and regulatory reporting based on daily / monthly /annual data will still be required, it is necessary to build a solution that will link both worlds (near real-time and financial/regulatory reporting).
- In some countries regulators may not agree to banks using public cloud infrastructure. This will not allow them to get all benefits of the cloud, however they may still make use of some of them by building private cloud infrastructure.
The transformation journey to cloud infrastructure and a new cloud-native core banking solution may be a bumpy ride, therefore we would like to point out key lessons learnt from our previous engagements. Some of them may be obvious at the beginning of a transformation, however they may be forgotten or neglected later, especially when the transformation has been going on for several years. It is good practice to equip the transformation team with a list of key tasks that are required for successful execution. Such a list should be reviewed every 3 to 6 months. We suggest including at least the following items during the migration to a cloud core banking platform:
- Proper change management: There are several aspects that should be considered when planning transformation:
- Cloud core banking systems philosophy: as design approach of a cloud core banking software is different than legacy core banking software, the idea of composable architecture needs to be spread internally to avoid direct comparison between these two solutions
- transformation plan and progress: clearly communicating high-level project plan and backlog for coming months to all project participants is a crucial point that should not be underestimated as it helps keep the momentum and the right motivation level
- bottom-up safe communication channel: a safe communication channel available to each project team member to raise any doubts or questions
- new competencies: implementation of a cloud core banking system is not only a technology change, it requires the development of new skills within the organization, both in IT and business functions
- Clear architecture vision is a key to successful implementation. Bank should agree on high-level architecture and key principles and stick to them during implementation, especially in terms of a clean separation of responsibilities between systems, having their capabilities in mind. If there are doubts about any functionality or architecture decision, a quick proof-of-concept should be prepared and evaluated.
- Agile way of work is a default choice for cloud implementations; however, it is important to ensure the right level of supervision and reporting for executives to make them feel comfortable about such a critical change like core banking system replacement. Besides, when planning a full replacement of core banking software, it is advisable to start the implementation from a single banking product or a new business line offering and gradually transfer satellite systems into cloud banking infrastructure.
- Ownership of the transformation should be split between the business and IT, with both parties forming a joint team with the same goal. Project-related decisions should be made by groups consisted of business and IT representatives so that the business teams are constantly aware of the implemented changes that can influence their business as usual processes.
- Transformations are not easy for IT specialists – such engagements redefine the existing maintenance and operating teams, make current competencies obsolete, remove a lot of in-house built software, replace working solutions with others and require new skills. This can be a chance, but it also requires proper management of the IT function transformation, which is inevitable.
- Clean up: a good practice when transformation and migration take place is to get rid of the existing unused data and configurations that have grown in IT systems for years – it includes data warehouse cleanups, closing products that still exist on books with several clients that have not received any offer for a long time, fees and commissions tables that are long and hard to understand even for employees, etc.
The implementation of a new cloud core banking system is a significant change not only from technological perspective, but also from the perspective of business operations. Banks which decide to do this are entering new territory and must apply agile mindset to succeed. Transformation is also about choosing a reliable and knowledgeable system vendors and partners that would bring in a set of skills and experience that bank specialist may not have. We see that more and more banks are entering this space and being a trailblazer can bring many benefits, like quicker time-to-market for new products, improved decision-making processes across organization thanks to near real time reporting and ability to attract tech talent, which is a challenge across all sectors.