In 2009, Paul Volcker famously described the ability of the banks to evolve as follows: “The banks’ last true innovation was the ATM.” But that no longer holds true today.
Ever since the advent of cloud services, APIs, and digital banking, banks have witnessed a major shift in the way products are put together, with an emphasis on room for scale, user-friendliness, and cost-effectiveness. However, with the constantly rising customer expectations, banks are grappling with the push for digital transformation to stay competitive.
Core banking architecture, the backbone of a financial institution’s operations, stands at the heart of this transformation. It is this foundational technology that processes daily banking transactions and updates accounts and other financial records.
The architecture a bank chooses can profoundly influence its agility, capability to innovate, and the efficiency of its services. As such, selecting the right banking architecture is not merely a technical decision; it’s a strategic one critical to a bank’s growth.
To help you make the right decision, here’s a comprehensive overview of the types of core banking architecture and how to choose one.
Different Types of Core Banking Architectures
Several banking architectures can be characterised by their approach to data sharing, customer interaction, and technological foundation. Here are some of the prominent ones:
1. Monolithic Architecture
Monolithic core banking solutions have all the functionalities in a single codebase, deployed as a single unit. They are simple, efficient, easy to develop and test, but difficult to scale, modify, and adopt new technologies. Eg: A payment application and a store position application are part of the same IT solution. Since the object model is consistent across all components, there is no need to invest in complex mapping between different areas.
2. Service-Oriented Architecture (SOA)
SOA breaks down the monolithic structures of legacy core banking solutions into services, making them more modular. This architecture facilitates easier integration with new services and third-party applications, offering better flexibility than traditional models.
3. Microservices Architecture
You can go one step further with microservices architecture, which decomposes applications into small, independent services. Each service runs its own process and communicates through APIs. This modularity allows banks to update banking platforms or scale services independently, significantly reducing the time to market for new features. While Microservices architecture gives banks much needed flexibility while creating core banking solutions, composable banking takes it a step further.
What is Composable Banking?
Composable banking is an approach that is gaining traction as banks seek greater agility and innovation. It refers to a modular banking architecture where capabilities are built and deployed as ‘plug and play’ services.
But it goes way beyond “modular.” You see, modular banking is characterised by a predefined suite of proprietary modules that extend the functionality of the bank’s core systems. It’s more of a puzzle piece that can be put together to create a pre-defined picture.
Whereas in composable banking, the core banking systems coordinate between independent applications through open APIs. And functionalities can be controlled by easily adding or removing applications. It’s more like building Lego structures where blocks(applications) can easily be replaced for the best-fit solutions. Here are some of the primary benefits of composable banking:
- Agility: Composable banking platforms provide the convenience of adding, updating, or removing services without overhauling the entire system. For financial institutions, this makes it easy to respond to market changes and customer needs quickly.
- Customisation: Banks can tailor their offerings to specific customer segments by composing a unique mix of services, thereby providing a more personalised customer experience.
- Innovation: With a marketplace of services, banks can experiment with and deploy new features rapidly, fostering a culture of innovation.
- Cost Efficiency: By reusing services and leveraging cloud solutions, composable banking can lead to significant cost savings in development and maintenance.
When choosing a core banking architecture, keep change at the centre of your decision, specifically in terms of how fast your organisation can respond to it. Given the pace of digitisation and fast-evolving customer expectations, your business must stand resilient against change, be it micro or macro.
This paves the way for consistent customer satisfaction rates, an expanding product lineup, and the ability to scale on demand. iGCB’s Digital Core cloudbanking platform allows you to do all that with cloud-native and AI-powered efficiency, achieved through our signature eMACH.Ai solution. Smarter business products, streamlined processes, and a tech stack future-proof against change – integrate all this with your banking with iGCB’s Digital Core.
Upgrade to scalable, cost-efficient, and innovative core banking solutions today. Start your transformation journey here.