It’s time for core banking to get real
In my last couple of column pieces, I discussed the most important functional and technical characteristics that would define the ultimate core banking solution.
It really is time for banks to get ‘real time’ with their core banking solutions
However, it was pointed out to me that I took something for granted, and in hindsight, it was a great observation.
In today’s world, where we are used to online shopping and mobile payments, many are not only carrying less cash but fewer cards also. It’s easy to think that all banks are truly running online every single minute of every day. However, this is simply not the case.
It’s hard to quantify exactly how many, but a significant number of banks – I would guess at least 50% – are still running on legacy core banking systems that have overnight batch processes. These batch processes update ledgers with charges, interest and transactions that could not be processed in real time or near real time.
There are a number of reasons for this. For example, when these systems were created:
- Transactions were carried out in branches so were built to handle the branch staff user base, not the creation of transactions by customers.
- Most transactions used cash, so a significant amount of processing was not done on the core banking system at all.
- Technology and especially storage was expensive and it was cheaper to process transactions in volume overnight when branches were not operational. At this time, branches were connected to central mainframes using expensive private networks, too.
- There was no real-time settlement between banks.
I’m sure there are some grey-haired readers out there that can add more reasons.
Aside from the huge volume increases and the expectations of consumers that banking is 24x7x365, the act of processing transactions has become much more complex. In the very early days, you could only transact what you had in your account. Later you could have overdraft limits based on an offline credit assessment. These days, more advanced platforms are constantly assessing your income/spend to not only understand your risk, but to check for fraud, anti-money laundering and many other processes to meet compliance and reporting requirements.
In part one of my “one core to rule them all” double bill, I did say that the ideal core should “always be on”, and there should not be a period of time where the system is shut down for “overnight batch processing”.
However, this does not tell the full story. Some systems achieve “always on” by capturing transactions while batch processing occurs, thus appearing to be “always on”.
Beyond “always on”, real-time banking is really becoming less about processing transactions (don’t get me wrong, this is still key) and much more about processing data in real time.
As mentioned above, there are an increasing number of processes that banks have to carry out for every transaction. For some of these tasks, legacy technologies simply can not scale to improve those processes. For example, imagine if banks could spot a fraudulent transaction by identifying that an ATM withdrawal at 11pm in London could not be possible when the customer had used their card to pay a bill in a branch at 10:55pm in Edinburgh. Or that a crypto purchase was unlikely for a 78-year-old that still uses a cheque book and visits their branch weekly to withdraw their pension.
Aside from protecting the customer (and the bank), there are huge opportunities for real-time banking to hyper-personalise banking, and most importantly to improve the one thing they are rapidly losing – customer engagement.
Today, banks have lost some of their engagement to fintechs and neobanks providing, quite frankly, not much more innovation or vastly improved customer experience. I’m quite happy to be challenged on this. But just as the “Uber experience” has been replicated by new challengers and even existing taxi companies, improved customer experience in banking is now table stakes.
Aside from real-time banking or the processing of transactions, some core banking vendors already provide real-time data analytics and truly scalable event processing to allow way more to happen behind the scenes than is possible on legacy platforms (even many incumbent core banking solutions).
This sounds technical, but let’s look at a business example. Imagine a bank could offer a product whereby every customer that spent over £100 on a meal on Valentine’s Day would receive a gift or cashback if the total spent by all its customers was over £1 million. This may be a silly example, and I’m sure you can imagine better – which I’d love to hear from you. The point is that something like this would require real-time queries across customer transactions, not an offline batch process typically run on a legacy data warehouse architecture rather than a real-time database.
Building on this, imagine the useful conversations you could have with your bank’s AI. You could ask questions like:
- Looking at how much I spend on my car with fuel, tax, insurance and maintenance, would I be better off using taxis?
- Looking at how much I spend on trains, would I benefit from a rail card?
- Where can I make savings so that I can afford a holiday to the Maldives next year?
These conversations would not only need richer data sets, but would also require broad queries that many systems can not cope with in real time.
This week, I’m just saying that it really is time for banks to get ‘real time’ with their core banking solutions. I truly believe that failing to move to the next generation of real-time cores and analytics could be just like the Kodak and Blockbuster moments that were defined by the transition to digital.
About the author
Dharmesh Mistry has been in banking for more than 30 years both in senior positions at Tier 1 banks and as a serial entrepreneur. He has been at the forefront of banking technology and innovation, from the very first internet and mobile banking apps to artificial intelligence (AI) and virtual reality (VR).
He has been on both sides of the fence and he’s not afraid to share his opinions.
He founded proptech start-up AskHomey (sold to a private investor in spring 2023) and is an investor and mentor in proptech and fintech. He also co-hosts the Demystify Podcast.
Follow Dharmesh on Twitter @dharmeshmistry and LinkedIn.
Read all his “I’m just saying” musings here.
