The unbundling of core banking

Banks have evolved over time to provide a rich set of products and services to customers of all types – from consumers to small and large businesses.

The rapid evolution of technology has allowed smaller companies to reinvent core banking

However, in parallel, the number of banks has reduced through consolidation, and we have far fewer banks than we had a few decades ago. Post the financial crash in 2008, it was clear that the space was becoming increasingly dominated by a smaller number of players.

As a result, for some time, product innovation was limited, as was customer choice. Regulators sprang into action to help create more competition and fuel innovation. As such, we began to see increased funding into fintechs, who in turn began to unbundle banks product by product, process by process.

I believe a similar pattern has occurred in core banking. However, unlike banks, this is not a space regulators can step into to drive competition. Instead, it is the rapid evolution of technology that has allowed smaller companies to reinvent core banking. These companies are leveraging technologies like MACH (Microservices, APIs, Cloud and Headless) and AI to provide banks with far more flexibility, agility and scalability than solutions based on older technologies. They have created solutions to meet the demands of today’s customers – they are digital solutions for a digital world.

However, the main challenge for any bank has been moving to a new platform. Until recently, the only options really were to replace a core and migrate the data or create a new bank. Increasingly, a third option is gaining favour, and that is to modernise their existing core. This poses less risk as this option allows banks to replace parts of their core rather than trying to move it. So, for example, if regulators are breathing down a bank’s neck about their KYC or AML checks, the bank can now find a specialist provider to help. The same can be done for any product/process.

What is more is that, as I highlighted in my previous article, standards like BIAN are really helping banks to “plug and play” solutions from different vendors. Increasingly, newer providers are providing low-code/no-code solutions to help smaller banks with fewer IT resources to adopt their tech more easily. At the same time, they are providing the necessary code hooks for larger banks to have much greater control over the capability of the solutions provided so that they are not constrained by the vendor and can avoid vendor lock-in.

Process by process, product by product, and even channel by channel, I believe legacy cores are being unbundled from their monolithic code bases in a very similar way banks are slowly being unpicked by fintechs. This is the unbundling of core banking. In a similar way to banks partnering with fintechs, some vendors have also partnered with best-of-breed providers. How sustainable this will be remains to be seen, as vendors won’t have the resources to partner with all incumbents – therefore limiting their sales reach.

This week, I’m just saying that legacy core banking is slowly being taken apart. While core modernisation allows banks to retain the old core as a ledger, I suspect this is the beginning of the end. It’s no wonder that technologists refer to core modernisation as the “strangler fig pattern” – this is a type of fig that grows around a host tree, until eventually the host tree dies.

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. All opinions are his own – feel free to debate and comment below!

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 X @dharmeshmistry and LinkedIn.

Read all his “I’m just saying” musings here.