What Core Banking’s 40-Year Evolution Says About What’s Next for Banking

There’s a misperception about bankers and banking. That misperception is that money — in all its forms — is the most important asset. The reality is that customers are the most important asset, because if there are no customers there is no money. And financial services executives who understand the connection also understand the importance of technology as it serves those two assets: customers and their money.

It’s a connection easily made by Michael Haney, head of product strategy at Galileo Financial Technologies, who told PYMNTS in a recent interview that banking infrastructure has undergone a significant evolution over the past few decades. It’s an evolution that’s important to both customers and their money.

Banks are no longer feeling the need to build, own and operate their own data centers, to purchase hardware, to build everything in-house. They’re increasingly becoming more comfortable with getting their infrastructure, platforms and software in a service model from the cloud, said Haney, as the definition and construct of core banking systems changes.

This allows the bank to focus on things that are more important, according to Haney — namely customer engagement, product innovation and risk mitigation — rather than grappling with non-differentiated back-office processing.

The Guiding Principles

“A core banking system, at its heart, is where your account lives as the customer of the bank,” Haney said in a new installment of the “What’s Next in Payments” series. Core banking spans all manner of financial products, from checking and deposit accounts to personal loans.

Behind core banking, of course, lies technology — and banking technology has changed over the last several decades, Haney noted. “We’ve moved from monolithic mainframes of the 1970s to the client server computing era that took hold in the 1990s, to now, today’s API centric architectures,” he said.

Microservices are among the basic building blocks — and everything’s moving to the cloud for on-demand computing power and storage.

There’s another shift that’s been in the works, he said, where the core banking systems (CBS) have slimmed down. Larger banks may have built their own in-house platforms — or perhaps core processors are powering smaller community banks.

“The role that this actual CBS application plays is much more limited in the grander ecosystem than it once was. It focuses again on being that system of record for the customer accounts, the day-to-day posting of all kinds of debits and credits to those accounts,” said Haney.

Connectivity and Embedded Finance

Technology is important, he said, and so are technological changes. But it’s what those changes enable that’s bringing a sea change to financial services.

Joint research from PYMNTS Intelligence and Galileo has found that roughly half of account openings are happening at FinTechs and digital banks — and so the takeaway for traditional financial institutions (FIs) is that they have to take a more customer-centric approach and update their offerings to make sure they resonate with customers.

The digital challengers, he said, have not only embraced this concept of direct or branchless distribution, but they have upended the banking business model, with new, more transparent pricing frameworks, combination products and most importantly, superior user experiences.

With cloud-based core banking services in the mix, “we see the ability to create new combination products by breaking down silos that once existed between deposit lending and payment solutions … and there’s the ability to connect the bank to a broader ecosystem and support trends like open banking and embedded finance,” said Haney.

That connectivity is especially important, he said, to younger consumers — millennials, Gen Z and other cohorts — who have not known a world before the internet or mobile phones.

“They expect their bank to be always available, they expect transactions to be processed in real time, and they expect ease of use,” said Haney. As many as 60% of individuals prefer to manage their day-to-day financial activities without any human interaction at all, according to the Galileo Consumer Banking Report by Datos Insights.

The rise of embedded finance, and the breaking down of silos, also has been a boon to financial inclusion, said Haney, as banks and other providers are able to serve gig workers, immigrants and lower income households. The reach of the banks themselves will only broaden with the rise of open banking, said Haney, as consumer-permissioned data helps shape FIs’ strategies and go-to-market approaches.

“What started out as a vision to allow customers to control their own data has turned into much, much more with all these other use cases that are changing open banking frameworks,” said Haney.