• Ulf Meyer, Spokesman of the Management Board at SWK Bank


• 02.02.2023 10:45 am
#banking

The banking industry is facing ongoing transformation pressures: increased customer demands, more regulation, and shrinking margins are increasing costs and competitive pressures for many banks. These developments come at an inopportune time: extensive product portfolios, error-prone manual processes, and a frequently outdated IT architecture not only drive up operating costs but also significantly limit the ability of many banks to act and change. Therefore, they have to adapt their business and operating models to constantly changing circumstances. The core banking system plays a special role in this. With the emergence of cloud-based offerings, banks have the opportunity to exchange their infrastructure completely or partially with complementary systems. A currently frequently discussed concept is the so-called multicore model. It integrates the best of the main and possible additional specialised platforms with state-of-the-art digital cloud-based applications.

In this multicore model, there are four possible roles for core banking: Main Core, Specialty Core, Edge Core, and Parallel Core. This separation opens up room for manoeuvre when renewing the core banking system: it is not a matter of deciding for one system and against the other, but rather for one and the other. This is because the multicore model integrates the best of the main and other special platforms. An IDC Financial Insights study with executives from the Southeast Asian banking sector reflects these experiences.

The analysis found that the gradual introduction of new core banking systems significantly reduced financial, technical, and reputational risks. In the past, the integration of multiple core banking systems was considered far too expensive and complex, the IDC said. Banks had therefore regularly tried ‘big bang’ or ‘rip-and-replace’ projects, despite high risks. There are several examples of failed migrations, also here in Germany. Cloud-based core banking systems change this principle: by dissolving monolithic structures in favour of smaller sliced microservices that are addressable via open interfaces and orchestrated via robust frameworks, it is now easier to connect multiple core systems. This reduces the risk of replacing legacy core systems while increasing their value in the long term through modular extensions.

But there needs to be good planning for eventual migration to a fully digital core. Banks used to be built to last forever, but today they need to be ready for change. With changing regulations, it is now easier than ever for consumers to switch banking providers, making customer experience the most important factor in a bank's offering. Without the adoption of digital banking technologies, incumbents will not be able to compete with the new digital and personalised offerings. At the same time, companies from outside the industry will increasingly build their own services on top of banking architectures using Open Banking or Finance.

Each bank is technically different and has its own goals in transforming its business and operating model. The multicore approach now offers the opportunity to also align the renewal of the core banking system, or systems, more closely with its requirements. And this can be done with the right degree of speed and security during ongoing operations. The prerequisite for this, however, is to adjust one's systems to the new level of connectivity and interoperability. As well as strengthening the legacy core, where necessary and possible, especially at the integration points. 

How to successively design and implement a multicore model

Before implementing, a target picture should be developed for the long term. Even in the planning phase, banks are therefore well-advised not to let the complexity become too great despite the newly gained scope for action. Both during the planning and later migration, those responsible should, if possible, work their way from the special systems step by step to the more essential components and test their functionalities on a small scale. Furthermore, it is advisable to evaluate and select a provider at an early stage who will then be involved in the design and to consider the extent to which the provider enables the mapping and orchestration of in-house business logic and what ecosystem of best-of-service applications it brings to the table. In most cases, an implementation partner provides support throughout the entire process.

Example of an implementation of a multicore model

SWK Bank makes its systems and processes available to other banks and fintechs as-a-Service. The technology and thus also the core banking system must follow this approach. To be able to serve new partners with innovative products more quickly, SWK Bank decided to expand its Banking-as-a-Service business with a new cloud-native core banking system. For this purpose, all business logic was removed from the backend and migrated to the middleware based on rules. New partners can therefore use process routes in a modular way and, due to the multicore model, even independently of the core banking system: they can work via the existing core banking system, the new core banking system of SWK Bank, or completely system-agnostically. In the latter case, SWK Bank manages the sub-ledger on its respective system and provides the reporting individually tailored for integration by the partner, for example via .CSV files.