What financial institutions need to know about coreless banking

Coreless banking represents a groundbreaking paradigm shift in the world of banking, aiming to revolutionize how financial institutions operate.

In a nutshell, it is about embracing a system that gives banks the ability and flexibility to build and customize products on a single platform. This strategy enables a wide range of innovations, from banking-as-a-service (BaaS) programs to the launch of digital-only brands. It even facilitates the expansion of business capabilities, such as commercial sub-account management for gig economy wallets and rental offerings.

One of the key characteristics of coreless banking is that it is not only for large organizations. It is an approach that any bank – regardless of its size – can adopt within its ecosystem. 

Now's the time to take a closer look at how coreless banking can impact the banking landscape.

Understanding how coreless banking works

Let's get one thing clear: Coreless banking does not mean a "banking system without core." Instead, it is a transition from monolithic systems to architectures built on microservices and application programming interfaces (APIs).

As banks embrace coreless banking, APIs become pivotal tools to foster connectivity and interoperability. Acting as digital bridges, APIs facilitate seamless communication and data exchange among systems, applications, and external entities by providing standardized interfaces and protocols.

Therefore, financial institutions are no longer tied to a single core banking system vendor. Thanks to this adaptability, banks can construct their systems in a more vendor-neutral manner and easily integrate or replace services as needed.

Added to that, banks are not obligated to source all banking software modules from a single vendor. Instead, they can opt for the best-of-breed software modules from various vendors to suit their specific requirements.

Coreless banking can help financial institutions in numerous ways

The essence of coreless banking lies in its incremental nature. The process begins with the implementation of a virtual account system. This system allows banks to store customer information and associated accounts outside their traditional core banking systems, opening avenues for new business models and innovations.

Furthermore, coreless banking empowers financial institutions to achieve considerable cost savings. The reason is that it allows for the creation and maintenance of accounts at a fraction of the cost incurred by legacy systems. And this approach streamlines the way banks implement new solutions without having to invest heavily in IT infrastructure.

What's more, federal banking regulators have indicated that there will be a notable rise in supervisory scrutiny of financial institutions in 2024. In this ever-changing regulatory environment, coreless banking can help financial institutions achieve compliance. 

This is because these systems eliminate the need for third-party agencies. By giving ownership and control of their channel management, they allow banks to implement policies, procedures, and controls aligned with regulations and adjust to regulatory changes or evolving industry trends.

But there is a hurdle to cross

When it comes to implementing coreless banking solutions, some financial institutions might face challenges because of the technological gap between their existing infrastructure and the requirements for modernization and innovation.

Traditional core banking systems developed between the 1950s and 1980s are unable to keep pace with modern cloud-native platforms that can offer cost-efficiency, speed, scalability, and agility, which are vital for banks to adapt to market changes and innovate.

To tackle this issue, adopting an API-first approach is crucial, as it enables seamless integration with external systems, third-party services, and digital channels. Designing robust APIs with well-defined contracts, security mechanisms, and documentation can also facilitate interoperability and foster innovation. Finally, a comprehensive assessment of existing core banking systems, infrastructure, and technology stack is necessary to identify legacy components, dependencies, and areas for improvement. 

The bottom line is that coreless banking is about liberating financial institutions from their reliance on outdated legacy infrastructure. And it opens the door to crafting tailor-made products and services, unlocking cost-effective solutions, and meeting regulatory requirements. Even though traditional core banking systems pose challenges to implementing coreless banking, innovative tech solutions, such as APIs, pave the way for a smoother transition.