Core Banking Digest: Cloud, On-prem, or Hybrid?

With the emergence of new technologies such as AI, ML, IoT, and so on, the fintech industry is facing drastic changes and modernization. To keep up with the ever-increasing demand for customer-centric, efficient, and multifunctional banking services, companies have to advance their core banking systems.

As a means of data control and execution of crucial digital and physical banking processes, CBS comes in three major versions — on-premises, cloud-based, and hybrid solutions. If you wonder what option will work the best for your business model, you’ve come to the right place to find out. Fasten your belts!

Introduction to Core Banking

This term is used to define a back-end system that helps multiple teams and business branches of the same financial establishment to stay connected and guarantee high-end operations to their audience. As of 2022, the global CBS market was estimated at around $11 billion and is expected to grow at a rate of more than 9% annually.

With various features available, such systems will come in handy for different types of fintech companies:

small, midsize, and large banks;
credit unions;
microfinance institutions;
private banks;
community banks;
online and mobile banks;
investment companies, and so on.

Core banking systems aim at streamlining routing finance-related operations and handling any vulnerabilities and weaknesses of the establishment proactively. The range of available services usually includes the following:

audit and logging tools;
regulatory compliance solutions to ensure stable performance and customer privacy;
risk management instruments;
analytics and reporting;
tools for fee and interest calculations;
customer relationship management efficiency;
deposits, withdrawals, loans, transfers, and payments processing;
services to create, secure, and handle different kinds of user profiles, including checking and savings accounts;
APIs such as simple integrations with payment systems;
scalability features;
regular upgrades and real-time notifications;
recovery system and streamlined troubleshooting schemes;
multilayered cybersecurity mechanisms;
vendor’s support via multiple channels.

Deployment Models for Core Banking

While there are three basic approaches to integrating a CBS, it is crucial to estimate your company’s needs and infrastructure to see what tactic will deliver high-end results and revenues. This research will come in handy to define what combination of legacy and modern technologies and tools you require at the moment and in terms of future-proofing your investments.

Here is a common scheme of a tech stack in the market:

Front-end — it is devoted to customer experience and communication channels.
Mid-layer — add-ons such as risk management, loan and payment management, CRM, and so on help address customer requests and monitor their accounts and payments.
Back-end — a core banking platform itself serves as a general ledger and creates financial reporting and end-user data analysis.

Although businesses easily invest in optimizing front-end customer engagement technologies, the role of back-end services shouldn’t be underestimated. The failure of core banking software will result in losses for the entire infrastructure. Keep on reading this guide to see how to improve your business’s back-end capabilities and achieve a new standard of CBS at sites.

On-premise Core Banking

That’s what experts also consider a traditional legacy solution. Since it is hosted locally, it depends on the company’s expertise and effort in maintaining its up-to-date performance and tool stack. The first stage of the project requires significant resource allocation and professional in-house teams to control the process and proceed with ongoing support.

Brands prefer this method for the freedom of choice it offers. Although you will have to stick to the rules of the game and be attentive to must-have regulations and security standards to comply with, it stands out in opportunities to design and optimize the front-end and back-end of the service.

Advantages of On-premise Solutions

If you are seeking direct control over your company’s fintech infrastructure and want to know for sure what mechanisms help keep things in order, it is the best approach. You won’t suffer from connectivity issues and can receive an advanced product without significant TCO increases during its life cycle.

Challenges with On-premise Banking Systems

Dealing with such solutions will mean addressing these issues:

It will require more time, effort, and funds to implement and upgrade the existing system.
You bear full responsibility for software and hardware quality, optimization, disaster recovery, data backups, innovation implementation, storage, and other factors defining the credibility of the chosen CBS approach.
You will need to invest a lot more to cover the cost of hardware and software for launching and maintaining the self-hosted infrastructure.

Cloud-Based Core Banking

When it comes to exploring the efficiency of this CBS deployment approach, it is crucial to understand what model you require at the moment:

SaaS — as the most common type of service, it stands out with high-end risk and resource management, integration capacity, quick deployment, and automatic updates. With simple accessibility and scalability, this service is more cost-effective and simplifies deployment and maintenance challenges.
IaaS — when you go for infrastructure as a service, you can expect a boosted performance and scale of IT workloads, improved security, and optimized operational costs. Instead of purchasing physical servers and data centers, you can rely on third-party computational power.
PaaS — in this case, you will receive a platform for maintaining your banking operations across branches. If you are interested in managing the system’s lifecycle and employing advanced tools at affordable prices, it will work excellently.

Benefits of Cloud-Based Systems

Here are the key factors to say “yes” to this solution for your business:

centralized data security;
greener technologies thanks to cloud computing;
faster launch with minimized software and hardware expenses;
high availability and agility;
greater performance, regardless of the business scale;
automatic software updates;
mobility;
core banking providers’ support, and so on.

Potential Drawbacks of Cloud Solutions

The most challenging part of working with such systems is their integration with existing networks. The right choice of cloud-based core banking software will help minimize potential threats related to prospective tool incompatibility, a lack of compliance and data security, etc. To stay on the safe side, it is better to start by exploring a future roadmap first and map the dependencies and system peculiarities of the current legacy software and the new cloud-based one. Another concern to address is data privacy standards, which vary from vendor to vendor.

Hybrid Core Banking Solutions

You don’t have to neglect on-prem tools and fully migrate to a cloud-based version of CBS. Instead, to ensure this transition doesn’t lead to a negative ROI, you can combine the benefits of the two. This approach is pretty common — successful case studies by Raiffeisen Bank International and JPMorgan Chase prove how sustainable this solution is in practice.

This well-thought-out fusion of environments lets companies diversify their operations. While sensitive data storage takes place on local servers, analytics and reporting are transferred to the cloud in banking. You can choose any configuration that suits your business model and development objectives the most.

Combining the Best of Both Worlds

Let’s dig into the reasons making companies pursue this CBS approach:

advanced agility in meeting industrial challenges;
solving the problem of over-reliance on outsourcing without overwhelming the in-house team and resources;
streamlined management of different operational requests across branches simultaneously and without downtime;
easier expansion strategies that aren’t solely dependent on the vendor’s or on-premises infrastructure.

Considerations for Hybrid Deployments

While this approach allows for more flexibility and customizing business models, it requires attention to detail and an in-depth understanding of your company’s processes. It requires more investment than it might seem at first — to cover the cost of cloud computing subscriptions and in-house training programs. It facilitates innovation but would be lacking without accurate change management tactics.

Key Factors Influencing Deployment Decisions

In general, this process depends on three major groups of concerns and considerations:

Organizational context — the company’s size and infrastructure play a vital role in determining what core banking system will work perfectly.
Technological context — the overall complexity of deployment comes hand in hand with the need for an advanced tool stack to satisfy both the clientele’s expectations and the target business’s objectives.
Environmental context — competitive pressure and customer expectations are on the ever-enhancing side, which means a constant demand for better services and non-stop development.

Here is a brief and concise checklist for considerations to pay attention to select the best services:

features to ensure the service’s alignment with your company’s long-term development goals;
localization requirements with access to international markets;
functions tailored to modern trends with room for implementing future tendencies and technologies;
mechanisms to deliver top-notch backup and storage services;
failover and disaster recovery tools;
compatibility with multiple platforms and existing banking technologies;
reliability and prestige of the vendor;
system speed and responsiveness with scalable control capacity;
high-end sensitive data protection schemes;
the affordable upfront investment and ongoing fees for system support and upgrades.

Security Considerations

Without a doubt, fintech organizations of any caliber are extremely vulnerable to cyber threats since they deal with large volumes of sensitive data and funds on a day-to-day basis. While it is possible to implement protection measures for individual components and modules of the system, it is better to work on a wholesale and multilayered security framework.

When it comes to choosing the best core banking system, take into account the following:

the vendor’s experience;
what regulatory compliance solutions core banking providers offer;
the availability of backup services and recovery system tools;
available security protocols;
accessibility configurations like biometric identification and two-factor authentication.

Cost Implications

The budget you require for implementing and maintaining the chosen core banking system depends on what software you prefer and the suite of available high-end services and technologies. Overall, the variety of cost structures can be represented by the categories below:

on-premises licensing, which means pricing policies oriented on the self-hosted infrastructure with fluctuating expenditures;
subscriptions for using third-party computing powers and services for proper CBS performance;
fees for every transaction coming through the core banking system.

With the help of the Fintech core solution by Dashdevs, you can save money on deployment and get the most out of rapid bank establishment. Depending on the service package you prefer, you can choose one of the pricing models below:

The cheapest solution comes when you consider the white-label development strategy. On top of affordability, it is valued for easy system migration, maintenance, and optimization.

Scalability and Flexibility

The best tactic is to consider systems that can operate effortlessly out of the box. Such flexible configurations are common for cloud-based and hybrid CBS tactics and require more expertise in the case of on-premises solutions.

Scalability is another crucial factor in determining the best service of this kind. Whether you are a startup or a seasoned mobile-friendly banking service, the need for more storage and room for optimization is a constantly running engine toward modernization:

task management;
multi-processing;
a vast number of services;
ever-increasing client bases;
complex document and risk management.

Thanks to implementing new technologies like ML and big data under the roof of core banking software, it is possible to scale up without threatening the overall efficiency of the former legacy system.

Regulatory Compliance

If a fintech company doesn’t meet the market standards and regulations, its life cycle is doomed. It is crucial to consider systems with built-in regulatory reporting for more effective and streamlined operations. Furthermore, succeeding in the modern financial landscape is a daunting task without robust functionality related to KYC, AML, and KYB technologies. Compliance bodies to rely on depend on the country or region or your service, but opting for international regulations should be on your radar if you are interested in expanding your network. Here are a couple of examples:

ECB and EBA for banking organizations in the EU;
FDIC, OFAC, and OCC for companies in the USA;
FINTRAC, FCAC, and CDIC for businesses in Canada.

Conclusion

Start by analyzing your company’s infrastructure and defining your future goals. This way, it will be simpler to define what core banking software model will be ideal in your particular case:

On-premises solutions will prove their worth for experienced teams seeking full control over their performance and development strategies.
Cloud in banking is ideal for beginners and companies seeking a simple yet trustworthy way to adopt new technologies in the industry.
Hybrid options are great for organizations who have already invested in top-notch legacy systems yet don’t want to fall out of the competition for up-market technologies with remote access to their product offerings.

Whatever method seems more appealing, your approach will benefit from a well-thought-out decision-making strategy:

evaluate the existing system’s integration capacity and check the new upgrade’s influence to support its interoperability, transferable skills, and seamless data and workflow;
estimate the range of desired capabilities in CRM, payment processing, and other crucial areas for your business to see what services and built-in regulatory compliance are must-haves now and what can be added in future updates;
consider the dream software’s scalability, customizable, flexibility, and integration potential;
check prospective core banking providers’ credibility and what ongoing support services they offer.

Don’t hesitate to request demos and RFPs/RFQs to personalize your path to a new and effective core banking system for your company in the finance industry.

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