Core banking software or banking software modules? Advantages and disadvantages

Contemporary banking develops in line with the technology development. Banking services are not limited only to receiving deposits and granting loans. Customers may use a variety of products, including analytical tools, solutions supporting company management or advisory services connected with wealth management. What software is used by the banks to handle the transactions ordered by customers and provide support to the entrepreneurs?

What is the core banking system and what are banking software modules?

The term of core banking (Centralized Online Real-time Exchange) refers to the basic banking services and the backoffice enabling to provide them. To put it simply, the core banking software ensures synchronisation between particular bank branches. They are integrated with the centralised server which enables to process data in real time.

Although the computerisation of banking started in 1950s (ERMA system), the core banking system in the contemporary meaning of this term was a real breakthrough. Previously (in 1970s and 1980s), every bank branch would send the transaction data to the headquarters or to the regional data processing centre once a day (at day end) so it was impossible to implement any placed orders instantly. It was usually necessary to wait at least one business day for booking the transfer.

Although banks keep developing their services, core banking remains the core of their activity. When you look at the core banking software used by the banks, many of them still use systems developed for them before the Internet got so popular and encumbered with the technical debt. In the United States 43% of the banking systems are based on COBOL and 95% of transactions in payment terminals depend on the software written in this language.

The traditional core banking system is not the only one which enables the banks to pursue their objectives. A solution created to respond to the contemporary needs of banks is the modular banking software. Analogous to the core banking in the traditional approach, individual modules enable to:

• open bank accounts for customers,
• receive and perform cash deposits and disbursements,
• handle the entire process related to granting loans.

The distinguishing feature of the banking software modules is their open architecture. Thanks to it, the core banking system is better adapted to the changes and it can respond to the dynamic development of the financial sector. The modules enable the banks to select any functionalities they need and which help them to pursue their objectives. An example of modular software dedicated to corporate banking is Comarch Corporate Banking.

Core banking software — advantages and disadvantages

Although the uniform core banking software is still used by many banks, at least a couple of its disadvantages can be named. The most important include:

Low flexibility

Core banking systems are flexible, but only to a certain degree. This means their functionality can be extended but requires much money. The oldest software used today by the banks is based on the COBOL language and there are fewer and fewer programmers specialising in that technology.

Insufficient scalability

When the first core banking software was developed, the banks operated differently. They had fewer customers, processed less data and online banking belonged to the future. Consequently, older software does not cope with the growing requirements. The maladaptation to the system scalability needs makes the banks look for new solutions.

High maintenance costs

Older core banking systems are expensive to maintain (technical debt). On the one hand, specialists are required (due to the niche technology). On the other, all attempts at extending the system functionality entail high costs and risk. The reason is the need to create customised solutions compatible with the existing ones.

Although the core banking system has some disadvantages, it has also some advantages. The most important include:

Simplified customer service, minimized number of errors

Despite many years, the core banking software keeps fulfilling its function i.e. offering efficient customer services. The number of errors is minimal as most tasks are performed by computers. What is more, the banks can extend the functionality of the software used and compete efficiently on the contemporary market.

Facilitated decision-making process

The centralised banking system enables to collect and analyse data being the grounds for the decision-making process quickly. This enables not only to examine customers’ applications fast (e.g. concerning a loan or a credit), but also to make decisions concerning bank development directions, including entering other, foreign markets.

Advantages and disadvantages of the banking software modules

Today’s monolithic banking systems are frequently replaced by cutting-edge, modular solutions. However, they are not perfect and their major disadvantages include:

Joining modules is not always flawless

Although the modular software is based on modules as the name suggests, joining them is not always flawless. Much depends on the software provider and how they planned and performed the integration. Another problem may be the absence of modules required by the bank in connection with the products offered.

Universal but not customised solutions

Companies providing modular software create universal solutions which will be used by the largest group of customers (e.g. banks). This means customers are not involved in module design.

High number of modules may affect efficiency

Extensive, complicated systems developed for some longer time, composed of many different modules, may be less effective than the monolithic solutions designed with all functionalities in mind from the start. The appropriate architecture may prevent those problems.

Modular software is a response to the rapidly changing needs. The most important advantages include:

Reduced expenses for IT maintenance

The cost of the IT infrastructure can be reduced when using the banking software modules. Banks may also offer cloud services making them even more competitive. With respect to the SME banking, customers may gain access e.g. to the invoicing programme.

Software adaptation to the needs

Banking software modules are designed with different bank needs in mind. Consequently, the bank may use solutions dedicated to the headquarters, backoffice and frontoffice. Thanks to many modules, the bank may select the functionalities it needs currently.

Using cutting-edge protections

At present, particular importance is attached to the security, just remember the EU PSD2 Directive. Banking software modules can be used with the cutting-edge security systems. They include e.g. microprocessor cards and tokens. Banks may also introduce biometric authentication.

Both the core banking software and the banking software modules enable the banks to carry out their activity and offer not only products, but also services to their customers. The module-based software is particularly beneficial for the new banks (the so-called challengers) which, contrary to the oldest institutions on the market, frequently operate as neobanks (digital banks).