Specialized Solutions versus Core Banking Solutions

When banks across the globe are investing in specialized solutions for Front End Teller, Loans, Deposits, General Ledger, Payments, Cash Management, Trade Finance, Private Banking, Customer Data Management and so on, the role of the Core Banking Solution (CBS) needs to be reassessed. Initially,  the core banking solution was0020designed as an integrated solution providing a comprehensive functional offering in all areas of different lines of business, with transaction processing and accounting capability. The legacy software solutions used in banks developed by local vendors presented architectural, technical and functional constraints in scalability and performance, creating a demand for core banking solutions. Also, the maintenance and support of multiple solutions and vendors was a major issue for clients globally, making a core banking solution with integrated offerings the preferred choice.
However, specialized solutions were still available in the market in all areas of banking lines of business, and vendors would enrich the functionality based on market needs/demands. The design of these solutions was unique, enabling enhancement and integration with multiple host and channel solutions. Although initially, smaller banks did not prefer these solutions over CBS, the business requirements and complexities forced the Banks to explore these options. Depending on the extent of their operations on areas like Payments, Cash Management, Trade Finance or Private Banking, some banks began to procure these specialized solutions.
A trend analysis of CBS implementations at Tier I & II banks in developed and developing countries shows that smaller banks prefer CBS, whereas larger banks usually opt for a combination of CBS and specialized solutions. The transformation programs in smaller banks and developing countries are less time consuming. On the other hand, larger banks with peripheral/specialized solutions take longer to modernize their technology solutions given the complexity and multiplicity of solutions.
As business and functional requirements became more complex in different banks across markets, more and more enhancements were required in the CBS solution. Some of the CBS vendors re-architected the solution with advanced functionality and market specific releases. Since the solution was integrated, a line of code added into a deposit layer, for example, impacted multiple modules in the overall core banking solution, and elongated testing, analysis and product release timelines.
In the face of stiff competition, the CBS vendors started developing specialized solutions to keep pace with market demand. However, compared to specialized solutions, the products from CBS providers lacked maturity. The CBS vendors were not able to meet the breadth of functionality offered by specialized solutions in a short span of time.
To conclude, the role of the core banking solution needs to be revisited and strategized, with focus on the needs of different markets and client segments. There are Tier II/ III/ IV banks where core banking solutions can still be positioned according to lines of business, volumes and client segments. These banks may not require specialized solutions for all lines of business and would be able to support most basic banking requirements and transactions with an internationally branded CBS.  It will not be prudent to expect a core banking solution to develop functionality similar to that offered by specialized solutions. Larger banks should use the core banking solution for accounting, which means that it would have to interact with specialized solutions in an online/batch manner based on business requirement. Most of the business rules, processes, logic and validation can be undertaken in the specialized solutions. The technology and architecture of the core banking solution should be flexible enough to interact with peripheral specialized solutions with/without middleware for processing of transactions and accounting.  Core banking vendors must view this as an opportunity to increase market share by offering multiple solution offerings – core banking and specialized.

Functionality versus Process versus UI versus Regulation

The core banking solution was designed initially to centralize accounting in banks and enable their customers to transact from any of the branches or channels connected to the central database. Functionality and processes were built into the core banking solution, based on the software’s country of origin. The primary design was based on the knowledge of local banking/domain experts in the product company. Though the solution catered to most banking needs of a particular country or region, in certain markets, it faced fitment challenges both on functionality and process compliance. Variations in the account opening, customer creation or loan approval process in different markets often required subtle or even major changes in the software solution. Customization was required to achieve process automation to meet market requirements.
Some vendors hired local consultants for their knowledge of functionality and processes specific to their market, to better understand and meet requirements; others gathered local requirements as part of the implementation. Multiple versions/releases of the base software helped address the local requirements in different markets.
Banking processes evolved over time as new regulations were implemented by the regulatory authorities. The software was expected to include risk mitigation and anti-money laundering processes to protect the interest of the clients and banks.  As clients acquired additional peripheral systems, the need arose for automation and straight through processing through integration and workflow. This posed architectural and technological challenges to vendors.
In parallel, core banking evolved new functionality and products in the area of deposits, lending, trade finance, cash management etc. This required the software to be constantly developed, resulting in new product versions or releases from each vendor. Core banking vendors had to develop new modules and product functionality catering to specific market requirements in order to fight the intense competition and expand into new markets.
Core banking vendors adopted a varied methodology to comply with market specific functionality and processes:
a) Additional layer of market specific functionality over the base product
Some of the solution providers designed a thin layer outside the core database, which could be easily integrated into it to meet country specific regulations and processes. This ensured that the core database remained light and the data elements and functionality remained generic, suited to the global market.
b) Multiple releases catering to  different markets
A few solution providers developed the functionality on the base version itself and released market specific versions.
c) Ready to plug in customization infrastructure
Customization infrastructure was utilized to develop the country specific functionality, products and processes. The infrastructure could be used for accommodating new functionality and processes with integration capability.
Each of these methods provided different benefits and challenges. The thin market specific functionality layer option required architectural and structural changes to be effected.
The user interface or front end of the solutions proved inadequate to cater to the next stage of core banking requirements of clients. Most banks/clients preferred a simplified user interface (UI). Easy usability and navigation that required no prior training was the order of the day. Functionality with inbuilt processes and a proper User Interface was considered a unique differentiator of a core banking solution. This required further engineering and customization of the base product screens in line with market needs.
Across the globe, the core banking architecture, which was designed for functionality and accounting required reinvention to meet the increasing complexity of user interface, regulation and process, as well as keep pace with the ever changing business dynamics of functionality in different markets.
Today, core banking vendors should design their products such that the main layer of functionality and accounting remains intact and stable. They need to follow the right strategies to address changes in regulation, process, UI and functionality. Vendors must build a market specific layer of UI, workflow, processes and regulation, which can be easily integrated with the core banking solution and updated regularly through a plug in component. Here, they must take care to employ core architecture, which integrates with external industry standard software for these components, else will find it a challenge to manage customer expectations of functionality, process, user interface and regulation without impacting the solution’s performance, scalability or architecture .