Is Dual Core Banking Solutions the Way Forward for Banks?

A casual chat with my friends Aravindhan Ramalingam and Shridhar Iyer last week around Banks opting for multiple core banking systems led me to think on the reasons why they would be needing to go that way.

As someone who came with fairly conservative views on Core Systems, I have always believed that the Core Banking Solution or for that matter any enterprise application across any Bank should be centralized and integrated that gives absolute control to the Bank on the transactions, provide single view of business and more importantly reduce complex integrations that are needed in managing the transactions. While it was quite common to have a different CBS for Retail and Corporate Banking / Trade Finance owing to the nature of businesses that were being run by each of the business units and the strengths of the individual solutions, It wasn't very common till a few years ago to have multiple solutions catering to the similar products.

When I was consulting with a QA startup is when I saw for the first time that Banks were using multiple systems to cater to same business - One of the Banks had 3 different solutions catering to loan origination operations! The first thing that came to my mind was "why are they wasting resources?" All these applications catered to one functionality of loan origination - Why should there be multiple systems? End of the day the day all of them have similar interfaces and follow a workflow that can be defined. The realization was each of these solutions had their strengths on a specific business. For instance one of them was extremely good with MSME loans, the other one had brilliant platform capabilities that could help the Bank build and manage their Web and Mobile apps very quickly. This was used to create onboarding apps that could be deployed on mobiles and tabs of FOS agents. The realization that dawned was specialized businesses need specialized applications.

In addition to this, surprisingly, a lot of BFSI clients have started using platforms like SFDC, Mendix and Out Systems to create their own solutions catering to specialized businesses.

Coming back to multi-core banking solutions, one of the drawbacks that I think traditional CBS solutions carry is mostly a monolithic architecture. While APIs and Open Banking features are provided, they are mostly wrappers around the traditional core that runs on single DB. Managing and monitoring these applications is a humongous issue needing specialized tools like APM that needs specialized skills for stitching journeys and provide end to end observability solutions.

2 Black Swan events in the last 7 years ensured the digital transactions exploded in India - November 8, 2016 Demonetization and Covid-19. Of course RBI, NPCI, the fintechs and the entire ecosystem including the Government of India rose up to the challenge and India has the maximum volume of digital transactions in the world today. UPI that was introduced was straight out of heaven!

Performance of UPI transactions is as good as Rohit Sharma on a song hitting sixes at will against the toughest of the opponents!

Product differentiation is long gone in the Indian market. In-branch service differentiation is not needed mostly. Remember one of the Public Sector Banks build the entire "Banking Beyond Relationships" theme? Nobody seems to have the time to walk into a branch or even withdraw cash from ATMs most of the times. Why would I need it as I can easily pay a flower seller or tender coconut seller or even a cobbler through my phone? Honestly, I have withdrawn cash twice in the last one year from an ATM. Couple of times I was forced to visit my Bank's Branch personally in the last 15+ years were to close the loans that I had with them and collect the documents.

What differentiates 2 Banks today is the digital experience that their customers get. One of the easiest way to achieve better experience is through better utilization of technology. Customer expects that she is able to transact at any time from any place and the transaction gets completed within a few seconds. Scalability of monoliths always is a question mark that can be easily overcome by cloud native, microservices enabled, configurable core banking solutions.

Four tenets of performance of any enterprise application would be:

• Scalability
• Availability
• Redundancy and
• Fault Tolerance

Significant investments are needed to achieve these for monolith architecture based applications and hardware as compared to microservices based applications.

As against that, Scalability can be feature dependent rather than uniform and that flexibility is a life saver during peak transaction seasons like festivals, (not only Dasara, Deepavali but also Amazon Great Indian Festival, Flipkart Billion Dollar Day, and the like). Partners and Fintechs utilizing the Open APIs shared by Banks is increasing by the day.

Significantly monitoring and management of these applications become easier and one can incorporate principles like SRE and end to end observability without too many hiccups in these cloud native CBS applications to cater to the digital business. Most importantly, the release timelines for each of the features can be reduced drastically using frameworks and tools for DevSecOps for these new age solutions. The best part is there would be no 'Single Point of Failure' if managed well.

Of course they come with their unique set of challenges in terms of getting the "golden source of truth" but these are more manageable problems architecturally and technically. One of which is a tradeoff between storage and performance eventually and given the CX paradigm, performance stumps the cost of storage here.

One of the other trend that I am also seeing is "hollowing of core" to delink some of the transactions that demand significantly higher availability and performing metrics like Payments and Funds Transfers into a separate solution rather than having them on a monolith architecture.

While "Centralized Core Banking Transformation" was the theme of Early 2000's, it is back to "De-centralization", albeit in a completely different context today. No, I am not even hinting at Blockchain based DeFi solutions. Will keep that for a different day.