What is core banking?
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Published: 28 February 2024

Contributors: Teaganne Finn and Amanda Downie

What is core banking?

Core banking is the hub, or back-end connection, for multiple branches of the same bank that allows customers the freedom to access account transactions in a single safe entity. Core banking operations can include loan management, new accounts, deposits, and withdrawals, among other financial services.

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How does core banking work?

The first step in understanding how core banking works is by defining the term “Core”, which stands for Centralized Online Real-time Environment. The implication is that the banking services system is run from one place. It provides customers and financial institutions with a stable, smooth banking experience no matter their time or location.

In a core banking system, a series of back-end servers manages standard operations so that on the front-end account transactions and other actions are seamless for customers. These systems can be on-premises or cloud-based depending on the needs of the bank. The bank installs and maintains on-premises systems itself. Cloud-based core banking software is managed by a third-party provider.

Regardless of which core system is used, the way it works is that a customer withdraws money from a branch or an ATM and the application sends a request to the core banking system or back-end system. Once the signal is received the request is processed and authenticated the money can come through to the customer.

A core banking system typically consists of software that supports a database, application server, web server, and a firewall to protect the system from outside attacks. Another way to look at this system is that it’s an ecosystem of banking and lending solutions that are meant to provide safe and fast transactions.

Features of core banking

Core banking systems serve as the system board to connect multiple branches on an "always available" basis with real-time essential services, such as banking transactions and digital banking online or on apps. Some of the notable core banking features that make up the system are:

  • Loan and credit processing: The process of reviewing credit applications for loan applicants.
  • Mobile banking: The features of a physical bank are in the form of a phone app or on the web.
  • Account management: Whether it’s in-person or mobile, customers can have access to their account quickly and safely.
  • Daily banking transactions: On-demand withdrawals, moving money and changing account details are all processed because of a core banking system.
  • Account onboarding: Existing customers and future customers are able to open a new account or add to an existing one in an efficient and fast manner.
  • Customer relationship management: The back-end system allows for secure storage of customer data and generating reports as needed.
Benefits of core banking

Banks must consider size and budget when deciding on which core banking solution to use. Core banking modernization provides a framework for banks to function as efficiently as possible and provide options for scalability. The core banking system is a critical part of a bank’s operations and overall system efficiency and success. Here are some of the many benefits that a core banking system can bring to any bank.

Mitigate risk

Most core banking systems include high levels of cybersecurity to protect the infrastructure from hackers and malware, and protect customer data. Advanced technology such as encryption modules are used to mitigate fraud and credit risk. On the customer’s end more security measures can include two-factor authentication and bio-verification for extra security.

Improved customer experience

With more streamlined processes customers can get a more enhanced customer experience (CX) when making transactions and managing their accounts either at a branch in person or through online banking.

Increased compliance

Regulatory compliance is important for banks and the best way to manage it is through a core banking system, which is an organized, central repository for all financial data.

Better productivity

The single-entity model of core banking platforms boosts operational efficiency and ROI by connecting to multiple branches quickly. By cutting down on the time it takes to connect, banks are processing transactions faster and more accurately. 

The future of core banking

Core banking systems are vital to the success of how a bank operates and retaining and gaining customers, especially as the next generation of customers seeks out greater control over their finances and seek out new banking technology. Newer automation and data processing tools, such as cloud solutions and open banking, have streamlined operations in the most efficient way possible. One of the biggest innovations in digital transformation as of late is generative AI (artificial intelligence).

IBM Institute for Business Value recently released the 2024 Global Outlook for Banking and Financial Markets report and among the key takeaways was how generative AI can “Redefine a bank’s competitive edge in client relationships, evolve, and streamline core banking operations and bolster cybersecurity.”

The global outlook report surveyed 600 executives and brings the perspective from IBM experts to examine the growth and future of generative AI in business. Generative AI is expected to help evolved core banking operations through its comprehensive understanding of code and process complexities.

Read the full report
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