Financial institutions are deconstructing their core banking operations by moving applications to the cloud to boost efficiency. 

A core banking system is a centralized system responsible for recording transactions, maintaining customer accounts and loans, Sovan Shatpathy, senior vice president of product management and development of banking, financial services and insurance at Oracle, told Bank Automation News. 

However, banks have plugged in new technologies, such as digital capabilities, loan origination, collections and customer engagement platforms, and these have “created a bottleneck for the bank.” 

Now, financial institutions are decluttering their core systems — or “hollowing out the core,” Shatpathy said. 

Hollowing out the core for financial institutions means moving many of these added platforms to the cloud to reduce the processing burden on the core, Shatpathy said.  

“Then what will remain at the end of the day for the banking core is basically a transactional engine” that can increase efficiency of the bank, he said. 

Multilayer API 

New York-based Piermont Bank is in the process of slowly hollowing out its core to make operations more elastic and efficient, Wendy Cai-Lee, founder and chief executive  at the $488 million institution, told BAN. 

Banks that work with multiple players in the tech ecosystem need to have fewer dependencies on their core provider and take true ownership of their tech stack, Cai-Lee said, adding that hollowing out the core can be an integral part of that. 

“We have built an API layer around our core that allows us to deliver much faster integration timelines for our partners, customers and the vendors we work with,” Cai-Lee said. Having an API first core banking system will help the bank build more customizable platforms without slowing down its core operations or transaction recording and account maintenance. 

Piermont Bank processes more than $1 billion in transactions annually, Cai-Lee said, adding that it is decluttering the “core to supports real-time processing and data access in a secure manner.” 

Long term investment 

Financial institutions built their core systems decades ago, and they haven’t kept up with the changing technological landscape of today, Srawesh Subba, practice director at think tank Everest Group, told BAN.  

“Immediate ‘rip-and-replace’ strategies are rare, as they pose high operational and reputational risk,” Subba said. “Institutions are increasingly adopting approaches such as API-layer integration, middleware orchestration and gradual component de-factoring.” 

These strategies allow banks to maintain core system stability while incrementally enabling digital capabilities, Subba said, adding that modernizing core banking efforts can be capital intensive but are considered a long-term investment. 

“The core instead of being a jack of all trades, which has been the case for the past 40 to 50 years, is becoming deconstructed, slim and a distributed core,” Oracle’s Shatpathy said. 

No entity mentioned in the story shed light on how much money does modernizing the core takes. 

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