How to Migrate Core Banking System to the Cloud using Digital Transformation?

Let’s talk about core banking, or centralized online real-time exchange (CORE) banking. This system lets bank branches handle transactions between different locations and share data in real-time.

Gartner defines core banking as the back-end system processing daily transactions and updating accounts. These systems include deposits, loans, trade finance, payment systems, and services like clearing and demand drafts. They are all linked to general ledger systems and reporting tools.

Before core banking solutions emerged in the 1970s and 1980s, transactions could only happen at your home branch. Updates took a day as data was batch-processed at the end of each day.

Today, core banking has evolved into cloud-based microservice architectures, adapting to market demands and new software trends. Despite this, a recent study found that while 70% of banking executives review their core banking strategy, only 5% modernize annually. The perceived risk of failure often outweighs the benefits, leaving many banks reliant on outdated systems from the 1970s and 1980s.

Shifting from Core-Banking System to Cloud

Let’s chat about the big shift in core banking. For years, transforming core banking systems has been a hot topic in the Banking, Financial Services, and Insurance (BFSI) sector. Moving from legacy systems to modern, agile solutions is crucial for banks to stay competitive. And guess what? The cloud is playing a huge role in this transformation, offering benefits like cost-efficiency, scalability, and agility.

Milind Govekar, a big name at Gartner, puts it simply: “There is no business strategy without a cloud strategy.”

Banks rely on big, on-premise core banking systems. Sure, they’re solid, but expensive to maintain and not very flexible. The financial industry moves fast, and these old systems can't keep up. That’s where cloud-based core banking solutions come in. They offer a more adaptable and responsive setup, making it easier for banks to roll out updated products and services. This makes it easier to streamline their operations, and quickly meet customer demands.

Switching to cloud core banking means banks don’t need to spend huge amounts on hardware and software, which cuts down on operational costs. Additionally, this frees up resources for testing banking applications. This helps banks ensure a smooth customer experience.

Four Generations of Core Banking Models

Let’s talk about the four generations of core banking models, as explained by the cloud-native banking solutions provider, Thought Machine.

First Generation  

This was all about branches that closed at 5 pm. At the end of the day, they’d calculate and collect all the day’s transactions into a centralized general ledger. This ledger was basically the bank’s big accounting book.

Second Generation  

This model was extended to support various channels like ATMs and call centers. As technology evolved, they had to deal with more demand for server capacity, but the basic architecture stayed the same.

Third Generation  

These systems were still batch-based and monolithic, but not tied to expensive mainframes anymore. Banks could modernize their tech stack around a legacy core and use more customizable product engines. Big names like Oracle, Finacle, and Temenos dominate this space. You’d find these systems mostly in global tier 2 and 3 banks, especially in emerging markets.

Fourth Generation  

These core banking models are built from scratch to fully embrace cloud elastic scalability, using a microservices-based architecture. They’re ultra-lean, agile, configurable, and composable. This is where banking tech gets really exciting!

Major Types of Core Banking Modernization

Augmenting the Core

This involves boosting existing legacy core banking solutions by using cloud-native solutions to power APIs, providing scalability and agility. Large banks with complex in-house core banking systems prefer this approach because they’ve already invested heavily in their current systems. It’s usually a hybrid model, with cloud overlays on top of legacy core infrastructure.

Migrating the Core

This approach is about lifting and shifting the existing core banking solution from legacy systems to the cloud. Here, the cloud infrastructure takes over from the on-premises data center, making the whole setup more modern and efficient.

Replacing the Core

This is the most comprehensive change, where banks rebuild or migrate to a completely cloud-native core banking system. This model maximizes new cloud technologies and provides the most flexibility and modernization.

Delivery of Cloud Models

IAAS (Infrastructure as a Service)

Here, the service provider manages storage, servers, networking, and virtualization. Banks don’t have to worry about physical infrastructure aspects.

PAAS (Platform as a Service)

In this model, the service provider manages everything IAAS does, plus the middleware, operating systems, and runtime. It’s a more comprehensive service that handles more layers of the tech stack.

SAAS (Software as a Service)

This is the most complete service model. The service provider manages applications and data, in addition to everything covered by PAAS. Banks get fully managed software solutions, so they can focus on their core business functions without worrying about the underlying infrastructure.

Cloud Deployment Models

Let’s dive into the different cloud deployment models:

Public Cloud

This model provides cloud computing services for multiple customers through a shared cloud computing architecture. Customers share computing resources, making it a cost-effective solution.

Private Cloud

In this setup, cloud computing services are owned and operated on-site by a single organization. This model offers more control and security, as resources are dedicated to one organization.

Hybrid Cloud

Hybrid cloud is a mixed environment that combines public cloud, private cloud, and on-premise solutions. It offers the flexibility to use the benefits of all worlds, balancing cost, control, and scalability.

Community Cloud

This model involves a public or private cloud shared by a group with similar needs or interests, such as an industry group, government agency, or other association. It allows for shared resources while addressing specific industry or regulatory requirements.

Cloud Migration Strategies for Banks

No two banks are alike, and their cloud migration strategies are unique. Factors like the existing core system, cloud delivery model, deployment model, and type of modernization all play a role. The key is to team up with the right cloud service provider and technology partner. Cloud migration projects involve several phases.

1. Migration Strategy Plan & Architecture
2. Migration
3. Integration
4. Testing & Acceptance
5. Run & Optimize

Conclusion

Migrating to the cloud can be challenging, posing risks to achieving key business outcomes like flexibility, speed, agility, cost optimization, and customer experience. Cloud Migration Assurance validates each stage of the migration process to minimize risks.

CodeSuite’s Digital Transformation Services include pre-migration advisory, migration assurance, and post-migration validation. Our AI-enabled platform, provides testing services throughout the migration lifecycle.

Schedule a discussion with our Digital Transformation experts to learn how to accelerate digital transformation by migrating core banking to the cloud.