Core Banking Scalability for Digital Banks

Introduction

Over the last 2 decades of leading technology for a large global bank, I have personally led digital transformation projects to elevate their core banking architecture. This deep domain expertise comes in handy for us today, as we are building Coreium - a Managed Services provider for fintech and financial services providers.

The major challenge for any aspiring or existing banks today is to navigate their banking technology scalability with minimal disruption to business as usual while becoming future-ready for an acceleration of growth that is being witnessed across the digital ecosystem.

In this article we delve into a critical dimension of core banking – scalability, breaking it down into two essential parts.

The initial segment aims at the businesses group explaining the scalability challenges with legacy platforms, shedding light on the issues likely encountered by their IT teams and how it's impacting their business.

The subsequent segment is focused on solutions, discussing approaches taken by banks to address scalability issues.

 

The Need for Highly Scalable Core Banking

In the past, scalability wasn't a significant challenge. Annual capacity planning exercises allowed for adequate processing power, memory, and storage capacity. However, the landscape has changed drastically in the last 15 years, marked by shifts in Internet Banking, Mobile Banking, and now API/Open Banking, with AI Banking on the horizon.

With each shift, the entry point funnel has widened, introducing more transactions and diverse mixes, challenging the underlying core platforms. Conventional IT capacity planning, IT Infrastructure, and Core Platforms are not sufficient, given the dynamic nature of today’s business model.

 

Consider this: A corporate bank account may transact for as low as a dollar, but if millions of such transactions hit your core platform daily due to a corporate relationship with a digital content provider or a social media company, scaling up a mainframe infrastructure becomes exorbitantly expensive.

Imagine missing out on a potential deal with a major social media company because your system cannot efficiently scale for high-volume, low-cost transactions, and it will require your IT team 8 to 12 weeks to procure additional infrastructure for unplanned growth.

Another scenario to ponder is a one-time opportunity for a tie-up with a major retail outlet, expecting a million transactions within the first 2 hours of business to support their annual mega sale. If your core platform can't swiftly scale based on temporary spikes and then scale down, you risk missing out on significant business growth opportunities.

These are real challenges that banks face in the new world and it is only going to grow. You do not want your core banking platform to be a choking point.

There are three problems in scaling legacy core banking platforms

1. Upfront planning and provisioning
2. Take provisioning cycle time / over-provision
3. Legacy platforms are expensive to scale

 

What is needed is the ability for elastic and cost-effective scaling of your core banking platform, which is a necessity for a solid digital business. What a modern scalable platform makes possible is to scale up / down dynamically, in time, and in line with the business goals while maintaining a low cost per transaction.

Addressing Scalability Issues on Existing Core Banking Platforms

While you await the execution of your broader core banking overhaul, consider these interim and medium-term measures to improve the scalability of your existing legacy system. Many of these strategies will also be integral to your long-term core banking blueprint.

It's important to recognize that scalability solutions are not one-size-fits-all, largely because they depend on several variables like your specific core banking system, its technology architecture, application design, deployment model, and so forth. Moreover, the scale of your organization plays a critical role—the challenges faced by a global bank will inherently differ from those of a smaller, local institution.

Here are a few steps you can take to fortify the scalability of your legacy core banking system in the short and medium term:

 

Immediate Measures – Being Proactive is Key

a. Planning, Monitoring, and Reporting

Effective forecasting of your core banking's capacity needs, proactive planning, continuous resource monitoring, and setting up alerts for critical threshold breaches are essential. These should be well-established, automated practices.

b. Diligent Maintenance

Maintain your system with strong operational procedures, such as routine log cleanup, and housekeeping of old transactions, closed accounts, and audit trails from a certain period. Schedule regular database maintenance tasks like re-indexing, ensuring they are well documented, automated, and surrounded by controls that alert to any failures.

c. Benchmarking

Ensure every update or release is thoroughly benchmarked for performance and reliability before deployment. Use benchmarking results to inform your capacity planning, coupled with business growth projections to anticipate future demands, especially for new features lacking historical data.

d. Optimization

Tune your system parameters at the database, application server, and web server levels to maximize current infrastructure efficiency. Regularly address and remedy application issues due to inefficient queries or poor logic by refactoring code. Your control may be limited to system parameters and custom code for integrations and additional features that are extensions to the core stack.

 

Medium to Long-Term Strategies – Architectural and Design Changes

a. Shifting to Alternative Tech Stack

Transitioning from traditional, costly databases or application servers to modern alternatives can offer cost savings and improved scalability. This should be considered in the interim only for direct replacements to avoid extensive code refactoring, which is better suited for long-term strategies.

b. Externalize Development of New Features

Begin building new capabilities outside of your core system to avoid adding complexity. Design these features with a microservices architecture to ensure they are independent and loosely coupled from the core.

c. Hollow out Non-Core Elements

Strategically migrate non-core functionalities out of your core system to simplify it and facilitate eventual modernization. Examples include moving card management systems or notification services elsewhere. Assess your bank's unique setup to determine which components can be gradually externalized, aiming to streamline the core.

d. Architectural Changes:

Leveraging on the existing architecture with some re-architecture of demanding services, can potentially have significant headroom. Below are common architectural changes to consider:

Load Balancing: If your architecture supports workload distribution, consider segregating tasks across different server clusters for online channels, branch operations, back-office processing, and batch jobs.

Database Architecture: Utilize features like partitioning or distributed databases if available. For instance, redirect high-frequency read queries to a read-only database to reduce the primary database's load.

Caching: Implement caching for commonly accessed data to reduce server load and improve response times. Many databases support this, and your application design should incorporate caching principles where applicable.

Integration Practices: Optimize how external systems interface with the core banking system by categorizing demands as Real-Time, Near Real-Time, and Offline/Batch. Use integration patterns such as Store & Forward, Data Streaming, and Asynchronous Processing to minimize the core platform's load.

 

Adapting these strategies can significantly enhance the scalability of your core banking system, bridging the gap until a full-fledged modernization can be achieved.

 

Conclusion

In conclusion, the banking industry faces a critical challenge in adapting legacy core banking platforms to meet the demands of a rapidly evolving digital landscape. Scalability is no longer a simple, one-off exercise but a continuous demand to accommodate fluctuating volumes of transactions from diverse sources. Short-term measures such as proactive planning, robust maintenance, benchmarking, and optimization are essential to improve immediate performance. However, these are merely stopgap solutions. In the medium to long term, architectural and design changes, including adopting alternate tech stacks, building new features outside of the core, hollowing out non-core functions, and implementing load balancing, database architecture changes, and smart integration patterns, are crucial.

These steps will ensure that banks can scale their operations elastically and cost-effectively, positioning them to capitalize on new business opportunities without being hampered by outdated systems. As the banking sector continues to advance towards AI and open banking models, the ability to dynamically scale will become an indispensable trait of successful, future-ready financial institutions.

 

Get in touch with us at Coreium to brainstorm over a Zoom call or coffee, we would love to explore how our fintech wisdom could transform your business challenges into growth solutions.

 

 

Author

Niraj Sanghavi | Coreium