How Do Core Banking Systems Work?

Before the 1970s the movement of money was largely manual, and mostly carried out in person. The transactions weren’t processed until the time of closing and banks were not equipped with the capability to sync their information. Then came the mainframe and telecommunications capabilities and banks were one of the first to adopt. The advent to the Internet and the growth of online banking, there was an entirely new method to manage money centralized online real-time trading or the core banking. It was the back-end system that handles transactions through a vast branch network of banks.

Core banking systems simplified banking and improved customer service and created a chain reaction of improvements. For example the deposits were updated immediately on bank servers and the payment information was shared across branches, which meant that customers could take deposits from any of their banks’ branches.

The ripple effect is pushed into the present. This is why businesses can view their balances anytime and transfer funds with just a click button.

The Core Services

With a robust core banking system which allows banks to manage millions, if not millions of daily transactions, make changes to accounts in real-time and reduce the risk of payment errors through the accurate management of financial records. This is why banks across the globe spend hundreds of thousands of dollars annually maintaining their banking systems as an crucial infrastructure.

One of the most commonly used essential services are loan, deposit and processing of credit. The core banking systems connect to a variety different systems like reports and ledger systems.

A lot of banks depend on ledger technology in order to keep an exact account on their transactions. This is commonly known as an accounting system (SoR). If there is no insight into the funds that is coming and going out of bank accounts, a variety of issues can be faced by firms, including the possibility of insufficient funds, customer service expenses, as well as regulatory and compliance concerns.

Ledgers give real-time visibility and transparency of the balances and transactions, while making it less likely to make mistakes in bookkeeping. This transparency is essential for organizations operating at a high volume in an ever-changing financial system.

Major Providers

Although many of the core banking systems remain operating, and largely reliable, the move to cloud computing, digital banking and APIs has altered the way banks conduct business as well as establish relations with financial institutions. This has led to a number of core banks have expanded their offerings to meet new needs for payment processing.

Although banks are able to and do buy banking core systems, major commercial banks (like J.P. Morgan Chase for instance) have their own banks that have core systems for banking.

Challenges to Old Systems

In 1959, through Grace Hopper, Common Business Oriented Language (COBOL) is the programming language specifically designed for mainframe computers to handle processing of large-scale transactions. Although it is more than sixty years old COBOL continues to be a vital part of numerous modern banking core systems. The first applications of COBOL were for large corporations as well as government entities to use an uniform communication method.

In spite of more modern frameworks for development of applications, like .NET or Java around 43% of banks remain dependent on COBOL-based platforms. Institutions such as those of the IRS as well as Social Security rely on COBOL-based files to manage checks and distribute benefits. Additionally, 1.5 billion line of COBOL are created every year.

The question is: as technology improves and banks prepare for the future of digital technology will this outdated programming language remain in use? Modern payment systems can’t function on old-fashioned, outdated platforms for information technology alone. Moving to more agile IT systems that make use of contemporary programming languages are an an essential aspect for banks who want to adapt to the requirements of their customers.

Conclusion

In 2022, digital banking, cloud computing, APIs and cloud-based banking continue to transform banking. As the requirements for payment and operations change with technological advancements banks must adapt to a more digital as well as automated environment.

However, they are only able to strengthen their processes and reduce payments errors if they can are able to provide real-time transparency to their payments. Transparency in payment operations is no longer an advantage, but a necessity.