Novelty In Banking Organisations And The Core Banking Market
After having looked through the core banking market heavily as a result of work at BVNK, it became clear that there is a set of circumstances largely unique to the banking market around core banking software. Before we get in to what this is exactly, let’s take a look at the development of human systems (systems created by humans).
It’s an interesting angle to view things in terms of systems. I use “things” to describe a myriad of possibilities: companies, cities, technologies, nature. There are numerous human systems that govern our lives and interactions. As with most systems, including those in nature, these are under constant evolution. Due to these being human systems, their evolution is under the direction of humans. Thus, there are several sets of systems that evolve solely or mostly according to human direction.
The implications of this novel way of viewing human systems, particularly organisations, was first put forward by Dee Hock in his book One From Many. Dee Hock is the founder of VISA, and his book describes the journey to founding the organisation and details the struggles he had to overcome in order to do so. More than that, there is a hefty sprinkling of philosophical views on human systems and organisations. Dee’s view is that while there are many systems that have changed a great deal, be they from nature or from humans, the organisation has not managed to evolve much at all since the conception of the idea. One of the biggest breakthroughs of VISA was not the technology or the product - it was the structure of the organisation itself. VISA was one of the first commercial member-owned organisations to exist, and it wouldn’t have made it passed the starting gate without this as a central tenet.
The enterprise has hardly moved forward in terms of structure and function. The innovation in the enterprise is generally centred around supporting functions, like new software to help a company do what they already do more efficiently. The best example of this is the SaaS market and its influence in big enterprise companies all over the world. Systems that were disparate within and between organisations are now being unified to varying degrees. Take documents: this began as paper, got digitised in a particular format, moved to a shared repository and then eventually to the cloud. A key takeaway from these SaaS movements is that organisations are widely sharing the same underlying technology for tasks common to all of them. As a result there are many efficiencies gained by all parties.
Now, we move to our initial statement of the largely unique circumstances that banks face, especially with regards to core banking software. Currently, most banks use a heavily modified version of a core banking provider’s system. This looks like:
- A bank chooses the provider
- A bank chooses pieces of functionality
- An assessment of their business processes takes place
- Development and customisation work begins
This leaves the bank with a system that, at least mostly, fits their requirements both technically and at a process level. There is normally a compromise between the system's functionality and the bank's processes. The downside is that as more and more banks do this, the underlying shared resource gets minimised and all the potential benefits get lost. Banks can choose not to have their own flavour of software, but they lose a lot of functionality and flexibility as a result.
Taking a step back, what other industry still struggles with this degree of “every customer is a snowflake”? I would argue a handful at most, where the problem is integral to the industry and the type of system. It doesn’t make sense to me that this is still the case in the banking industry.
This is a general software problem, and as we are a software company it is how we choose to address it. In enterprises all over the world this problem exists to a lesser extent. It is managed through ensuring the upgraded system does not veer too far from the upgrade path, and that the customisations are kept within some set of sane boundaries. Unfortunately, banks are banks and they need what they need. So, what is the solution? How could this be better managed?
The route we have chosen is novel, at least to the banking industry. At a technical level we push the complexity to the edges. Through a separation of systems, we enable a major upgrade path to happen to the core system, and partial upgrade paths to happen to client’s systems. Each client has their implementation managed, adding any set of features they require, and they adhere to a functional contract. As long as the functional contract is adhered to, the upgrade path is maintained.
This may sound “easier said than done” but that’s the beauty of software development - as long as you ensure there is a technical framework to enable flexibility, it becomes technically feasible. Addressing and moving the business along is another task, but again with a technical basis this journey becomes easier still.
Now, if we use this moving forward, we effectively have a SaaS platform for disparate banks. It doesn’t have to be hosted, but the codebase can be shared enabling the same benefits. There are now several other benefits that can be enjoyed: bank to bank marketplaces, consumer to bank marketplaces and a pluggable architecture. We use the phrase “Wordpress for Banks, AWS Finance” to describe the environment looking forward.
So what do we have now? A shared, SaaS-like infrastructure with several marketplaces and extensibility built in, enabling banks to grow their offerings at the touch of a button, with functionality being added without core software adjustments. That sounds like a huge improvement with benefits shared across the spectrum: service providers, banks and consumers.
However, something is still the same as it has always been - the organisation. The organisations that are still the same are the banks as well as us, the core banking service provider.
We are still figuring this out at BVNK but we believe that a member-owned entity, while ensuring independent core banking development, would serve the banking market very well.
It’s incredibly exciting to look to the future of finance, and we cannot wait to help banks to better serve themselves and their customers. If you would like to know more, please get in touch with us.