Exploring the Building Blocks of Digital Banking Architecture

What Are the Components of the Core Banking System?

Knowing the components of the core banking system is fundamental to understanding financial operations. Each of them facilitates seamless banking operations and delivers exceptional customer experiences, from database management to transaction processing and risk assessment.

• Database Management System (DBMS): The DBMS stores and manages vast customer data, including account details, transaction history, and personal information. It is critical for data integrity, security, and accessibility for various banking operations.
• Transaction Processing System (TPS): TPS handles day-to-day banking transactions, including deposits, withdrawals, fund transfers, and bill payments. It ensures timely and accurate transaction processing while maintaining transaction records for audit and regulatory compliance.
• Customer Relationship Management (CRM) System: CRM systems manage customer interactions, including account opening, customer inquiries, and marketing campaigns. They help banks build and maintain customer relationships by providing personalized services and targeted communication.
• Loan Management System (LMS): LMS manages the entire lifecycle of loans, from application and approval to disbursement and repayment. It tracks loan applications, evaluates creditworthiness, sets interest rates, and monitors repayment schedules.
• Risk Management System: Risk management systems identify, assess, and mitigate credit, market, operational, and compliance risks. They employ sophisticated algorithms and analytics to manage risk exposure effectively.

Read more about web application components in our blog.

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Architecture of the Core Banking System

According to Gartner, the core banking system architecture is a back-end system structure that handles daily banking transactions and posts modifications to accounts and other financial records. A digital banking reference architecture is a standardized blueprint or framework that outlines the system’s structure, components, and interactions. 

Commonly, core banking systems are connected to general ledger systems and reporting tools. They can process:

• Deposits
• Loans
• Credit cards
• Mortgages
• Business loans

Essentially, the core banking system handles credit, loan, and deposit procedures. Creating new accounts, managing loans, calculating interest rates, processing deposits, and withdrawals, and customer relationship management functions are all essential banking services.

The core banking system’s architecture reveals a complex framework driving banking operations. Every architectural element, from user interfaces to backend systems, works together to ensure efficient, secure, and agile banking service.

• Front-end Interface: This user-facing component of the core banking system is accessible to bank staff and customers through web browsers, mobile apps, and ATMs. It provides an intuitive interface for conducting banking transactions and accessing account information.
• Middleware Layer: This communication bridge connects the front-end interface and the backend systems. It handles data exchange, transaction processing, and integration with external systems and services.
• Backend Systems: They consist of the core banking applications, databases, and infrastructure responsible for executing banking operations. These include the DBMS, TPS, CRM, LMS, risk management, and other specialized systems. These systems work together to ensure the seamless operation of the core banking functions.
• Integration Framework: It enables seamless integration with third-party systems, services, and APIs. It facilitates interoperability and data exchange with external partners such as payment networks, regulatory bodies, and fintech providers.
• Security Infrastructure: This one encompasses measures and protocols to protect the core banking system from cybersecurity threats, data breaches, and unauthorized access. Examples include encryption, access controls, authentication mechanisms, intrusion detection systems, and security monitoring tools.

Types of Digital Banking Architecture

There are two core digital banking platform architecture types: layered and microservices architecture. 

Layered architecture

A typical layered architecture of online banking software comprises three layers: the presentation layer (front end), middleware, and backend. These layers facilitate structured development and maintenance. Layered architecture offers scalability and flexibility, allowing institutions to adapt to evolving requirements and technology trends.

Microservices architecture

Banking’s software architecture is often based on microservices, which offer flexibility in choosing when and which functionalities to enhance or add. Microservices decompose banking applications into independent services. They foster agility and fault isolation, facilitating rapid development and deployment while ensuring system resilience.

Here are some additional architectural patterns that can be applied in combination with core architectures or on top of them:

• Service-Oriented Architecture (SOA): Divides the banking system into independent services for easier maintenance and scalability.
• Event-Driven Architecture (EDA): Facilitates real-time responsiveness by processing events asynchronously, ideal for personalized customer experiences.
• Hybrid Architecture: Combines elements of different architectures to leverage their strengths while mitigating weaknesses, offering flexibility and innovation.

Layers in the IT Architecture of a Modern Digital Bank

We have already mentioned a layered architecture. This structured approach offers scalability, flexibility, and separation of concerns in digital banking systems. Let’s explore each layer in detail to understand how they contribute to creating efficient systems. 

• Presentation layer (front end): The interface offers customers an intuitive platform to access banking services. It includes features like account management and bill payments, which are accessible through web or mobile applications for a seamless user experience.
• Middleware: An intermediary that facilitates communication between the presentation layer and the backend. It handles request processing and data validation tasks, ensuring smooth interactions and data exchange between system components.
• Backend: The backend, or data layer, stores and manages core data and business logic. It includes databases and application components responsible for processing transactions and maintaining data integrity, forming the foundation of the banking system’s functionality.

Modern Core Banking Architecture is More Actual than Ever

According to the Forbes survey, 78% of adults in the US prefer to bank via a mobile app or website, indicating a clear shift towards digital banking over traditional methods. This means that customers now anticipate banks offering the same ground-breaking features and services they often receive from businesses at the forefront of digital innovation.

Traditional banks must still optimize their core banking systems to benefit from cutting-edge technological developments. Otherwise, they fail to meet the market’s increasing expectations, putting themselves at risk and liability. Additionally, the pool of professionals with the technical and institutional knowledge to maintain outdated core systems shrinks. Thus, the operation and maintenance of those legacy systems become increasingly challenging and expensive.

The good news is that more modernization alternatives are now available to banks. Thanks to recent technological advancements and enhanced application management techniques, such options make the work considerably less daunting. Many advantages to modernization include the following:

• Digital competitiveness
• Better talent management
• Improved service
• Reduced risk
• Fewer expenditures
• Increased effectiveness
• Creating value for the company
• Readiness for the future
• Flexibility
• Capturing institutional knowledge

With the core system modernization, banks provide the cutting-edge digital features and capabilities that customers today demand. It opens the way to simplified, standardized, and scalable delivery models that respond swiftly to shifting market needs. These models are far more suitable for the current technology and talent environment.

Technology Stack for Digital Banking

Digital banking technology needs structure to meet present and future demands and accommodate core banking system modernization. It should align with strategic objectives and swiftly adapt to market changes. 

Let’s review the technologies that facilitate smooth digital banking operations.

Java and Spring Framework

Developers use Java and the Spring Framework to create robust banking applications with server-side components like servlets, JSPs, JSF, and Struts. These tools provide extensive functionality, empowering developers to build scalable applications in the cloud or on-premises.

Hibernate and Spring JDBC

Hibernate and Spring JDBC streamline data persistence in relational databases for banking applications. This hybrid approach combines on-premises and cloud-based solutions, ensuring efficient data management and retrieval.

Zimbra

Zimbra is an open-source collaboration suite that offers comprehensive email, calendaring, and file-sharing functionalities. It is vital for seamless communication within banking organizations. Zimbra, built on Java and utilizing a REST API, facilitates secure and efficient interaction between its various components, enhancing productivity and collaboration across departments.

MongoDB

MongoDB is a preferred choice for document-oriented databases in banking, facilitating online transactions and analytical processing. Its compatibility with JSON simplifies integration with diverse programming languages. MongoDB ensures flexibility and agility in banking application development.

JPA

Java Persistent API (JPA) standardizes data persistence in Java applications, providing a straightforward approach to accessing and modifying data. Widely adopted in Java EE, Spring Framework, and Spring Boot, JPA offers a robust foundation for building scalable and maintainable banking applications.

How to Design the IT Architecture for a Digital Bank 

Establishing a solid framework for an inclusive financial system relies on embracing modern core banking architecture. Crafting the IT architecture for a digital bank requires various essential elements to address evolving customer demands, streamline operations, and ensure regulatory compliance.

Cloud readiness

The architecture of modern core banking systems is cloud native. Due to their reduced reliance on hardware, cloud-native systems are cheaper to maintain and operate than conventional infrastructure. Agility is another advantage of cloud-native systems since it can significantly shorten the time it takes for new services and products to hit the market.

As traditional infrastructure functions in distinct blocks, with any new update represented by an additional layer, the cloud has significantly shortened the launch period for new goods. Modern core banking system design built on the cloud enables businesses to scale up or down their processes quickly. As a result, banks can save expenses and promptly adapt to changes in client demand and transaction volume without making equipment expenditures.

Open-banking compliance

Banks must expose open APIs to third parties as part of PSD2 regulations, and “open API” enables data sharing between financial and non-financial institutions. The ability to quickly introduce new services to the market and generate additional revenue streams through chances for partnership with other financial and non-financial institutions are notable benefits.

Additionally, by offering better, more individualized support with financial goods and services, core and mobile banking system architecture that is open banking-ready improves client engagement and retention.

API-first

Legacy stack requires custom point-to-point connectors or is incompatible with new suppliers or systems. Therefore, integration with new ones is challenging and takes longer. Modern core banking software architecture is an API-first solution that makes it simple and rapid to add new integrations.

API-first architecture has many ready integrations and a flexible infrastructure to develop new connections with other payment service providers. As a result, financial institutions can create and introduce new services and products considerably more swiftly while maintaining a market-leading position. Moreover, API-first architecture enables the delivery of Banking as a Service (BaaS) solutions to non-fintech and fintech companies, allowing them to integrate financial services without creating stacks from scratch.

Inoxoft has proven expertise in integrating online payment services with CBS. To simplify finance transaction processes, we adapt ‘PayPal-like’ online payment services to your company’s needs. We aim to improve the usability and modernity of your company to add value by providing the ability to accept payments for your products or services. We invite you to integrate premium online payment services to grow your business.

The advantages of using our payment integration services include:

• The transactions are completed quickly and are accessible from any location
• Payment services can be used by phone or custom business
• The transaction policies and certificates ensure the security of every user
• The services adhere to the EMV security standards

Self-servicing

Self-servicing is when clients carry out their routine financial transactions through channels and technologies that support banking. By using any self-service channels, such as online banking or ATMs, they can manage their accounts around the clock without visiting a bank branch.

Self-servicing will become a general requirement that pushes for a more standardized and modernized core banking architecture. Service functions have become much more streamlined and straightforward, and IT personnel are no longer required to remove or add features.

Security

All financial institutions are at greater risk from cyberattacks due to the daily increase in high-profile breaches that steal data and make headlines. Instead of only providing security around specific system components, the modern architecture of banking system should have an enterprise-wide security framework to safeguard the bank and its clients.

The following questions will help to assess the security of the core banking system architecture:

• What protocols do you have for security?
• How can you keep an eye on emerging threats and protect yourself?
• What kind of business continuity and backup services do you provide?
• What credentials does your security staff have, and how much experience do they have?

Flexibility and configurability

Effective financial institutions need a core banking system to tailor it to their requirements without making time-consuming, expensive, or difficult-to-manage changes. Although the system should function out of the box, system administrators should still be able to make necessary adjustments. Switching to a new, more effective environment requires keeping the distinctive workflows specific to the institution.

Scalability

Scalability is a system’s capacity to handle an enormous workload while adding resources. Simply put, it’s how fast an organization can produce more. Scalability comes in two types: vertical and horizontal.

With vertical, the productivity of each system component grows to the point at which the whole system gets scaled. In this case, elements get upgraded to a more powerful version to achieve the desired outcomes more quickly. Horizontal scaling means splitting the system into smaller structural components. Additional servers, processes, and structures must be added to make the entire system scalable.

Financial institutions can use both types of scalability to expand their management capabilities and service offerings. Below are more reasons why banks require scalability.

• Complicated document management
• Large client base
• Wide range of product offerings
• Personnel management
• Multi-processes and task management

Modern technologies, such as artificial intelligence, allow scaling up without compromising the high quality of services and security.

Transparency

An efficient architecture design for banking system should be transparent to facilitate financial reports and audits, as well as to ensure accountability. This tool gives the public a greater understanding of how banks serve their interests and are compliant with the law, ultimately leading to an increase in effectiveness.

Banks need to clarify what they do, how, and why to address the growing responsibilities and significant expansion of balance sheets. It is crucial since their independence has been questioned in many nations. Transparency and accountability are the collateral guarantees of freedom in the context of central banks.

Data digitization

Established technologies, such as sophisticated machine-learning techniques, are available today and can be used to digitize analog data, which is still all too common. Its careful integration with the banking systems and overall architecture should be a focus.

By embracing data digitization, banking institutions can offer better client services. It decreases human error and increases client loyalty. Thanks to the software architecture of online banking system, bank clients may access banks whenever they want. Data digitalization has made extensive cash management simpler and cashless transactions easier. Bank clients can now make transactions anywhere and anytime without storing cash.

24/7 operation with real-time processing

Although almost all banks now offer 24-hour access to their electronic customer channels, there are discrepancies in the information sent there. The banking services range from showing transactions only with a daily update to others displaying account activity on the go. Real-time processing is the goal. Modern banking system architecture should cover real-time processing requirements.

Read how to build a neobank from scratch in our blog. 

Advanced Technologies Driving Innovations in Core Banking Architecture

The use of cloud infrastructure and emerging technologies will help to comply with the requirements listed above and allow the creation of the architecture for building a core banking system. In more detail, let’s look at cutting-edge technologies that will drive innovations in the modern core banking architecture.

API platforms for open banking

Open banking procedures give non-bank financial companies and other third parties free access to customer banking and additional financial information. It is mainly built on APIs, or application programming interfaces, for open-source software. Open banking, which enables the networking of data and accounts for financial institutions, clients, and outside service providers, has been a significant breakthrough in altering the banking sector.

APIs let reputable external developers create applications and technological interfaces for financial organizations. With this, banks can offer cutting-edge products that improve client experiences. The bank acts as a platform, and other businesses construct applications using the bank’s data.

Artificial Intelligence and Machine Learning

Machine learning and artificial intelligence are widely used in various industries, proving they will remain relevant. Al can work in the banking sector for front, middle, and back office tasks, such as:

• Executing credit scoring and improving lending decisions
• Assessing risks
• Identifying and preventing fraud and money laundering
• Creating voice assistants and chatbots
• Streamlining customer authentication and providing users with customized recommendations and offers

Learn more about AI use cases in banking in our blog. 

Robotic process automation (PRA)

AI-driven virtual assistants are self-learning systems that quickly carry out time-consuming, repetitive jobs. Additionally, thanks to robotic process automation (RPA), banks can generate meaningful customer experiences that are immediate, quick, efficient, and practical, which also automates repetitive operations.

Banks can easily automate tasks like customer onboarding, timely loan processing, account closure, and other functions by combining the power of AI and RPA. They can reduce expenses and increase efficiency by clearly understanding the significant bottlenecks. Through automation, banks are better able to cut back on manual labor and free up their executives’ time for more intricate, strategic responsibilities.

Inoxoft has built a software web application for a trading automation platform. It eliminates manual labor and automatically generates sheets with optimized exchange rate data. In addition, this app compiles all created orders for lucrative purchases following a predetermined financial strategy. Here’s what we’ve achieved, confirming the successful project’s completion:

• Calculating each currency pair continuously from each stock in a queue order
• Order generation is based on calculations using a mathematical formula, order enrollment, and automated order transmission to the broker
• Flawless coordination between the services
• Creating voice assistants and chatbots
• Triple reduction in order generation time

Examples and Case Studies

A robust IT architecture defines banking systems’ scalability, security, and agility and determines their ability to innovate and meet customer expectations. By examining real-world case studies, you can gain valuable insights into how leading banks build and enhance their digital banking infrastructure.

PayPal

With its client/server architecture, PayPal prioritizes transaction security and reliability, supported by robust encryption and authentication mechanisms. Its seamless integration with third-party platforms extends to advanced fraud detection and prevention systems. This ensures safe and secure digital payments for millions of users worldwide.

Furthermore, PayPal’s adoption of cloud-native technologies enables dynamic scalability and high availability, facilitating uninterrupted service delivery even during peak transaction periods.

BBVA (Banco Bilbao Vizcaya Argentaria)

BBVA’s distributed system architecture supports a variety of digital banking services, emphasizing data security and privacy. By leveraging a hybrid cloud infrastructure, BBVA ensures scalability and reliability, allowing seamless access to banking services across various devices and platforms. 

Moreover, their integration of third-party platforms extends beyond conventional banking, encompassing innovative fintech solutions, thus enhancing customer engagement and satisfaction.

Monzo

Monzo’s microservices core banking systems architecture is designed for agility and innovation. It allows them to swiftly adapt to evolving customer needs and market trends. Each microservice operates independently, enabling continuous integration and deployment while maintaining high levels of security and resilience. 

Additionally, Monzo focuses on real-time data processing and analytics. It empowers them to deliver personalized digital banking experiences and insights, driving customer loyalty and retention.

Consider Inoxoft Your Trusted Partner

Thanks to modern digital banking architecture, banks can offer the cutting-edge features and capabilities that customers demand today. It lets you create standardized, scalable, and responsive banking systems that are responsive to changing market demands. A reliable vendor will help you meet today’s core banking system architecture requirements with enhanced security, automated processes, and superior client experience.

Inoxoft is an international software development company and certified partner that builds market-leading solutions. We provide exceptional banking software development services to help you scale up with improved client experience, security, and automated operations. Our top banking software developers create online banking solutions, including custom banking CRM software, and put creative ideas into practice. Let’s look at one of the solutions in detail.

Our client, a US fintech company, aimed to simplify financial transaction processes and improve user experience. By integrating ‘PayPal-like’ online payment services, Inoxoft helped the company to ensure quick, safe, and reliable transactions. We addressed global automation and security concerns through custom software integration, enhancing finance tracking and enabling one-off, recurring, and subscription payments. 

As a result, our client achieved improved user experience, secured transactions, efficient finance tracking, and significant savings on transaction costs. It facilitated flawless and quick payment processing worldwide.

Inoxoft offers bespoke banking software development services to realize the best custom banking solutions, such as:

• Mobile banking app architecture
• Loan management and origination systems
• Scaling with innovations
• Customer analytics
• CRM integration
• Security and compliance
• Business process automation

Contact us to discuss your core banking system architecture and get an estimate.