With the ongoing digitization of banking, technology and systems have become ever more important. Technology drives the business capabilities and customer solutions, with a high impact on both the customer experience and operational efficiency.
The technology requirements are derived from the value proposition and key processes. Typically, the main requirements for digital banks are to accommodate real-time and 24/7 on-demand availability of services, flexibility and scalability of infrastructure, a 360-degree customer view on their profiles through leveraging data from various touchpoints, and efficient omnichannel stage management.
Traditionally, banking IT architecture was designed from a product perspective resulting in a product-oriented service approach. However, to be able to deliver a superior customer experience, digital banks ought to take a client-centric approach in designing their IT architecture. In this article, we dive deeper into the technological building blocks of a digital bank and provide you with some of our best practices when designing the IT architecture of a digital bank.
The different Layers in the IT architecture of a modern digital bank
Back-end: running on the core banking system
The back-end includes all back office-related processes, the core banking system (CBS) and client information. The back-end administers processes such as customer information, payment transactions, loan issuance, and deposits. The core banking system is the technological heart of a bank. Banks - both traditional and digital - typically leverage existing solutions from service providers as opposed to maintaining their own (proprietary) core banking systems.
In recent years a new generation of core banking system providers has emerged, more tailored to the needs of digital banking. Serving both fintech start-ups as well as incumbent banks, these modern providers typically offer more flexibility, scalability and interconnectivity at a significantly lower cost.
Modern core banking technology is cloud-native, enabling automatic scaling capacity, continuous development and software deployment, and instant creation of new environments via code. In addition, it offers a single view of the customer, separate from core banking platforms or data warehouses. This enables a more effective and personal customer experience, together with better insights into business and product performance. Furthermore, the technology is reusable across all channels, creating ‘product factories’ with clean, standardized integration.
Middleware: connecting the back-end, front-end and business applications
The middleware is the software layer that helps connect the back-end with the front-end and business applications. Middleware acts as a system orchestrator, connecting all layers and reducing the need to involve the core banking system in every single customer interaction. Technology providers like Backbase and BPC can provide such middleware and operating systems, including related business applications for payments, card issuing, real-time notifications and other services.
Front-end: providing the customer experience
The front-end is the visual layer through which customers interact with the bank, providing the customer experience. This includes, for example, mobile and online banking channels, together with third-party channels such as payment gateways, financial marketplaces, and ATMs. Digital banks can develop their front-end fully in-house and also in-source solutions from external software and BaaS solution providers who typically offer customizable white label solutions. The choice of in-sourcing depends on the level of customization required, timing, cost, and flexibility.
API layer: connecting internal and external applications
The API layer or integration layer is an alternative layer to connect with external third-party applications providers to seamlessly integrate their services. With the advent of open banking, composable banking and super apps, third-party integration has become an integral element of banking and has led to heavy API layer investments. The API layer also typically functions as a sandbox to test new services in an isolated environment. Third parties typically test responsiveness in the sandbox before moving on to full integration. Immediate availability of the API and clean and concise documentation is therefore important for optimal capitalization of (future) partnerships.
How to design your IT Architecture
While the building blocks are largely the same for all modern digital banks, we have seen that there are many options to set up the tech stack. From building all capabilities in-house up to fully outsourcing your IT infrastructure, everything is possible. In our last blog, we discussed how to choose the right IT Vendor. But this time we want to answer the question: How do we make sure to take the right approach?
When designing the IT architecture of your digital bank, we recommend firstly focusing on the effortless transition from the front, middle, and back-office for both the user and the employee emphasizing agility in its core processes.
To achieve the intended result and make smart investments, a bank has to develop its IT architecture and operations based on business requirements by thoroughly assessing business background, strategy, organizational structure, processes and needed capabilities. In other words, the business architecture presents the foundation to design the subsequent Data and Technology architecture that will, in turn, enable the logical and physical application, data components and vision of the business architecture.
Typically, the IT architecture should center itself around a few core IT architecture principles:
Resilience and robustness of the system with a concise IT governance to be prepared for all kinds of technology and cybersecurity risks as well as general heavy computational workload.
Flexibility of the solution to integrate with various platforms and emerging technologies with minimal changes or immutable disruptions to core functions and ultimately to support new business initiatives.
Scalability of the infrastructure to support fast-paced expansion the current business activities by ensuring modularity and adaptability in the design in front of changing market dynamics.
By following those principles, the bank will form a future-proof technology stack, adaptable to change and disruption both internally and externally, while also minimizing efforts in custom-based development through a standardized system approach.
Beyond the basics of designing the business and technology architecture, you also should consider implementing other forms of digital innovation within your IT Strategy, aiming to either improve customer experience, reduce operational costs or improve risk management. These include new advances in artificial intelligence, natural language processing, automation, and data analytics
If you are not starting your digital banking venture from scratch but already have some technology available internally it is critical to also consider any gaps in the current IT landscape and how to address them.
In the end, there is no one-size-fits-all when it comes to the technology stack of a digital bank, especially when it’s about replacing outdated legacy architectures. Often a comprehensive transformation strategy and roadmap are needed to evolute your bank successfully.
How Fincog can help
With a proven track record in managing core-banking implementations and end-to-end migration of banking and payment services, we assist our clients in defining IT Strategies and designing the IT Architecture and Infrastructure. Our team of experts builds upon vast experience in technology strategy, enterprise architecture and core-banking solutions as well as our proprietary databases of +100 banking technology providers from across the globe to learn from the best practices internationally.
Fincog is a leading strategy consultancy specializing in fintech and banking. We enable our clients with end-to-end consulting support in designing, building and scaling digital banks as well as transforming legacy organizations.