How to become digital to the core with APIs

Industry Perspective

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Core banking, a centralized, online, real-time exchange, was a simple but revolutionary convenience when first introduced. A customer could access accounts and even conduct transactions from any of a bank’s branches, whether across town or out of state. It was a watershed moment for banks as well, knocking down a significant barrier to expansion.

The core underpinning today’s banks has expanded far beyond its humble beginnings. Dozens of innovations — all added to the core — have improved banking for customers and institutions: compound transaction capacity, ATMs, internet banking, horizontal products, data warehousing, to name just a few.

But the complexity of what’s now a sprawling, tangled system is beginning to catch up with banks. The cost to maintain the core is growing faster than the value banks can add to the system. Every time a new function is added, the complexity is compounded and makes it more difficult and expensive to respond to changing market conditions.

Almost any bank will say it takes a lot of time to modify any element of its core banking environment. Interfaces and data extracts often create inconsistencies that need to be identified and resolved. Small changes require exhaustive testing and even the most thoroughly vetted additions can have unintended consequences when they’re implemented in a live system.

This is a problem. “Stodginess” was once a quality equated with stability, but not anymore. New channels to reach customers come to market continually, and customers expect to find their bank there, delivering an experience to equal the service provided by other forward-leaning, customer-centric companies. What’s more, the evolution of financial technology companies has created even more pressure. Banks that have embraced innovative solutions and technologies from these companies are rapidly advancing, while other banks remain tied to a legacy-centric strategy. Now, even the institutions that have resisted change have little choice but to rethink this “core” capability and the components that have been bolted on over the years.

Banks aren’t debating whether they need to do it, but how to go about it. The estimated cost to replace core systems can easily run into the hundreds of millions. There’s no return on investment in doing that — and not just because it’s expensive. Ripping and replacing a system that underlies the institution carries unacceptable risks. But banks aren’t completely out of options.

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Going coreless

If “doing nothing” occupies one end of the modernization spectrum, the idea of adopting a decentralized approach and going completely coreless lies at the other. Decentralized and autonomous processing solutions are creating new opportunities to radically simplify architectures, reduce costs, improve security and give banks the freedom to innovate.

Blockchain technology has gained a lot of notice for its ability to create distributed ledgers that are decentralized and coreless. Transactions are recorded and verified across a network of systems that are entirely independent of one another. Blockchain-based currencies such as Bitcoin and Ethereum are completely decentralized. With this approach, infrastructure costs are minimized, and changes can be made rapidly.

However, blockchain has some interesting drawbacks from the perspective of banks and regulators. Ownership and control of customer accounts are pushed all the way out to the digital wallets that customers maintain, which effectively eliminates the need for a bank. The decentralized nature of blockchain makes regulation difficult to formulate or enforce. Consequently, adopting a wholesale blockchain strategy doesn’t make sense for institutions.

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Digital transformations can enable anytime, anywhere banking, but banks will have to weigh that agility against the costs and complexities of modernizing cores and processes.

Modernizing to an agile bank

Progressive modernization

Do nothing — innovate around core

Rip/replace — coreless

Complexity

Cost

Middle ground

Most banks can achieve the results they’re looking for by following a middle path. New tools, technologies and lessons learned from digital transformation projects over the last few years have made it possible to update an institution’s core and address issues of additive legacy following a measured, iterative approach.

What elements perform the most essential functions in a bank’s core? While this answer will be different for every institution, it is the key starting point. Once this question is settled, an API can be developed to act as a translator and gatekeeper between the core and outside functions.

An API receives and validates requests to perform a list of agreed-upon transactions, such as debiting or crediting a customer account. Add-on functions, such as a transfer request to move funds between customer accounts, would use the API to communicate with the core system.

This insulating layer not only protects the core system from the unintended consequences of change, but it also enables a bank to begin isolating and modernizing additive legacy functions. By no longer dealing with a huge monolith of interwoven features, functions, applications and data, an institution can begin breaking apart functions into independently operating, Lego brick-style microservices that can be assembled in different ways to perform different functions. A microservice created to check a customer balance can be reused in every add-on function that requires this feature, from ATM transactions to bill payment to digital wallets.

The loose coupling between APIs and microservices gives banks the freedom to choose whether to develop a function, outsource development or use a pre-developed solution offered by any one of a growing number of financial technology companies.

For example, there are ways that blockchain solutions can be used to an institution’s advantage. Payments constitute a function that spans bank accounts and often banks themselves. Blockchaining these would offer all parties a single view of a payment, its status across organizations and an immutable proof of payment. Customer accounts can be built using a similar approach, but with access limited to the institution.

In an API and microservices environment, this type of function could be rapidly built on a blockchain platform offered by a third party. This approach gives banks the ability to make changes faster while reducing the size of the operating environment. Further, the loosely coupled API approach enables a bank to evolve different systems at different paces. (DXC Technology has adopted this strategy to modernize its own core banking system, Hogan® Systems, as well as other legacy assets.)

APIs will evolve and change, raising the prospect that this approach is just recreating the next generation of the legacy application estate and that complexity will rise as the solution ages. To break this cycle, an API manager built with cognitive-enabled process-automation and process-orchestration is essential to understand and manage use of the API.

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About the author

Venkataraman Balasubramanian

Venkataraman Balasubramanian is responsible for the digital solution strategy for the banking and capital markets industry at DXC Technology, leading subject matter expert teams on the industry issues and helping set the technology direction for DXC’s digital solutions. Before coming to DXC, Mr. Bala was client managing director in the financial services sector at Xerox, where he oversaw complex global relationships, and before that he served in senior management roles at global firms, as well as startup operations. He is a proven leader with a track record spanning 30 years in the United States, India, Singapore, Hong Kong, Taiwan and China.

About DXC Technology

DXC Technology (DXC: NYSE) is the world’s leading independent, end-to-end IT services company, serving nearly 6,000 private and public-sector clients from a diverse array of industries across 70 countries. The company’s technology independence, global talent and extensive partner network deliver transformative digital offerings and solutions that help clients harness the power of innovation to thrive on change. DXC Technology is recognized among the best corporate citizens globally. For more information, visit dxc.technology.

© 2018 DXC Technology Company. All rights reserved. MD_8708a-19. October 2018

Enabling experimentation and embracing failure

Risk, experimentation and rule-breaking are all hallmarks of thriving tech startups, but there are few, if any, banks that would be described this way. Safeguards, policies and procedures at banks are built in at every step to protect customer accounts. This is necessary, and appreciated, but innovation does not thrive in an environment where employees are rewarded for never failing. With respect to the development of new systems and features, banks can and should encourage employees to experiment and, perhaps, fail.

One DXC client has established a team that undertakes a series of small projects designed as experiments to discover what works and to rule out what doesn’t. Experiments that succeed are promoted to the larger organization. This approach is not only effective for reshaping the digital core, it’s also a good way to drive innovation into everything the bank does. It encourages banks to look outside the institution, to leverage new ideas, technologies and platforms.

Banks are at a crossroads. In an effort to keep up with changing customer needs and markets, legacy core systems have become untenable to maintain in their current state. Progressive modernization following an API-led approach can help banks adopt an affordable and rational strategy to build for the future without abandoning the platforms they depend upon.

Learn how DXC is working with banks to innovate with digital solutions.