Core banking and payments are often considered separate operational areas. Although I have been a big proponent of banks treating payments as a business (not just a cost center), this practice has perhaps created a bigger disconnect between payments and core banking operations than is healthy. At least – they didn’t become any closer.
On the face of it this may not seem like an issue. Payment systems typically access the deposit account (or current account) systems for funds authorization and transaction posting. Core banking is really a service provider to the payments systems in this case. But one of the perennial discussion points in mature banking markets is the need to renew core banking platforms. Many of these are older mainframe systems that rely heavily on batch processing cycles which, although somewhat limiting in flexibility and functionality for a modern bank, are not physically broken. Being treated as a cost center, the business case for replacement has often been less than compelling, especially in mature markets with a complex technology environment.
Relationship to Payments
Likewise in payments. For years payment systems were virtually unchanged, and were driven by the market practices of a given country. To a greater or lesser extent these was cheque processing, card systems, high value urgent systems (like Fedwire), and lower value ACH systems operating on a batch basis. Each has distinctly different characteristics. But recent developments in electronic payments are changing that.
Many countries around the world such as the UK ,Canada, Australia, and India to name a few, now have or are looking to implement, systems offering a blend of functionality. UK Faster Payments is a good example: providing near real-time low value (therefore low cost) guaranteed payments between consumers or businesses, nationally. Sadly the US is not one of those countries.
So what’s the link to core banking? Often through regulation, both mature and emerging payments markets are enhancing the electronic payments infrastructure capabilities. In turn, this places additional high performance requirements on functions such as risk management, account authorization and posting services. So when looking at the business case for core banking modernization, look to other drivers affecting related systems.