From Shut to Open: The Evolution of Core Systems
The emergence of self-service channels, such as the web and mobile banking, as well as transformative technologies like big data, electronic payments and remote deposit, have led the evolution of core processing since 1990.
One essential element of the progression, particularly for credit unions, was a shift from closed core systems to open architectures.
Open architecture core banking systems give credit unions the ability to keep pace with rapid technological changes and incorporate best-of-breed functions across the branch, online, mobile and ATM channels.
Today's core processing systems must also have the ability to service all channels 24/7 and seamlessly connect to a wide variety of self-service solutions, as well as to more advanced personal and business banking management systems.
“One of the key aspects of this change is the degree to which core processing architectures have become more open,” Keith Riddle, senior vice president and chief product management officer at the Columbus, Ohio-based, $3.7 billion Corporate One Federal Credit Union.
Theresa Benavidez, president of the San Diego-based core processor Corelation, noted, “An open architecture allows credit unions to implement just about any financial services technology its membership demands, which opens the door to nearly any technology available.”
The movement to open core systems has been significant, suggested Riddle, given the pressure on credit unions to compete with larger financial service providers, very powerful non-financial entities and various verticals.
“Back in the day, the core processor was isolated and third parties didn't talk to it,” William T. Wittig, vice president/CFO for the $205 million, Canton, Ohio-based CSE Federal Credit Union, commented. “Now everything is real-time and it all needs to integrate with the core.”
Credit unions also used to take what the vendor provided. Santo Cannone, chief product officer for the Brookfield, Wis.-based Fiserv's Credit Union Solutions division, explained, “If credit unions wanted to customize a function, techs went into the source code and changed it, and not many folks did that.” Now, software development kits allow for the creation of additional products.
Application programming interfaces now permit credit unions of all sizes to seek best-of-breed solutions, which allows them to differentiate themselves in the marketplace and grow their member bases, Riddle added.
Also, the rise of the Internet and connected computing dramatically altered data processing from IT and member experience perspectives.
“Twenty-five years ago, there were no such thing as networking outside the credit union – everything was self-contained,” Cannone said.
Self-service channels – with the exception of ATMs – took off in the 1990s. Before that, credit unions mainly adopted desktop PCs run on Windows 3.1 for business purposes and knowledge of the Internet was limited, Ted Bilke, president of Symitar, a division of the Monett, Mo.-based Jack Henry & Associates, recalled. He explained if the member wanted to get cash, make a deposit or apply for a loan, he or she would most likely head to the nearest branch.
Cannone pointed out a credit union's most vital branch at that time was its main office or the one closest to its key SEG.
“Now the most important branch is your virtual branch, your online presence,” he said. “The consumer is now in control.”
Spencer Jones, head of product management – enterprise solutions at the Toronto-based fintech provider D+H, commented, “In the 1990s, we lived in a dial-up, nine-to-five weekday, analog world. Today, we live in a high-speed, always on, digital world. Core account processing was conducted in one monolithic, enterprise, big iron system. Today, there are diverse, distributed, thin client systems.”
Core changes relate overwhelmingly to the member service channel, Preston Packer, director of sales and marketing at the Sandy, Utah-based technology provider FLEX suggested.
“[In the 1990s], progressive credit unions ran core systems that provided member account access through ATMs and telephone banking. Today, progressive core systems provide integrated Internet banking and mobile banking, allowing real-time transaction processing and lending. The 1990s provided account status. The 2010s allowed for account management and creation.”
One of the key changes that took place over the past two decades revolved around payments, Mark Sievewright, president of Credit Union Solutions at Fiserv, said.
“We’ve seen consumers take control of their finances in a way that was unimaginable 25 years ago,” Sievewright noted.
Twenty-five years ago, hand-written checks were the primary tools used by consumers to pay bills and transact store purchases. Each check represented an expense to the financial institution for clearing the check.
“Furthermore, check clearings could take more than one week to clear through the consumer's account,” Bilke explained. “Today, check volume is down significantly and continues to dwindle. Consumers use their debit cards instead of checks and settlement is immediate.”
Jones noted another big difference between 1990 and 2015.
“A ‘system of record’ core was also your ‘system of engagement,’ supporting one primary channel-branch,” he said. “Today, there are omni-channel ‘systems of engagement’ with unique features creating the value for the customers/members.”
The growth of data analytics also changed the way credit unions operate. They now look at their core processing platform as a system of record or archive that provides data to help them find new solutions, Riddle explained.
Benavidez noted having quick access to member data in one spot enables faster member service and increased opportunities for cross-selling.
“Today money is being increasingly represented by information,” Sievewright added. “Big data will change our lives as we move forward.”
Software-as-a-service models and cloud computing changed the dynamics of deployment and backup as well. Twenty-five ago, on-premises core deployment was more commonplace, Riddle said; now many credit unions look at outsourcing their core platforms in order to better focus on member acquisition, cross-selling and revenue generation.
From an overall network and infrastructure perspective, offsite, backup systems’ use of the cloud has made a significant impact, Matt Wilhelm, managing partner at the Cleveland-based IT services firm Encompass Group, LLC, mentioned.
“Ubiquitous access with newer browser-based platforms, as well as hosted service bureau and subscription based architectures, has also made IT support easier on the credit union,” Wilhelm said.
While self-service channels and digital services has increased convenience for consumers, it also created greater opportunities for fraud, Bilke admitted, to which core vendors have responded with add-on security solutions.
“Security has evolved significantly with strengthened passwords, biometrics, multi-level authentication, data masking from both consumers and employees, better system controls on authorization levels, event monitoring and reporting, and PA-DSS certification under the PCI standard,” Bilke said.
Sievewright concluded, “How credit unions do core processing is almost unrecognizable from what it was years ago.”