Federated banking
It was almost definitely watching the TV series Star Trek where I first heard the word ‘federated’.
Federated technology could allow for a more radical transformation at banks
The United Federation of Planets is the interstellar government with which the Starfleet Enterprise is associated. In technology, the term is used to describe an architecture that allows enterprise organisations to share information systems while having a layer of autonomy to operate their own way or design their own products (it also applies to operational functions like HR).
This isn’t a hugely important topic for a very small bank or credit union. However, it is a huge issue for consideration in larger banks and is one of the reasons why they have ended up with multiple core systems.
As I’ve described before, the larger the bank, the more complex its organisational structure. Very separate business units can be set up for different brands, customer segments, products, geographies and even business processes.
Inevitably, an individual business unit will want autonomy to create and manage their own destiny and meet their own goals. As a result, these business units have often ended up either building or buying their own core banking system. This is a big factor contributing to the “silo problem” we in technology despise.
Another reason for choosing a different core is their specialisation to a specific product. For example, card systems used to have specialised hardware platforms and card processing systems (cores for cards) to cope with the transaction volumes. Core systems for mortgages had extended features for defining and managing product lifecycles.
Technology has evolved and cloud computing has redefined scalability both from a hardware and software design perspective. Cloud has also enabled remote self-service, so access is not limited to internal networks. Data structures are not confined to relational databases, making it possible to provide more flexible product definitions. So, is it possible for a bank to run off a single core? The cost saving of running a single platform would be significant, let alone the reduced complexity of managing multiple systems, suppliers and integrations.
It is certainly possible to run a single core platform for all products within a single division. Modern core solutions that are truly cloud native handle both issues of product flexibility and system scalability (and resilience) much better than legacy systems. This is called a “multi-tenant” solution. However, across a more complex bank structure, there are further challenges. Sometimes data needs to be kept separate – for example to distinctly manage business and personal customers or because certain countries mandate customer data must be held in the country. Outside of core banking, both data and other capabilities also often need or would benefit from a shared platform – for example fraud, risk or marketing. This adds to the complexity of rationalising technology.
There are legacy core banking platforms that solved the scale/cost issue by creating a multi-tenant model typically for credit unions, building societies or other smaller banking companies. But again, they suffered from legacy tech issues like requiring an “end of day processing window” or maintenance downtime.
A federated approach is one that allows all units or many banks to run on a shared architecture while having autonomy to define their own products and processes and take control of what data is or isn’t shared. This is a much more complex challenge than just multi-tenant core banking. However, the advantages could be huge – not only in cost reduction, but also in reducing complexity.
This isn’t something that should be attempted as a ‘big bang’ implementation, but one that could be trialled with smaller systems first. Core migrations are complex and can be costly not only in terms of money, but also in careers. Done right, they can of course make careers.
The focus of digital transformation has largely been external things like customer experience and self-service, and new technologies have facilitated new ways of working. The “IT department” itself has also arguably transformed in the last decade. They have adopted new technologies and been moving to new ways of working like design thinking, agile development and continuous deployment.
However, does the opportunity of a federated technology landscape offer a more radical transformation, one that could shrink the burgeoning IT departments that have exploded in size over the last decade? This week, I’m just saying that digital transformation at banks is not just about their customers, but also whether there is a better operating model to utilise internally. And federated technology plays a huge role in that internal transformation.
About the author
Dharmesh Mistry has been in banking for more than 30 years and has been at the forefront of banking technology and innovation. From the very first internet and mobile banking apps to artificial intelligence (AI) and virtual reality (VR).
He has been on both sides of the fence and he’s not afraid to share his opinions.
He is CEO of AskHomey, which focuses on the experience for households, and an investor and mentor in proptech and fintech.
Follow Dharmesh on Twitter @dharmeshmistry and LinkedIn.
Read all his “I’m just saying” musings here.
