Core banking system - Ikajo Glossary


Core banking system

A core banking system is an operating system or software that manages financial transactions among different branches of the bank. “CORE” is an acronym for Centralized Online Real-time Exchange. The word “core” itself also literally conveys the meaning, because the core banking system is the heart of every crucial process that the bank or credit union undertakes.

What services does core banking provide?

The role of the core banking system cannot be overestimated in the digital age, because it makes the banking system function as a whole. The service is given by a group of networked bank branches to give the clients access to their bank accounts and execute transactions from any office of branch members. In addition, the core banking system does such kinds of services:

  1. Maintains all records for all of the bank’s transactions;
  2. Floats new and manages already existing accounts;
  3. Processes payments and checks;
  4. Manages and services loans;
  5. Processes cash deposits and withdrawals, calculates interests;
  6. Manages customer relations and CRM activities;
  7. Establishes interest rates and allowed number of withdrawals.

All of the above-mentioned services function due to the software and network technology of the bank that centralizes its record-keeping and provides access to them from any location. The clients get access to these services through multiple channels, such as ATMs, Internet banking, mobile banking, and others.

Core banking operating principle

The system consists of back-end servers that manage standard operations, for instance, interest calculation, passbook maintenance, and withdrawals. 

Let’s examine the core banking operating principle in the withdrawal example. The moment a client initiates the withdrawal of cash from a branch or an ATM, the application forwards a request to the centralized data center, which authenticates it. 

Core banking also has a data center that involves the database, an application, web servers, and a firewall to prevent malware attacks. Based on the hosting, IT core banking systems can be cloud-based or installed on local servers via an On-Premises setup. In case the core banking system works on local servers, the bank administration can customize the system in several ways. If the software of core banking is cloud-based, there are two possible ways to use it: pay-per-use for Cloud as a Service (CaaS) or relocation of their local servers to the Cloud to get more flexible customization. 

Core banking system advantages

Before the core banking system was implemented, managing clients’ accounts, loans, mortgages, and transactions took plenty of time and effort. But when the banks started to use the core banking system, they significantly improved the quality and speed of their service. Among the main core banking system advantages are:

  • Boosted efficiency

Because core banking makes the system function as a whole, the time it takes to connect with various branches is reduced significantly. No matter where the client is located, transactions are processed quickly.

  • Increased security

To secure the infrastructure from fraud the system uses advanced encryption modules. For instance, there is bio-verification and two-factor authentication that the customer passes in order to prove his identity. Besides, there are banking regulations of security the system should be in compliance

  • Reduced operational costs

Since the core banking system is fully automated, there is no need to use additional human resources. Also, AI-enabled infrastructure boosts completion rates and reduces the chances of human error.

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