Imagine waking up to find that your bank's mobile app is down, your scheduled payments are stuck in limbo, and your account balance is inexplicably frozen. Now consider that this isn't just happening to you, but to millions of customers. This nightmare scenario became a reality in June 2024 when four major UK banks experienced a system failure, exposing the vulnerabilities of outdated banking infrastructure. This incident is not an isolated case, but a symptom of a larger, industry-wide challenge.
Legacy banking systems, once the backbone of our financial institutions, are now struggling to keep pace with the rapidly evolving customer expectations and emerging technologies. The disruptive potential of blockchain, artificial intelligence, and digital currencies further underscores the need for a fundamental shift in how banks operate and serve their customers.
One of these disruptions is the rise of open banking which you can learn more about in a previous blog in this series: Open Banking: Beyond the Hype Into Reality
Modern customers expect real-time access to banking services, intuitive mobile applications, and instant digital transactions. However, legacy systems, characterised by their inflexibility and sluggish performance, are ill-equipped to integrate with cutting-edge technologies. This disconnect not only frustrates customers but also puts banks at risk of losing business to more agile competitors who can meet these demands.
The stakes are even higher when it comes to security. Financial institutions have always been prime targets for cyber-attacks, but the threat landscape has grown exponentially more complex. Legacy infrastructures are becoming increasingly vulnerable to sophisticated cyber threats, exposing banks to potential data breaches and substantial financial losses.
Cyber-attacks are now deemed the number one systemic risk to the financial system, according to Bank of England statistics. The inherent complexity of outdated systems amplifies operational risks, leading to frequent downtime and ongoing maintenance issues that further erode customer trust and operational efficiency.
Compounding these challenges is the intensifying regulatory environment. Banks must navigate ever-expanding operational resilience requirements from the FCA (Financial Conduct Authority) and PRA (Prudential Regulation Authority) to ensure a “stable and integral financial system,” ensuring their systems adhere to the latest regulations to avoid hefty fines and reputational damage. Legacy systems, with their rigid architectures, make it increasingly difficult and costly to implement necessary changes to meet these evolving regulatory demands.
In response to the challenges posed by legacy payment systems, the UK has set in motion the New Payments Architecture (NPA). The NPA aims to overhaul retail and interbank payment infrastructure, promising enhanced efficiency, improved security, and greater innovation in payment services. While this initiative represents a step forward in addressing the limitations of legacy systems, it faces its own challenges. The complexity of the project, coupled with the pace of technological advancement, has raised serious questions about its timeline and long-term relevance.
As the NPA progresses, there's ongoing debate within the financial sector about whether emerging technologies might overtake or complement the NPA's objectives. This uncertainty underscores the difficulty of modernising core financial infrastructure as applications, regulations, and customer expectations change around it, highlighting the need for flexible, adaptable solutions that can evolve alongside emerging innovations.
Facing Off Against Disruptive FinTechs
Traditional banks now also face fierce competition from agile FinTech companies. These nimble newcomers are disrupting the market with innovative solutions and services. Their ability to provide faster, more efficient, and more attractive financial services pose a significant threat to established banks. The message is clear: adapt quickly or risk being left behind in an increasingly digital and competitive financial landscape.
This convergence of challenges creates an undeniable imperative for change. Banks must reimagine their core infrastructure, embracing modern technologies and innovative approaches to not just survive, but thrive in this new era of banking.
In this blog we will look at three key insights that can guide banks in building a future-proof, infrastructure capable of meeting the demands of tomorrow's financial landscape.
1. Reimagining the Core Banking Platform
As we continue our exploration of operational resilience in the banking sector, it's crucial to examine the technological foundations that underpin modern financial institutions. The shift towards containerised platforms and hybrid cloud architectures has revolutionised how banks develop, deploy, and scale their services.
While cloud-native architectures offer significant benefits for banks, it's crucial to approach this concept with nuance. The term can mean different things to different people, and, as time goes on, we’re seeing firms increasingly aware of the risks from vendor lock-in, and therefore prioritising careful implementation.
A more precise and flexible approach would be to focus on event-driven architectures (EDA) that can be run on cloud, multi-cloud, or hybrid environments that still use traditional data centres. This flexibility allows banks to leverage cloud benefits while maintaining control over their infrastructure.
The advent of EDA is driving a move towards "coreless banking," where banking functions are broken down into independent, interoperable services. This shift may lead to increased reliance on third-party services and products, changing the overall infrastructure footprint of banks. As a result, there's a greater emphasis on ensuring the resilience of these third-party components and managing a more complex ecosystem.
While a coreless banking approach offers potential for innovation and agility, banks must carefully balance these benefits against the need for stability, security, and regulatory compliance in their critical operations.
Distributed ledger technologies (DLT) like blockchain present an opportunity to establish an immutable, secure "golden record" of financial data. By strategically integrating DLT, banks can address longstanding challenges of fragmented information across disparate systems, enhancing data integrity and consistency.
Embedding smart contract and tokenisation capabilities into core platforms can unlock automation of complex financial products and services. This drives efficiency and enables innovative offerings that can set banks apart in a competitive landscape.
For more on DLT technology in banking you can read a previous blog in this series: What Do Banks Need to Know About Central Bank Digital Currencies?
2. Strengthening Security and Compliance
As cyber threats grow more sophisticated and regulatory scrutiny intensifies, robust security and compliance measures are non-negotiable for modern banking infrastructure.
Adopting a zero-trust security model with advanced encryption and granular access controls is crucial for safeguarding sensitive customer and transaction data. Privacy-enhancing technologies like secure multi-party computation can further bolster data protection while enabling valuable analytics and insights.
Enterprise-grade permissioned blockchain networks offer enhanced transparency, auditability, and traceability. By deploying these networks with robust identity and access management, banks can streamline regulatory compliance and reporting processes.
Exploring emerging standards for self-sovereign digital identities presents an opportunity to simplify customer onboarding, enable portable identities across financial services providers, and unlock new personalisation opportunities – all while maintaining the highest levels of security and compliance.
3. Unlocking New Revenue Streams
Building a future-proof banking infrastructure isn't all about defence – it's also about creating new opportunities for growth and innovation. For years, banks have relied on a 'pay-per-transaction' model, but this is being rapidly eroded by disruptive payment technologies and alternative payment networks (APNs) such as digital wallets, peer-to-peer (P2P) payment platforms, and blockchain-powered remittance solutions.
As banks become disintermediated from these low-margin services, they must rethink how they generate value.Evolving core banking capabilities to a cloud-based, API-driven Banking-as-a-Service (BaaS) model allows banks to monetise their products and services more flexibly.
By monetising their infrastructure through modular banking functions—such as compliance-as-a-service, identity verification APIs, or credit underwriting services—banks can create new revenue streams by becoming integral components of broader digital ecosystems. This positions them as platform providers, allowing third-party FinTechs to leverage their core capabilities without the traditional customer-facing model.
By combining AI and machine learning capabilities with secure, immutable blockchain networks, banks can drive highly personalised financial services and intelligent product recommendations. This data-driven approach not only enhances customer experiences but also generates valuable business insights while ensuring privacy and regulatory compliance.
Preparing for the Future of Banking
As we look ahead, it's clear that building resilient, future-proof banking infrastructure requires a multifaceted approach. Banks must embrace a mindset of continuous innovation and digital transformation to stay ahead of the curve.
Collaboration will be key. Partnering with FinTech companies, engaging with regulators, and leveraging blockchain experts can provide valuable insights and accelerate progress.
To fully realise the potential of next-generation banking platforms, institutions should conduct comprehensive use case explorations and proof-of-concept deployments. This hands-on approach allows banks to identify the most impactful applications of new technologies and refine their implementation strategies.
While the path to future-proof banking infrastructure may seem daunting, the rewards for those who successfully navigate this transition are substantial. By reimagining core platforms, strengthening security and compliance, and unlocking new revenue streams, banks can position themselves for long-term success and deliver the very best services for their customers.
If you'd like to learn more about building resilient banking infrastructure or explore how your institution can leverage these insights, please get in touch.