Industry focus: How traditional banking tech infrastructure is being transformed

The more forward-looking banks are looking to create a composable set of systems and architecture that allows them to plug-and-play best class components into their infrastructure rather than sourcing from a single provider. They don’t want to be tied to monolithic systems that are so deeply interconnected that making small changes requires the entire environment to be shut down; instead, they want to be able to make tweaks and adjustments any time they need, ripping out things that don’t work and replacing them with newer modules when appropriate. 

These components aren’t entirely of their own creation now, either. While banks will still have proprietary technology within their platforms, they are also likely to be using components built by third-party providers. Sometimes, too, these components sit outside of their own firewall. These banks have accepted that embracing the wider ecosystem rather than taking a hermetic approach is the best way forward. 

There’s also been a change of attitude towards technology investments. Rather than making a massive, up-front payment for infrastructure, they want to spread it out so it’s more in line with their operational costs. Subscription-based Software-as-a-Service (SaaS) models make it easier for banks to align their expenses with their operational income, allowing them to function more efficiently. 

While changes in back-end operations are usually something that customers aren’t aware of, it’s the needs and desires of clients that are actually driving these changes. After all, they are the ones demanding always-on, real-time transactional capabilities. The impacts that customers see from these transformations are largely positive, which is obviously great from their perspective, but they’re unlikely to appreciate just how many hurdles and obstacles banks need to overcome in order to provide these services. 

As well as overhauling legacy infrastructure and taking a new approach to how they use and pay for technology, banks also need to manage liquidity in a different way to cope with the real-time payments environment. How banks manage their liquidity on a 24/7 basis is going to be a massive challenge. It’s not something they’ve done in the past, and it’s not something that they’re structured to do. 

An even bigger challenge, though, is fraud prevention. Whenever a new payments system is introduced, it becomes a target for bad actors who are looking for ways to exploit the system for their own ends. We’ve seen it with crypto, we’ve seen it with Zelle and most recently we’ve seen it with closed-end solutions like Cash App. The problem affects the payment industry as a whole, meaning efforts to combat this fraud will need to be concerted and coordinated in a way that will ultimately be effective, but the last thing a bank wants is to be the weak link that these criminals target.  

For banks that are still in the process of digital transformation, there are still more areas that will need attention if they want to reduce the number of headaches they suffer — and boost their chances of success — in a real-time payments environment. Things like OFAC checking and anti-money laundering checks will need to take place on all transactions and these aren’t necessarily easy to implement into legacy architecture. 

Cloud platforms and microservices represent a way for banks to take the strain away from their existing systems while offering a great degree of agility too; not just in terms of flexibility when it comes to adding components but scalability as well. Cloud platforms can help deal with the load, but banks shouldn’t be fooled into thinking that the cloud is the answer to all of their problems. 

When it comes to services that are as important as payments, banks need to be certain that they have taken every measure possible to fulfil their obligations to customers. Regulators, too, will be keeping a close eye on all cloud-based payment services, and it seems inevitable that they will insist that banks take a multi-cloud approach at some stage in the future. 

The launch of FedNow was arguably the biggest change the banking industry has seen so far this century. Driven by consumer demand — which itself was shaped by the recent pandemic — banks are faced with some very big challenges right now. 

Modern problems require modern solutions; that’s why the banks that upgrade and future-proof their core infrastructure by looking to third-party providers and cloud platforms will have the best chance of thriving in a real-time world. Those that don’t accept the need for change, or are too slow in their transition, will be the ones that fall by the wayside.