Banks Seek New Digital Core to Enable Transformation

A new digital core is a platform or system that uses new technologies to support digital banking services as banks undergo digital transformation. Though there are various ways in which banks build these new digital cores, transformation to an open and distributed architecture is inevitable.

In the banking industry, the stable running of IT systems is imperative. This is what drove the industry to begin IT construction relatively early and what continues to drive it to make significant investments each and every year. However, the IT architecture of the banking industry — particularly the core system — has stood still for decades.

In 2020, however, it has become clear that banks need to change their architecture. Intelligent mobile Internet technologies — such as 4G and 5G — and intelligent terminals are now popular. Open source technologies based on cloud computing are developing rapidly. And the banking habits of customers are changing fast. In this environment, traditional bank services — from deposits and loans to remittances — are quickly evolving to include payment services (particularly mobile payments) and investment services (which also include wealth management).

Meanwhile, an increasing number of service scenarios are based on Internet technologies, boosting the Internet finance industry. As Internet finance has developed, Financial Technology (FinTech) enterprises have used new technologies such as Artificial Intelligence (AI), blockchain, cloud, and big data — collectively referred to as ABCD — to quickly gain a large number of customers, particularly millennials, with enhanced business competitiveness.

In China, alongside FinTech companies, Internet giants such as Alibaba and Tencent already occupy a majority of customers’ Internet portals through their own Internet business ecosystems, including almost all payment scenarios. These enterprises also encroach on traditional financial service scenarios, posing a huge threat to traditional banks.

Digital Banking Trend Gains Momentum

For banks, as financial markets continue to become increasingly open, financial services are disintermediating, with traditional interest margins shrinking. An increasing number of newcomers to the market have also exacerbated the decline of intermediate businesses. In these circumstances, traditional banks must not become complacent. Instead, they must digitally transform.

To implement digital transformation, traditional banks require new technologies to reshape businesses and upgrade core business systems, to reduce operation costs, improve risk control capabilities, simplify methods to acquire customers, and optimize the customer experience, as well as enter the long-tail market, which has yet to be penetrated.

Meanwhile, through service transformation and the upgrade of core service systems, the lifecycle of financial products is significantly shortened, with faster service innovation fostered. With such transformation and upgrade, banks can also integrate into — or build — more open banking ecosystems, transforming banks into a Banking as a Service platform that connects various fields, including government, tourism, healthcare, and transportation. This enables banking services to be accessed anytime, anywhere, creating new “digital banks.”

The construction and transformation of digital banks is the new direction for the industry. But it’s not the case that traditional banks are simply trying to transform into digital banks; they’re looking to build entirely new digital banks — also known as “open” or “virtual” banks — instead. FinTech companies have identified huge potential in this area of the banking market, and their aim is essentially to become technology giants with a banking license.

The construction of digital banks needs a suitable market environment. This environment should feature adequate network and smartphone coverage, low loan coverage for Small- to Medium-Enterprises (SMEs) — which increases the need for digital banking platforms — and FinTech with specific functions.

In terms of services, the process requires scenario-based products, fast market entry, simpler interactions with customers, cooperation in the ecosystem, always-online services — and everything must be connected.

Elsewhere, in terms of technology, digital banks require high performance, high scalability, and high availability. They also need open source technologies, distributed architecture, a micro-service design, and a Development and Operations (DevOps)/Continuous Integration and Continuous Delivery (CICD) outlook and model.

Unlike traditional systems, a new-look digital core banking system must be constructed using new technologies, with support for digital banking services. There are various ways to construct this new digital core in different countries and regions, and for different banks at different stages, but dual-mode architecture is the most common strategy.

Dual-Mode Architecture: The Mainstream Architecture of Bank Digitization

The core systems that banks have developed over several years are supported by traditional IT architecture — stable architecture — and can’t simply be disregarded or rebuilt within a short period of time. However, banks do need new architecture to support applications and services such as mobile payments, small- and micro-finance, and eCommerce in open banking environments. Such applications can’t simply be built and tacked onto the core, stable systems of traditional banks, which are designed for deposit, loan, and remittance services. Instead, most of the new services are cloud-native applications, developed based on new technologies — technologies that are open and agile. This is known as an “agile architecture.” A dual-mode architecture therefore consists of two types of architecture: stable architecture and agile architecture.

This new type of agile architecture is generally open, distributed, or cloud-based. Chinese banks and financial institutions have been progressing relatively fast over the last 10 years, not only as a result of the natural evolution of their own business development, but also in the face of competition from domestic Internet companies. And, of course, China is arguably the most developed eCommerce market in the world. During the annual “Double 11” and “Double 12” shopping events, banks — whether traditional or more innovative — need to be able to process massive amounts of online transactions in a very short timeframe. This has driven banks to update their entire technical architecture, to support fast and elastic resource deployment as well as quick iteration of applications, meeting the requirements of fast market changes.

Changes in expectations regarding user experience are also driving traditional banks to quickly develop new applications, such as marketing applications (for flash sales and similar) and non-traditional financial service applications (for life and eCommerce services), with the aim of attracting new customers, particularly millennials. In this context, traditional banks need to quickly build a new digital core based on open and distributed technologies, to better support the rapid development of next generation applications, quickly gain new customers, improve the customer experience, and reduce the overall IT Operations and Maintenance (O&M) cost per account. This new digital core must also support the construction of a next generation data platform, to enable banks to quickly reconstruct the data plane — with big data, data lakes, and data factories — as well as support the rapid development and deployment of innovative banking services.

Meanwhile, banks still need to maintain the stability of their traditional core, to continue to provide traditional banking services, such as processing savings and general ledgers. As these services have been running stably on traditional platforms for years, any benefits or incentives for changing these services aren’t particularly significant. So, although many banks are migrating service applications from the traditional core to a new digital core, using dual-mode, two-core architecture will continue to be the mainstream approach for many years to come. It’s worth adding that this architecture transformation and service migration is likely to be implemented faster by banks in China than elsewhere.

Huawei’s Solution Helps Customers Build a New Digital Core

IT architecture is the technical foundation that supports the core banking system. For the transformation of bank IT architecture, Huawei usually explores — and combines — two directions: “open” and “distributed” modes. In a distributed mode, the system can be expanded quickly and horizontally, supporting large and non-linear transactions, and this is closely related to the entire architecture design. Traditional bank architecture is centralized and difficult to expand horizontally. However, x86-based architecture and various open distributed technologies — including the MySQL database and Hadoop — are easy to expand horizontally, for example, WeBank’s Extensible Markup Language (XML) architecture.

During open distributed architecture trials, many technical problems faced by the industry have been successfully resolved. Multiple large-scale practices have been implemented as a result. WeBank has been a good example of this. Other banks, such as China Minsheng Bank and MYbank, have followed suit, building new open banking system architecture based on open distributed technology. Although the progress of many banks outside China has been relatively slow in this regard, they continue striving to gradually transform a traditional core into a new core, moving mainframes and mid-range computers closer to users. Even though the entire industry will maintain a traditional architecture (or core) for the foreseeable future, the transformation to new architecture — a digital core — is a trend that has now become irreversible.

The Global Financial Services Business Unit of Huawei’s Enterprise Business Group is dedicated to promoting the successful digital transformation of banks that we’ve seen in China over the past 10 years to overseas banks. In particular, the construction and transformation of a new digital core and architecture has been very successful.

Since 2019, Huawei has worked in China with the banking service provider Forms Syntron to develop a solution called Fincube. This solution helps banks easily build a distributed banking digital core system that converges Infrastructure-as-a-Service (IaaS), Platform-as-a-Service (PaaS), and Software-as-a-Service (SaaS) layers. Huawei also provides the IaaS infrastructure architecture and distributed storage technology based on HUAWEI CLOUD, while the partner provides fully distributed PaaS technologies and modular digital banking systems that can flexibly adapt to various service development and O&M scenarios. Since it was launched, this solution has become popular among customers, and it was quickly put into commercial use by a leading bank in Thailand. The solution meets the development requirements of the bank’s Internet financial services — such as digital wallet and mobile payments — and increases system processing capability from hundreds of Transactions Per Second (TPS) to thousands per second. This will increase to tens of thousands in the future. As a new digital banking platform, it supports the bank’s open banking development strategy and connects its ecosystem partners in the government, education, healthcare, and transportation sectors. In the future, it will also help the bank execute important national financial service development strategies and new banking ecosystem business models.

Huawei has also worked closely with MuRong Technology — another leading Chinese provider of bank software — to help a major Kenyan bank quickly build a new digital core system, based on inclusive financial services. This helped the bank to implement its inclusive financial strategy to quickly obtain customers and issue small- and micro-loans in five East African countries. Compared with traditional systems, the bank’s new digital core significantly improves transaction capacity and performance, and provides intelligent data service functions such as real-time risk control and intelligent risk control through the introduction of a Huawei big data processing platform and distributed database technologies. With these improvements, both the bank’s ability to gain new customers and its asset quality have been greatly improved, along with its overall competitiveness in the region. There are, of course, many more success stories to be told, including Huawei’s regional and global cooperation with leading banking system providers such as Sunline Technology and Temenos.

Through various channels and Huawei’s exhibitions, it’s apparent that many overseas bank customers are extremely interested in the new IT architecture and digital transformation of numerous Chinese banks in the past five to ten years. Indeed, the development of the technologies in the real world has proved that an open distributed architecture is feasible for the banking industry. However, without large-scale and long-term application verification, many banks would simply refuse to follow suit.

Many large-scale banks, along with fast-growing banks in China, have adopted good practices in terms of building new digital cores and transforming their IT architecture. As a result, customers outside China have been able to see first-hand what the future could look like. The Chinese example is leading to rising confidence in transformation.

As a global ICT solutions provider, Huawei aims to bring the solutions and best practices applied in the Chinese banking industry to more bank customers outside China. Indeed, the biggest value that Huawei can contribute to the global financial industry is its ability to replicate successful practices in China on a global scale, empowering the digital transformation and success of global financial customers.