Next-Generation Core Banking: Why Banks Must Break the Monolith

For over a century, the banking industry has been characterized by innovation and constant change, and that’s accelerating. Why? There are several reasons that combine to force the pace. As a competitive, service-based business, banking needs to be customer-centric and responsive. If any bank fails to address new customer needs, another bank will do so. This competition has been around for centuries, but over recent decades, technology has continually redefined what’s possible and the pace of change. Today’s customers expect a quality banking experience, available 24/7 across all channels. And if they feel let down, many customers will not hesitate to switch banks or take to social media to express their discontent.

Banks were early adopters of technology. The first electronic funds transfers were enabled by the advent of telegraphy in the mid 19th Century. The Telegraph offered customers money transfer services by sending coded messages to designated recipients. This early transfer service highlighted the reciprocal nature of banking and the need to be able to transfer value remotely, securely and quickly. While telegraph services may be confined to history, the collaborative nature of banking is more relevant than ever.

A great deal of banking innovation has revolved around technology, cooperation, and bidirectional message flows. For example, the establishment of the SWIFT network in 1973 standardized message formats and created a global network for secure messaging. As global trade flourished, a host of new schemes emerged to help businesses and consumers exchange value conveniently, quickly, and securely. Today, payment is a focal point for innovation and branding, with companies like PromptPay empowering users throughout Asia to make and receive real-time payments using mobile banking apps via QR codes linked to proxies like phone numbers or national ID numbers. More innovation is inevitable, but a quick look backwards provides a clearer view of the road ahead.

In the middle of the 20th Century, larger banks in North America, Western Europe, Canada and Japan adopted mainframes for core banking solutions, and many other regions followed. Powerful mainframes became a staple in Western banks, enabling them to automate many manual processes and adopt a centralized system of record keeping. Mainframe computer systems often mimicked the names and manual processes they replaced, such as ledgers, accounts, and customer data.

Mainframe computers empowered banks to process massive batches of transactions securely, reliably, and efficiently. In practice, the mainframe became a computerized “vault” where mission-critical data was processed and stored within a secure, closed ecosystem. Mainframe computers also brought economies of scale to banking – additional customers could be serviced at very little incremental cost, confirming that banking was becoming a scale business driven by technology.

The need for scale also created a significant barrier to entry in the banking industry. Larger banks–and banking groups–often dominated specific geographies as substantial speculative investment in mainframe technology was needed to participate. Large banks could spread the cost of account administration, innovation, and regulatory compliance over a wide customer base and were often able to “out invest” competitors. Major banks were also able to attract, train, and retain the right talent to build proprietary infrastructures using tools, such as COBOL, PL/I and Assembler. While these technologies would initially give banks a competitive advantage, they would eventually create data silos and become an impediment to modern open-source contribution projects.  

As the new millennium approached, the banking industry began to experience both the benefits and drawbacks of its technological progress. While the mainframe era had ushered in an unprecedented ability to process massive transaction volumes and robust centralized data processing, it also precipitated new challenges.

Over time, the codebase grew organically, gradually becoming complex, tangled and difficult to manage. Without a “composable architecture” any change in one part of a system could have unintended consequences elsewhere, making maintenance and updates risky and time-consuming. Banks with a traditional mainframe architecture often struggled to allocate clear roles and responsibilities and to implement clean design patterns. Moreover, batch processing meant downtime was required to update and integrate systems, which became increasingly unacceptable to customers. The infrastructure that once enabled banks to scale rapidly and dominate markets started to impede their ability to respond to the demands of a digital age. This situation is an ongoing reality for many incumbent banks.

With the arrival of new banking channels, such as 24/7 telephone, online, and subsequently mobile, traditional mainframe architectures with their interwoven components were increasingly described as monoliths that were unsuited to customer needs in the 21st Century. Difficult to integrate, they generated “stovepipe” technology stacks and data silos with information stored in different formats across multiple systems, often in different locations.

This made it difficult to obtain a unified view of customer data, slowing decision-making and frustrating customer service. Monolithic architectures were unsuited to the climate of continual change, and innovation was slow and expensive to implement. Moreover, many banks had bespoke technology stacks for different channels, adding to the integration and support challenge.

Meanwhile, customer expectations were increasingly set beyond banking with internet giants, including Amazon, Google, Apple and Netflix, making technology part of everyday life. Tech giants also raised the bar by blurring the distinction between technology and business by introducing wallets, cards (for example, Apple Pay and Apple Card), and other embedded financial products. Apple has progressively penetrated the financial services landscape by offering financing for its own products and partnering with financial institutions to boost customer acquisition and retention. This reflects a universal trend of customers demanding banking services aligned to their busy 24/7 lifestyles and visiting branches less often. Consequently, the role of the branch pivoted from transaction processing to providing customers with advice or selling financial products.

Many of the emerging technologies and methods were open-sourced, which effectively marked the end of monolithic mainframe architectures that had prevailed for decades. Modern computing helped foster a collaborative banking culture, and in 2015 new regulations encouraged open banking and market entry by fintechs, neobanks and challenger banks.

Being “born on the cloud,” challenger and digital banks embraced Agile methods, microservices, and DevOps. Modern banks could build a continuous integration and continuous delivery (CI/CD) pipeline to speed up software delivery, improve code quality, and reduce errors through automation. Meanwhile, legacy banks were constrained by waterfall methods, inflexible software release windows, and the need for extensive regression testing. In most cases, testing took much longer than writing new software.

Technology redefined the economics of financial technology and pushed innovation to the top of the agenda. Although incumbents had strong brands and large customer bases, the cost of customer servicing was high and innovation slow.

This inflection point forced banks to reckon with the limitations of their entrenched monolithic technologies and to begin exploring new ways of working, embracing composable architectures, and open systems often facilitated by open APIs. Many banks acknowledged a role for technical partners to help them accelerate transformation and reap the benefits of modern technology and a new, open collaborative financial ecosystem. This in turn, changed how technology was designed, built, and consumed. 

The end of the century also marked the dawn of a more democratized, collaborative, and dynamic banking sector. One of the drivers of collaboration was the growth of open-source computing, which thrived on the contributions of a community of developers, users, and testers who collaborate to develop, improve, and maintain the software. Because the code is open, it can be adapted and customized to meet specific needs. Just as importantly, users can inspect software to understand how it works and to check for security vulnerabilities.

Open-source computing ushered in a new era of freedom, trust, and transparency, which would create a more collaborative and innovative technical landscape. New banking features and bespoke functions could be integrated into the bank’s technical ecosystem as APIs to deliver a best-of-breed banking solution. In this new era of “bootstrap technology” bank technologists could focus more on developing business logic and less on boilerplate coding.  

As the pace of innovation accelerated, banks with monolithic architectures simply could not keep up. The combination of open-source computing, Agile methods, microservices, and continuous delivery facilitated the release of new software 24/7. A modern bank can implement an event-driven architecture and build applications that respond to real-time events. In this new era, data becomes the “new oil” that powers innovation. The gap between business and technology has shortened to the extent that, throughout the banking industry, technology has become the business.

The democratization of technology has transformed how people choose, consume, and use technology. As cloud has become mainstream, many organizations have opted to adopt hosted solutions residing on a public or private cloud. This relieves banks of the burden of large periodic speculative investments in hardware and software to run the business, and it provides a ready-made solution to capacity planning and the need for backup solutions.

As consumers flocked to retail digital and mobile banking, the cloud has become the baseline for banking success. By moving to the cloud, a bank can achieve greater scalability, flexibility, and cost-efficiency. This is reflected in the uptake - by 2022, 86% of the financial services in Asia adopted public cloud for at least some market data needs, showing a clear direction of travel.  

The proliferation of cloud-based services also transformed the market dynamics of the banking industry. Although still a scale business, new banks, including startups, digital banks, and neo banks, emerged as regulators in global locations issued new banking licenses to boost competition. Many of these new banks were “born on the cloud” and could partner to provide a comprehensive range of banking services in a very short time.

Modern technologies empowered banks to scale their applications according to demand and to deploy updates rapidly without disrupting the entire system. Moreover, systems can be integrated seamlessly to boost innovation and deliver value quickly. Many modern banks are really technology companies operating within the constraints of a banking license, and a lot more fintechs are working in partnership with regulated banks to deliver customer value faster. 

[1] Cloud Facts

Modern technology boosted innovation and enabled new ways of addressing traditional challenges. But the global financial crisis also catalyzed change. In the wake of the collapse, a demand surged for decentralized, transparent systems that didn't rely on intermediaries. Bitcoin, the first blockchain-based digital currency, launched in 2009 as a direct response. Blockchain promised transparency, immutability, and a system where users could verify transactions without trusting a central authority.

From there, smart contracts emerged. These are self-executing agreements with rules coded directly into the blockchain. The decentralized nature of blockchain directly addresses the issues of trust and accountability that the crisis exposed. Since then, banks have been increasingly exploring and adopting blockchain technology.

Smart contracts and blockchain continue to reshape banking by automating processes, enhancing security, and enabling transparent transactions. These technologies reduce costs, streamline compliance, and open new avenues for banking innovation. Proven use cases include:

1. Cross-border payments: Traditional international transfers can take days and involve high fees. Blockchain networks like RippleNet and JPMorgan’s JPM Coin now enable near-instant, low-cost global settlements— completed in seconds instead of days.
2.  Tokenized assets and settlement: Financial institutions are piloting tokenized versions of traditional assets like bonds and securities. Smart contracts can automate dividend payments, voting rights, and ownership transfers on blockchain-based platforms.
3.  Central Bank Digital Currencies (CBDCs):  While not fully decentralized, many CBDC pilots - like those from the European Central Bank or the Bank of England-use blockchain infrastructure to test programmable money, where smart contracts can enforce spending rules or automate taxation.

Smart contracts have almost limitless potential to eliminate third-party intermediaries and offer almost instant settlement in any market.  Together, smart contracts and blockchain are reshaping banking by automating processes, enhancing security, and enabling transparent transactions.

Legacy banks face several technical challenges and need to transform. But with their strong brands and loyal customers, they have everything to gain. Bank transformation requires a next-generation core platform to replace legacy systems that are slow, costly, and hard to modernize.

A modern core enables real-time processing, open APIs, and cloud scalability, allowing banks to deliver instant, personalized, and seamless digital experiences across channels. It enhances security and compliance, reduces operational risk, and supports faster product innovation through a modular, microservices-based architecture. By modernizing the core, banks can lower long-term costs, improve efficiency, and stay competitive in a rapidly evolving financial landscape.

The continuous adoption of modern technologies in the banking sector is inevitable due to the rapidly changing demands of the digital economy, the changing world order, and the expectations of modern customers. Banking was an early adopter of technology, but a look backward suggests that it could become a victim of its own success. The technology that has driven success has become an impediment to further progress. Although all banks now offer digital services, many have yet to digitalize fully. With a digital infrastructure, a bank can embrace change, insulate itself from an uncertain future, and put innovation at the heart of all that it does. 

GenAI is proliferating through all areas of banking to boost efficiency, streamline business processes, and increase automation, and the pace of change is only accelerating with new use cases emerging constantly. It has reached a stage when banks cannot afford to ignore this technology and need to have their systems ready to adapt and integrate with the ever-increasing GenAI ecosystem.

With geopolitical changes that are seen around the world and a change in world order that’s happening, a day might not be far when stablecoins backed by gold, oil or rare earth minerals start to emerge as reserve currencies issued by the Central Banks, which would then require banks to have systems that can hold and transact in such currencies as they deal with fiat currencies today. Is your bank ready for such a radical change? Would your Core Banking System support transacting with stablecoins and smart contracts?

As the financial landscape evolves, driven by fintech innovation, increasing competition, and the need for greater efficiency, traditional banks must embrace these advancements to stay relevant to their customers.

Technologies like cloud computing, next-generation core banking, blockchain, and AI are not just optional upgrades but essential tools for improving scalability, availability, security, and profitability.  Failure to adopt and integrate these innovations could leave banks vulnerable to disruption, unable to meet regulatory requirements, and outpaced by more agile competitors.

The bottom line is banks can NEVER stop evolving and can only participate and grow with the constant change.

The good news is that, with the right technology strategy, a bank can insulate itself from change and put innovation at the heart of its business. And banks can achieve more in less time through partnership.

For several decades, GFT has delivered digital transformation projects in partnership with some of the world’s most successful banks. For many banks our collaborative approach, expert knowledge and unparalleled practical experience make us the obvious partner. GFT can help you turn the digital challenge into a unique business opportunity.

Get in touch with us to discover how we can help you prosper in a digital-first world!