Challenger banks plan to lower banking costs by operating without physical branches. But that’s not their only advantage over traditional banks. These fintech startups use cloud software to process financial transactions. This software increases their transaction processing speed and reduces their operating costs further. So it’s not just the lack of a branch network that helps challengers compete with traditional banks. They also have better back-end software. But now traditional banks can also set up modern core banking software with the help of the fintech Finxact.
The hardware that banks use to process financial transactions is often very old. Some banks are still using IBM mainframes to maintain their account records. And when they do, these systems may be programmed with ancient languages such as COBOL. So it’s difficult for banks to upgrade their systems to support new services, such as open banking. They might even have a hard time finding engineers who know COBOL to maintain their current transaction-processing hardware.
And banks often maintain their core banking software on systems set up at privately owned data centers. The bank incurs additional costs to operate the data center, such as lease payments and electricity bills. And it has to employ staff in the data center, including information technology professionals and security guards. Many software companies moved to the cloud long ago to avoid incurring these costs. But banks have been slower to adopt to the cloud, partly because alternative core banking software was hard to find.
A Streamlined Solution
When banks embark on projects to replace core banking software, they might get distracted. Creating a mobile banking app also improves the customer experience. So does adding communications technology that allows the app to send payments to other banking systems. Finxact, on the other hand, is a core as a service company. It only develops cloud software that replaces core banking technology. It isn’t a bank itself, it makes software for banks.
The Finxact software processes payments. It uses APIs to communicate with the third-party software that provides other banking services. And it processes payments in real time, unlike older banking software that uses batch processing. This also means that the bank doesn’t need to reconcile its accounts, because transaction records are always up to date.
Finxact designed its software for open banking. Its transaction processing software was built to connect with other banking software through APIs. Legacy banking core software was designed to process transactions internally for banks. It was never meant to be connected to third-party financial software. But banks have to plan to support third-party services now. National governments are requiring banks to support open banking with laws such as the European Union’s PSD2.
And cloud-based core banking software, like other cloud services, scales to fit the bank’s requirements. A bank won’t have to lease a huge datacenter or buy a powerful mainframe to support peak demand during the holiday season. With cloud platforms like Amazon Web Services and Microsoft Azure, a bank can rapidly respond to fluctuations in demand for transaction processing. Otherwise, it might take weeks for the bank to add more processing capacity to its datacenter. So the bank doesn’t have to invest in unnecessary hardware and can charge lower fees to account holders.
Faster Launches for Challengers
Sometimes it seems like new challenger banks are emerging every day. And with competition quickly emerging in any niche that neobanks attempt to target, it’s important for them to get their banking software set up to support depositors as fast as possible. And they might also need to add new features quickly, such as support for peer-to-peer payments or cryptocurrency transactions. Cloud-based core banking software can help in both of these areas.
Benefits for Traditional Banks
While Finxact provides core banking software to challenger banks, its customers include traditional banks as well. And these banks may receive much greater benefits from transaction processing software, especially if they’re replacing software that’s four decades old. A project like this might be the best way for a bank to reduce its operating costs.
It would be hard for a traditional bank to shut down its branches and become an online-only bank. Financial regulators might even punish the bank for doing that. Replacing core banking software is a major project for a traditional bank or credit union. But with cloud software it can reduce costs and process transactions faster while maintaining its branch network.
Replacing core banking software with cloud software from Finxact is a major project that could be very expensive for the bank. And the bank might have to shut down temporarily to set up the new system, annoying its customers. But in the long run, it’s worth it for a bank to use core banking as a service software. Otherwise, it will lose out to high-tech challenger banks that can process transactions faster and charge their customers lower fees.