Each U.S. #depository institution (DI)—including #banks and credit unions—uses a back-end information #technology system to process daily transactions and manage financial accounts. Many of these “core banking systems” are outdated and unable to fully accommodate modern services, such as open banking and instant payments. Modernizing these systems is a complex process, and DIs may consider a full replacement, a component-based replacement, or augmenting their existing system.

The core banking system of a depository institution (DI)—the back-end information technology system that processes daily banking transactions and updates financial accounts and records—is crucial to the products and services a DI offers its customers. Many DIs still use legacy core systems up to 40 years old that reside on mainframe hardware coded with outdated programming languages (McKinsey & Company 2022). To offer customers better payment services that take full advantage of modern payment methods—such as instant payments—these DIs will need to modernize their core systems.
Despite the importance of modernizing core systems, the systems themselves and the core banking services market are not well understood. Most DIs rely on core banking services providers for their core systems and ancillary services, so modernizing the systems requires close cooperation and coordination with these providers. In addition, ancillary financial services such as payments processing are often integrated with the legacy core systems, making the system architecture complex and difficult to change. This Payments System Research Briefing describes core systems and the options DIs have for modernizing them. Two forthcoming Briefings will examine the market structure surrounding core providers and explore the role of core providers in facilitating the adoption and broad use of instant #payments.

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Types of core banking services: Primary or ancillary, in-house or outsourced,
Legacy core systems versus next generation,
Options for DIs to modernize their core systems,
An additional consideration for modernization: Transition to the cloud,
Summary,