What Is a Core Banking System? 

When it comes to managing, prioritizing, and adopting new banking technologies, there’s an awful lot to consider lately. From endlessly evolving digital transformation strategies that may include complex cloud migration initiatives and API-based integrations, banks, credit unions, and other financial institutions are tirelessly confronting a rapidly changing financial services landscape. While exploring new opportunities around cloud technologies and other financial innovations is essential to modernizing—and critical to reimagining the consumer banking experience for the future—there’s one element of a financial institution’s infrastructure that remains stubbornly central to its business operations: the core banking system.

A core banking system is a backend software system that financial institutions use to maintain customer accounts, process daily banking transactions, manage investments and deposits, process loans and mortgages, perform interest rate calculations, and post transactional updates to an internal accounting system’s general ledger. With the ability to connect to multiple banking channels, a core banking system provides the technology for financial institutions to offer financial services and products through a network of branches, brokers, ATMs, online banking, and mobile banking apps.

As the central underlying component of a wider core banking platform, this type of legacy banking system is generally built on a monolithic architecture, where the entire banking application uses one code base and combines all its functionality into a single, cohesive software package.

Due to the inherent constraints of this design, core banking software are often complex and not easily configurable, making it difficult for financial institutions to introduce new products or update existing ones. Changes to one component can have wide-ranging effects on the entire system, requiring extensive testing and system-wide updates.

That’s no longer sustainable. Financial institutions are under increasing pressure to embrace modernization. The rise of open banking, real-time payments, and fintech partnerships means that outdated, rigid systems can no longer meet market demands. New technologies, competition, and business models are pushing banks to evolve, improving customer experiences and making banking more flexible.

Modern banking technologies must be adaptable. The ideal core banking system should support integration and interoperability—particularly as the industry moves toward open banking, where financial institutions must connect with third-party providers, including account information service providers (AISPs) and payment initiation service providers (PISPs).

Replacing core banking systems with modern platforms is a challenge. With higher complexity comes higher risk, and replacing a system that has been operational for decades involves risks related to business continuity, regulatory compliance, data security, and legacy dependencies. This is why many financial institutions are choosing to modernize rather than replace their core systems, ensuring continued stability while integrating new technologies.

Learn how seamless fintech partnerships, open banking, and digital innovation are transforming banking.

How Are Banks Modernizing Core Banking Systems? 

To modernize core banking systems, many banks are strategically blending legacy infrastructure with modern technologies. By adopting a hybrid approach, financial institutions are balancing stability with innovation—refactoring or restructuring their existing systems while integrating cloud-based frameworks that provide greater agility.

Many banks are prioritizing core modernization by adopting cloud-native architectures, containerization, and APIs. This shift supports real-time data processing, enhances scalability, and improves integration with fintech ecosystems. Legacy system dependencies are being addressed through modular upgrades, allowing institutions to incrementally modernize their technology stack while maintaining operational continuity.

While every financial institution is different and there are many different applications, systems, architectures, and approaches used to effectively manage a financial institution’s core banking operations, there are generally three types of core banking systems today: monolithic core banking systems, modular core banking platforms, and cloud-native core banking solutions.

With core banking systems dating back to the 1980s and 1990s—and some legacy code dating back even further—banks have traditionally relied on rigid, monolithic structures. To break free from these constraints, financial institutions are now implementing cloud-native solutions, microservices, and DevOps methodologies. These modern approaches enable faster development cycles, seamless integrations, and improved regulatory compliance.

While every financial institution is different, most core banking systems today fall into three main categories:

1. Monolithic Core Banking Systems: Traditional backend systems that process transactions, maintain accounts, and handle essential banking operations. While efficient, they are rigid and difficult to update.
2. Modular Core Banking Platforms: More adaptable systems with independent modules that manage different banking functions, allowing for incremental updates without affecting the entire system.
3. Cloud-Native Core Banking Solutions: Modern, API-driven platforms built on microservices architectures, enabling financial institutions to rapidly deploy new services and scale their operations efficiently.

Before examining these systems in detail, it’s important to understand how decades of banking technology evolution have shaped today’s complex core banking environment.

The Evolution of Core Banking Systems and COBOL

Many of the first core banking systems were developed using COBOL, a programming language created in 1959 by Grace Hopper and a team of industry experts. COBOL became widely adopted in banking due to its strong batch processing capabilities, transaction efficiency, and precision in financial calculations.

Surprisingly, COBOL remains a critical part of banking infrastructure. Despite efforts to transition to modern programming languages, COBOL-based core banking systems still power a significant portion of financial transactions worldwide. However, the industry is facing a growing shortage of COBOL developers, making system maintenance increasingly difficult.

In 2017, Reuters estimated that there were over 200 billion lines of COBOL code still in use. A 2022 study suggested that the real figure could be closer to 800 billion lines, highlighting the persistent reliance on legacy technology. According to industry estimates:

• Over 40% of banking systems still run on COBOL.
• More than 80% of in-person banking transactions rely on COBOL-based systems.
• Approximately 95% of ATM transactions involve COBOL in some capacity.

A portable programming language that was both hardware independent and, for its time, easy to read, COBOL was quickly adopted for its performance capabilities, standardization efforts, and its compatibility with mainframes—large computers with powerful processing capabilities often used by banks or government organizations for mission-critical applications. Throughout the 1960s and 1970s, COBOL was widely used in the development of key government and financial systems around the world, and it has ultimately become the backbone of not only the computer software industry, but also the global economy.

COBOL is everywhere. Even today, it’s considered the code that controls money.

Surprisingly, many banking leaders view the language as strategic and critical to their businesses today, even though COBOL developers are getting harder and harder to find and more flexible systems, architectures, languages, and technologies are available.

In 2017, a report by Reuters estimated that there were over 200 billion lines of COBOL still in use. According to that same report, 43 percent of banking systems are built on COBOL, 80 percent of in-person transactions use COBOL, and 95 percent of ATM swipes rely on COBOL.

More recent research suggests that study may have underestimated the real figures and prevalence of COBOL, suggesting that approximately 800 billion lines of COBOL are still in use today.

Many core banking systems were originally programmed in COBOL because of its large-scale batch processing capabilities, transaction processing capabilities, and mathematical precision—everything a core banking system needs. It was also extremely fast. Paired with mainframe computers, COBOL was—and somehow remains—incredibly powerful.

Unfortunately, it’s also obsolete. Most university or college curriculums don’t offer it. That alone makes it hard to find developers, making its programs hard to change or update.

While COBOL’s efficiency and reliability have kept it relevant, it presents significant modernization challenges. Most universities no longer teach COBOL, making it difficult to find skilled developers. As a result, banks are leveraging middleware solutions, API integrations, and cloud computing to extend the life of these systems while introducing modern functionality.

Types of Core Banking Systems: Monolithic, Modular, and Cloud-Native

There are three main types of core banking systems in use today:

1. Monolithic Core Banking Systems

The original core banking solutions, these systems manage transactions, account updates, payments, and general ledger functions. While reliable and secure, they are inflexible, requiring major system-wide updates for any modification.

2. Modular Core Banking Platforms

A more adaptable approach, modular platforms separate banking functions into independent components. Banks can implement, update, or replace individual modules—such as loans, mortgages, or compliance tools—without affecting the entire system. This improves agility and reduces operational risk.

3. Cloud-Native Core Banking Solutions

The most modern iteration, cloud-native core banking platforms leverage microservices, APIs, and containerization to create a scalable and flexible banking environment. These platforms allow banks to introduce new products faster, enhance security, and improve system resilience. Cloud-native architectures also enable continuous integration and deployment (CI/CD), supporting agile software development practices.

The Shift from Monolithic Systems to Microservices  

When we think about financial technology and the future of banking, we tend to consider the things that symbolize progress. It’s easy to look to the recent rise of neo banks and other popular fintechs or even turn to Banking-as-a-Service and embedded finance to gain new perspectives on how emerging models and technological innovations are disrupting traditional finance by leveraging modern systems to create entirely new personal banking experiences.

As financial institutions continue modernizing, the industry is shifting from monolithic core systems to microservices-based architectures. Microservices allow banks to develop and deploy services independently, improving scalability and reducing operational risks. By breaking down monolithic structures, financial institutions can achieve greater flexibility and seamlessly integrate new fintech solutions.

While completely replacing core banking systems remains a complex challenge, many banks are embracing a phased approach—modernizing their most critical services first while gradually transitioning toward cloud-based infrastructures.

Looking for a Core Banking Solution?

Portfolio+ provides modern, cloud-based core banking solutions used by leading financial institutions across Canada. We understand the challenges of legacy modernization and offer solutions designed to integrate seamlessly with existing infrastructure.

If you’re exploring core banking modernization, open banking strategies, or cloud migrations, contact us today to learn how a Portfolio+ cloud-native core banking solution can drive innovation for your financial institution.

 

Sources: 

https://en.wikipedia.org/wiki/Core_banking (Retrieved June 8, 2023)

https://en.wikipedia.org/wiki/FLOW-MATIC (Retrieved June 8, 2023)

https://www.ibm.com/downloads/cas/WZVPAYWL (Retrieved June 12, 2023)

https://fingfx.thomsonreuters.com/gfx/rngs/USA-BANKS-COBOL/010040KH18J/ (Retrieved June 14, 2023)

https://www.wealthsimple.com/en-ca/magazine/cobol-controls-your-money (Retrieved June 14, 2023)

https://www.microfocus.com/en-us/press-room/press-releases/2022/cobol-market-shown-to-be-three-times-larger-than-previously-estimated-in-new-independent-survey (Retrieved June 14, 2023)

https://www.howtogeek.com/667596/what-is-cobol-and-why-do-so-many-institutions-rely-on-it/ (Retrieved June 14, 2023)

https://en.wikipedia.org/wiki/COBOL (Retrieved June 13, 2023)

https://americanhistory.si.edu/cobol/proposing-cobol (Retrieved June 14, 2023)

https://www.ibm.com/downloads/cas/WZVPAYWL (Retrieved June 12, 2023)

Reuters: COBOL’s Role in Banking (Updated)

Micro Focus: COBOL Market Study 2022 

IBM Research on Banking Infrastructure

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Banking technology is complex. Many of the largest banks and financial institutions in North America operate on a unique collection of financial applications, legacy systems, powerful programming languages, and modern digital platforms—all carefully integrated over decades of investment in core infrastructure. Apart from retail banking software and term deposit software, it’s arguably one of the most critical elements of a core banking system: investment management software.

Investment management software is a core banking technology subsystem designed to help banks, financial institutions, investment firms, and credit unions manage and oversee investment portfolios. This software streamlines various investment-related processes, from investment planning and trading to analysis and reporting, providing a comprehensive solution for managing financial assets from stocks, ETFs, bonds, and mutual funds to tax-sheltered investment plans.

Users can use the platform to open accounts, administer plans, buy and sell securities and financial assets, track performance, manage risk, and handle compliance. The software is particularly useful in automating routine tasks, providing real-time insights and access to financial markets, and helping organizations meet regulatory standards—all critical in an industry where access, performance, and data accuracy are essential.

In this blog post, we’ll summarize why banks need investment management software, explore how these systems work, and discuss the different types of investment accounts they support. We’ll also highlight the essential features of investment management software and explain the differences between non-registered and registered investment accounts. Finally, we’ll look ahead to the future, touching on the importance of application programming interfaces (APIs) and exploring how emerging technologies like artificial intelligence may shape the next generation of investment management solutions.

Why Do Banks Need Investment Management Software?

People turn to banks and financial institutions for many reasons, but at the heart of it all is one simple idea: A financial institution is the safest place to put your money. Whether clients are building up their savings, buying a home, or planning their financial goals, banks and credit unions are often the first stop. Beyond being safe, these trusted institutions provide opportunities with access to financial assets, investment options, and expert advice—all of which can help grow a client’s wealth. However, with thousands of clients and countless portfolios to manage, financial institutions must rely on technology to efficiently oversee these investments at scale.

This is why banks need investment management software. By centralizing critical investment management tasks, an investment management system offers a streamlined platform for banks and financial institutions to manage portfolios with precision and efficiency. From onboarding new clients, setting up portfolios to tracking transactions, reconciling accounts, and monitoring investment performance, this software helps institutions ensure that investments align with their clients’ short- and long-term financial goals.

With automated compliance reporting, risk analysis, and trading, investment management software also helps institutions reduce errors, eliminate redundancies, and make smarter, faster decisions. With these simple automations, financial professionals can focus on higher-value work and the things that really matter—like providing unique advice, building strategic investment plans, and nurturing customer relationships through personalized financial services.

Ultimately, investment management software doesn’t just keep financial institutions organized—it empowers them to deliver more effective, efficient, and personalized services, making it a key component of modern core banking infrastructure.

How Does Investment Management Software Work?

Investment management software generally acts as a central hub for managing all the tasks involved in overseeing client investment portfolios, bringing together data, automating workflows, and offering tools that allow banks and financial institutions to manage investments smoothly and accurately. But not all software is created equally.

Depending on the system, investment management software can be a specialized subsystem within a core banking application, a fully standalone application, or a point solution with limited investment book of record (IBOR) functionality that integrates with pre-existing systems and external third-party applications through an application programming interface (API). Apart from modern APIs, these systems may also use other technologies for integration, like file-based transfers where data is exchanged through batch file uploads and downloads using Secure File Transfer Protocol (SFTP). Despite their differences, these systems ultimately perform many of the same tasks, consolidating data, automating operations, and providing real-time insights that enable banks to efficiently manage portfolios and investments for a wide range of client needs. They help streamline complex investment operations, while meeting both client needs and regulatory requirements.

So, how exactly does investment management software work? The software walks banks and financial institutions through a process that makes it easy to onboard clients, set up investment portfolios, execute trades and orders (stocks, ETFs, mutual funds, bonds, etc.), monitor portfolio performance, and rebalance portfolios based on asset allocation.

Let’s explore the workflow process in a little more detail.

Here’s how investment management software typically works:

1. Client Onboarding: The process starts with bringing a new client onboard. Investment management software allows banks to create new customer profiles, providing an integrated workflow that ensures the proper information is collected. This ensures legal and compliance checks like know your customer (KYC) and anti-money laundering (AML) are completed. Information about the client’s financial goals, risk tolerance, and investment preferences is captured at this stage.
2. Data Integration and Portfolio Setup: Once the client is onboarded, the software integrates data from multiple sources. Client profiles, account details, and pre-existing data provide a comprehensive view of the client’s investment needs and financial goals. From here, financial advisors can begin to set up client investment accounts, plans, and products. They can build personalized portfolios, aligning asset allocations with the client’s needs, ensuring that investments reflect their financial objectives and risk tolerance.
3. Trading and Management: As financial advisors work with their clients to make investment decisions, the software automates the execution of trades, ensuring that they are completed accurately and efficiently. Trades are processed with minimal manual intervention, reducing the chances of errors and delays.
4. Portfolio Monitoring and Rebalancing: The software continuously monitors portfolio performance in real-time, tracking changes in the market and comparing them to the client’s investment strategy. If performance deviates from predefined targets, the system triggers rebalancing recommendations or sometimes automatic adjustments to keep the portfolio aligned with the client’s goals. Automated rebalancing can help protect clients from excessive risk, especially during market fluctuations.
5. Compliance and Risk Management: Throughout the lifecycle of client portfolios, investment management software helps ensure financial institutions remain in compliance with relevant regulations established by regulators, such as the Office of the Superintendent of Financial Institutions (OSFI) and provincial securities commissions. The software automates critical compliance reporting tasks, minimizing manual errors, maintaining a comprehensive audit trail for compliance verification, and adhering to regulatory mandates.
6. Reporting and Insights: In addition to regulatory reports, over time the software provides both clients and financial institutions with transparent, real-time or periodic reports. These reports give insights into portfolio and investment performance, market trends, and compare client portfolio growth with market indices, helping financial advisors offer informed guidance to ensure their clients stay updated on their investments.
7. Advisory Services: The software’s reporting capabilities can also provide data-driven insights help provide personalized advice. Whether it’s suggesting adjustments based on market conditions or financial goals, the investment system supports advisory services by giving banks the tools and information they need to deliver better services.

In summary, investment management software works by automating and streamlining key tasks in a logical, step-by-step process—from onboarding clients and setting up portfolios to monitoring, rebalancing, and ensuring compliance. This workflow helps financial institutions operate more efficiently and make more informed decisions, ultimately improving the client experience by optimizing portfolio performance and creating tailored investment portfolios.

Different Types of Investment Accounts: Non-Registered vs. Registered

We’ve explored how investment management systems work, but understanding the types of accounts these systems support is just as important. Investment management software is designed to manage both registered and non-registered accounts, each of which includes various types of investment accounts suited to different financial needs. Let’s break down these categories and highlight some of the key account types that can be managed on these systems.

What Are Registered Accounts?

Registered accounts are investment accounts that are registered with the Canadian government and offer specific tax advantages and incentives. Also called tax-sheltered accounts, these accounts are popular for long-term investing, especially for retirement, as they provide tax-deferred or tax-free growth.

Here are the main types of registered investment accounts in Canada:

• RRSP (Registered Retirement Savings Plan): One of the most common registered accounts, an RRSP allows individuals to save for retirement with tax-deferred growth. Contributions are tax-deductible, and taxes are paid only when funds are withdrawn, typically in retirement when the individual’s tax rate is lower.
• TFSA (Tax-Free Savings Account): A TFSA allows individuals to save or invest money and withdraw it tax-free. Unlike an RRSP, contributions to a TFSA are not tax-deductible, but earnings within the account grow tax-free, and withdrawals are also tax-free.
• RESP (Registered Education Savings Plan): An RESP is designed to help save for a child’s post-secondary education. Contributions are not tax-deductible, but investment income grows tax-deferred, and the government may contribute additional grants, like the Canada Education Savings Grant (CESG).
• RDSP (Registered Disability Savings Plan): An RDSP is designed to help parents and individuals save for the long-term financial security of someone eligible for the Disability Tax Credit (DTC). Contributions are not tax-deductible, but the plan offers tax-deferred growth, and the government may contribute through matching grants or bonds, making it an attractive option for those with disabilities.
• FHSA (First Home Savings Account): The FHSA allows first-time homebuyers to save up to a specified limit, combining aspects of an RRSP and a TFSA. Contributions are tax-deductible, and withdrawals (including any investment growth) used to purchase a home are tax-free, making it a powerful tool for home ownership savings.
• RRIF (Registered Retirement Income Fund): An RRIF is a registered account that converts RRSP savings into income during retirement. Funds in an RRIF must be withdrawn annually, and the withdrawals are taxed as income.
• LIRA (Locked-In Retirement Account): A LIRA holds pension funds for individuals who have left a company’s pension plan. Unlike an RRSP, funds in a LIRA are “locked in” and generally cannot be withdrawn until retirement, except under certain circumstances. It can later be converted to a Life Income Fund (LIF) or a similar retirement income option.

What Are Non-Registered Accounts?

Non-registered accounts, on the other hand, do not offer the same tax benefits as registered accounts. These are flexible investment accounts that can hold a variety of assets but do not have the same restrictions or advantages when it comes to taxes.

Common types of non-registered investment accounts in Canada include:

• Individual Accounts: These are personal accounts held by an individual investor for saving or investing. There are no tax advantages, but they offer flexibility, and there are no withdrawal restrictions.
• Joint Accounts: A joint account is held by two or more individuals, such as a couple, who share equal ownership of the investments. Joint accounts are typically non-registered, though joint registered accounts like joint RRSPs also exist in some cases. Taxes are paid on investment income, and all holders are responsible for reporting their share.
• Corporate Accounts: These accounts are used by businesses to invest surplus funds. Corporate investment accounts allow businesses to grow their assets, but the income earned is subject to corporate tax rates, which may differ from personal tax rates.
• Taxable Investment Accounts: Taxable investment accounts are similar to individual accounts but are specifically used for investments that are subject to taxation. These accounts may include equities, bonds, mutual funds, and other taxable investment products.

Ultimately, registered and non-registered accounts each offer unique advantages tailored to specific financial goals. While registered accounts often provide tax incentives and are designed for long-term savings, such as retirement or education, non-registered accounts can sometimes offer greater flexibility without tax-deferred or tax-free growth. By supporting both types of accounts, investment management software helps financial institutions meet diverse client needs.

4 Key Benefits of Investment Management Software for Banks and Credit Unions

Investment management software offers a wealth of advantages that make it indispensable for banks, credit unions, and other financial institutions. By providing a unified platform to manage client investment portfolios—sometimes through a combination of integrated solutions that handle different aspects of the investment management lifecycle—these systems streamline operations, enhance client service, and drive efficiency across the board.

1. Streamlined Operations and Efficiency: By centralizing and automating key investment tasks, investment management software enables institutions to optimize their workflows and reduce operational overhead. From client onboarding to portfolio rebalancing, the software minimizes manual intervention, reduces errors, and allows financial professionals to focus on higher-value work. This operational efficiency translates into significant cost savings, faster transaction times, and improved scalability.
2. Enhanced Client Experience: Investment management software empowers financial institutions to deliver personalized, client-centric services. With tools that provide detailed insights into individual client needs and market conditions, advisors can create tailored portfolios, offer data-driven recommendations, and ensure each client’s investments are optimized to their goals. The result is a more engaging and rewarding client experience, building trust and long-term relationships.
3. Improved Risk Management and Compliance: The regulatory environment in the financial sector is complex and constantly changing. Investment management software helps institutions stay ahead by automating compliance processes, maintaining comprehensive audit trails, and performing real-time risk analyses. Automated alerts and compliance checks enable institutions to respond quickly to changing regulations and ensure adherence to Canadian standards, such as those set by the Office of the Superintendent of Financial Institutions (OSFI) and other provincial regulatory bodies.
4. Real-Time Insights and Analytics: Access to real-time market data, portfolio performance metrics, and comprehensive analytics is crucial for making informed investment decisions. Investment management software aggregates and analyzes data, providing actionable insights that enable financial professionals to respond dynamically to market fluctuations, rebalance portfolios as needed, and align investments with changing market trends.

The Role of APIs and Cloud Infrastructure in Investment Management Solutions

As the financial industry evolves, so too does the technology that supports investment management. To meet the growing demands of Canadians and financial institutions, investment management software is increasingly leveraging cloud infrastructure and Application Programming Interfaces (APIs) to offer more flexible, scalable, and integrated solutions. These innovations are enabling even smaller institutions to access powerful investment management capabilities without the need for extensive IT resources through the deployment of point solutions.

Cloud-Based Solutions Offer Scalability and Flexibility

Cloud-based deployment or cloud banking is revolutionizing the way investment management software is used across the financial sector, particularly as a core banking application. By moving to the cloud, financial institutions gain access to highly secure and scalable solutions that can grow with their needs. The cloud provides a more cost-effective way to manage investment portfolios, reduces IT infrastructure costs, and enhances data storage and security. This flexibility allows institutions to respond to market changes quickly, deploy new features seamlessly, and ensure their systems remain up to date with the latest advancements in financial technology.

API-Driven Integration Can Streamline Customization

APIs are making investment management systems more customizable and create interoperability with other financial technologies. Through API-driven integration, financial institutions can create or connect point solutions tailored to their specific needs, without having to replace their entire IT infrastructure. For smaller institutions, like Canadian credit unions, this means they can easily implement an investment management system that integrates with their existing platforms, making it possible to leverage advanced tools and features without significant upfront investment. APIs provide a way to connect different financial systems, enabling seamless data exchange and improving operational efficiency across multiple platforms.

Looking Ahead: The Future of Investment Management Software

As technology continues to evolve, so will investment management systems. There’s no doubt that artificial intelligence (AI) will play a powerful role in personal investing in the years ahead as trusted investment management software expands to provide more powerful personalized investing experiences.

In the coming years, AI may play a crucial role in automating portfolio management, improving risk analysis, and driving smarter investment decisions. While AI applications in investment management are still developing, they hold the potential to significantly enhance how financial institutions manage assets and respond to market conditions, offering an exciting glimpse into the future of investment management solutions.

For more information on Portfolio+, including its API and investment management capabilities, cloud-based banking solutions, or its core banking system, contact us today!

Sources:

https://www.investopedia.com/terms/k/knowyourclient.asp  (Retrieved November 7, 2024)

https://www.investopedia.com/terms/i/investment-management.asp (Retrieved November 5, 2024)

https://www.canada.ca/en/revenue-agency/services/tax/registered-plans-administrators/registered-investments/registered-investments-1.html (Retrieved November 6, 2024)

https://www.investopedia.com/terms/u/unregistered-account-/-nonregistered-account.asp (Retrieved November 7)

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The right loan origination software can make a world of difference when it comes to lending—and a loan origination system can arguably provide one of the most impactful ways to completely transform an organization’s lending process. That’s why Canadian banks, credit unions, and financial institutions are always seeking new technologies in order to improve their lending processes and operations. If there’s a way to streamline the loan approval process or make the homebuyer’s journey a little smoother, forward-thinking financial institutions want to know about it.

One of the biggest problems banks and financial institutions face is rooted in lending processes. Traditional lending processes involve high level of tedious and sometimes complex manual tasks, including document collection, application review and verification, and a slew of other data entry challenges. These manual processes are notorious for leading to long turnaround times and bottlenecks in loan approvals. They slow down the overall lending cycle, frustrate customers, and directly impact operational efficiency. Whether it means acquiring more powerful decision-making capabilities, automating borrower risk assessments, or discovering new integrations to enhance the customer experience, banks and financial institutions are constantly exploring solutions to these challenges.

To address these challenges, many institutions make strategic, targeted investments in lending software—a broad category of technology solutions that automate and optimize the entire loan lifecycle. This includes systems designed for specific stages of lending, such as loan origination systems (LOS) and loan management systems (LMS).

We’ve covered loan management software in a previous post, but we haven’t yet explored loan origination software, the nuances between lending systems, or the opportunities this technology offers to create a more modern and intuitive lending experience.

So, what is a loan origination system? How does it fit into a financial institution’s core banking infrastructure? What are some of its key features? And what are some of the problems it can help banks and financial institutions address in their lending processes and operations?

In this blog post, we will explore the loan origination system, highlighting its unique role in the lending process. We’ll cover the key feature of an LOS and examine how it benefits banks, financial institutions, and credit unions looking to streamline their lending business. We’ll also discuss how an LOS often works alongside an LMS, to provide banks and financial institutions with a comprehensive, efficient approach to loan origination and servicing from start to finish.

What Is a Loan Origination System?

A loan origination system (LOS) is a digital platform that automates and manages the initial stages of the loan process, from application intake and document collection to credit assessment, underwriting, and loan approval. By streamlining origination and loan processing, an LOS enhances decision-making and improves borrower experiences, enabling faster loan and mortgage approvals, while ensuring regulatory compliance.

By automating key steps, an LOS reduces manual workloads, minimizes errors, and accelerates decision-making, ensuring a smoother pre-approval process. This not only benefits lenders by improving operational efficiency, but it also creates a better experience for borrowers, who can receive faster loan decisions with fewer delays. In fact, modern loan origination systems can even bring approval time to within a few minutes, and loan funding to within 24 hours.

An effective LOS is equipped with various features and functionalities that cater to the complexities of the lending process. These digital lending capabilities not only simplify the workflow for financial institutions but also enhance the overall experience for borrowers.

Let’s look at some key features of a loan origination system.

Key Features and Functionalities of a Loan Origination System (LOS):

• Application Intake: Digital forms that enable borrowers to easily submit their loan applications online, providing a user-friendly interface to gather necessary information.
• Application Processing: Automatic validation of submitted information to reduce errors, ensuring that applications are complete and ready for review.
• Document Management: Secure collection, storage, and retrieval of necessary documentation (e.g., income verification, credit history), along with e-signature capabilities for remote signing.
• Credit Assessment and Scoring: Integration with credit bureaus for instant credit reports and automated scoring algorithms for real-time credit assessments.
• Underwriting Automation: Automated underwriting processes that evaluate borrower risk using predefined rules and algorithms to help streamline decision-making.
• Regulatory Compliance: Built-in compliance checks and anti-fraud controls to adhere to relevant regulations and audit trails for accountability.
• Integration Capabilities: APIs that allow seamless integration with other financial systems and compatibility with third-party platforms.
• Reporting and Analytics: Dashboards providing insights into loan performance metrics and customizable reporting tools for operational analysis.
• Customer Relationship Management (CRM) Features: Tools for tracking borrower interactions and automated communication features to enhance the customer experience.

These features work together to create a streamlined and efficient loan origination process, significantly reducing manual workloads and errors. Collectively, they improve decision-making, accelerate loan approvals, and provide a better experience for borrowers.

Ultimately, an LOS enables banks, credit unions, and other financial institutions to modernize their operations and enhance the overall efficiency of their lending services.

How Does Loan Origination Software Streamline Lending?

So, how exactly does an LOS enhance the efficiency of a bank’s lending services? Well, an LOS streamlines the lending process by automating traditionally manual and time-consuming tasks, such as application intake, document collection, and credit assessment. By digitizing and automating these tasks, the system eliminates a lot of the inefficiencies rooted in manual data entry. That reduces the risk of human error and speeds up loan approval times.

Integrated workflows within an LOS also ensure that loan and mortgage applications are processed faster, allowing financial institutions to handle larger volumes of loans and mortgages without sacrificing accuracy or compliance requirements.

This approach helps address some critical challenges that lenders face, like delayed approvals due to incomplete documentation, inconsistent underwriting decisions, and bottlenecks caused by manual reviews. For example, by automatically validating applicant information and integrating credit reports, an LOS allows underwriters to focus on risk assessment rather than paperwork.

An LOS doesn’t completely eliminate manual intervention from the lending process. Not for everyone, anyway. But it comes close. It can provide significant automation and efficiency gains, while eliminating redundant tasks, ensuring that underwriters can spend more time focusing on what really matters—making sound lending decisions.

What’s the Difference between a Loan Origination System and a Loan Management System?

While both an LOS and LMS are both key components of a financial institution’s banking technology, these lending software solutions can often serve distinct functions. It’s important to remember that every financial institution is different. Their systems are different. Their processes are different. And their technology is different. With countless iterations of underlying technology solutions often spanning decades, it’s not uncommon for financial institutions to have a collection of modern platforms, modular core banking solutions, and other legacy technology integrated with a pre-existing core banking system.

With this in mind, it’s important to note the nuances. Some mortgage software and loan management lending solutions offer workflows that cover the entire lending lifecycle from origination to funding to servicing. But, as we mentioned, there are often key differences between loan origination systems and loan management systems. So, what’s the difference between and LOS and an LMS?

Generally, an LOS focuses on the pre-approval stages of the lending process, assisting with loan application processing and document management and credit assessment. An LMS takes over after the approval stage, managing the loan or mortgage through repayment and servicing until it reaches maturity.

Together, these two systems cover the full lending lifecycle, providing financial institutions with powerful tools to efficiently manage loans and mortgages from start to finish.

How Do Loan Origination Systems Work with Loan Management Systems?

Although a loan origination system and a loan management system can serve distinct roles in the lending process, they often work together to ensure seamless end-to-end loan management. The transition between an LOS and LMS is critical for maintaining data integrity, speeding up operations, and providing a seamless experience for both lenders and borrowers.

A modern LOS generally handles the pre-approval and origination stages—such as application intake, document verification, and underwriting—up until the loan is approved. Once a loan is approved, the LMS takes over, managing the loan’s lifecycle through repayment and servicing. This includes tasks like tracking payment schedules, calculating interest, processing payments, generating statements, and ensuring compliance throughout the loan’s duration.

The Role of Application Programming Interfaces (APIs) in LOS and LMS Integration

The smooth collaboration between LOS and LMS is often achieved through integration using Application Programming Interfaces (APIs). APIs facilitate the secure and real-time transfer of data between the two systems. Like a messenger, an API ensures that critical information like borrower details, loan terms, and underwriting decisions are automatically and securely transferred from the LOS to the LMS without manual intervention, allowing financial institutions to maintain efficiency and accuracy across their operations.

Using APIs, the integrate systems can also connect with other financial tools, as well as other systems used in a bank’s infrastructure, including customer relationship management (CRM) platforms, compliance monitoring systems, and credit-scoring models. This creates a streamlined environment where data flows freely and securely between multiple platforms, creating a comprehensive, integrated ecosystem that enhances productivity and improves the lending experience.

5 Benefits of Implementing Loan Origination Software for Lenders

It should be obvious by now: A loan origination system is a powerful way to transform a financial institution’s lending operations. The right system will not only streamline lending leading to faster and more efficient loan approvals, but it will also help banks and credit unions prepare for a future of personalized banking that meets the expectations of digital native consumers, while supporting business partnerships, integration, and interoperability.

In fact, an LOS has the potential to make the single biggest impact to user experience—not just the borrowers experience, either, since lending software paired with APIs can even help financial institutions transform the lending experience for their own internal underwriters and loan management professionals.

Ultimately, loan origination systems offer a wide range of benefits, helping financial institutions overcome traditional challenges in the lending process. If we were forced to narrow it down, these are the five key advantages of adopting an LOS for banks, credit unions, and other lending institutions:

1. Improved Efficiency and Faster Loan & Mortgage Processing
   By automating manual tasks such as application intake, document collection, and credit assessment, an LOS dramatically reduces turnaround times. This efficiency enables financial institutions to process a higher volume of loan applications without sacrificing accuracy.
2. Enhanced Accuracy and Reduced Human Error
   An LOS automates data entry, document verification, and compliance checks, minimizing the likelihood of errors. Automated workflows ensure that tasks are completed consistently and accurately, reducing the risk of compliance issues or mistakes that could slow down the approval process.
3. Increased Loan Approval Speed and Customer Satisfaction
   Faster loan and mortgage approvals lead to a better experience for borrowers, making the overall lending process smoother. An LOS can integrate real-time credit scoring, instant document validation, and automated decision-making to further accelerate loan approval timelines, ensuring customers are not left waiting.
4. Strengthened Compliance and Risk Management
   Built-in or configurable compliance features allow financial institutions to stay aligned with ever-changing regulatory requirements. By automating audit trails, risk assessments, and reporting, an LOS helps mitigate risks associated with manual compliance processes, making it easier to meet legal standards.
5. Integration with Other Core Banking Systems
   LOS platforms integrate seamlessly with loan management systems (LMS) and other banking tools, creating a unified ecosystem. Through APIs, an LOS can connect with third-party tools, CRM platforms, and credit-scoring models, ensuring that data flows smoothly between systems to enhance operational efficiency and decision-making.

Loan Origination Software Will Drive the Future of Lending

Over the past decade alone, banking has changed dramatically, driven by changes in technology that promote personalized, self-serve, data-driven digital banking experiences. With a focus on personalized banking—as well as core modernization and cloud adoption—many financial institutions may be realizing that their legacy lending platforms and processes have been neglected. With APIs and increased competition in the lending space, there’s never been a better time to explore opportunities offered by loan origination software and lending technology.

As we explored, implementing an effective loan origination system that automates key processes and significantly reduces manual workloads, minimizes errors, and accelerates the loan approval process will help ensure seamlessness in an organization’s lending lifecycle.

As the industry continues to evolve, technology will continue to drive the future of lending. This makes it imperative for organizations to uncover lending solutions that address traditional challenges while providing the foundational technology that will position them for future growth and success. And with the increasing adoption of APIs in the banking industry, strategic investment in new systems can also help protect investments in trusted core and legacy systems, creating a comprehensive suite of technology that’s tailored for any financial institution’s unique needs.

For instance, our Equitable Bank case study explores how one Canadian bank used Portfolio+’s API to launch its own loan origination system, leveraging a pre-existing loan management system to create a modern user experience for its underwriters, while transforming its lending technology.

Ultimately, a loan origination system can help financial institutions meet the demands of modern borrowers and create a more intuitive lending experience for internal underwriters, while providing a more efficient, compliant, and user-friendly lending environment overall.

Lending is a complex process. By leveraging the capabilities of an LOS, financial institutions can mitigate some of those complexities and creating a better borrowing experience.

For more information on Portfolio+, including its API and loan origination capabilities, loan management software, lending software, cloud-based banking solutions, or its core banking system, contact us today!

Sources:

https://www.investopedia.com/terms/o/origination.asp (Retrieved October 16, 2024)

https://en.wikipedia.org/wiki/Loan_origination (Retrieved October 17, 2024)

https://www.mckinsey.com/capabilities/risk-and-resilience/our-insights/the-lending-revolution-how-digital-credit-is-changing-banks-from-the-inside (Retrieved October 18, 2024)

https://www.investopedia.com/terms/a/automated_underwriting.asp (Retrieved October 21, 2024)

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Loan management software (LMS) is a specialized system used by Canadian banks, credit unions, and lenders to manage the entire lifecycle of loans and mortgages. This critical tool automates and streamlines key lending processes, including loan origination, underwriting, approval, funding, and servicing. As a vital component of a core banking system, a LMS ensures efficient loan portfolio management while meeting complex regulatory requirements.

In this blog post, we explore the core functionalities of loan management software and highlight the critical role it plays within a comprehensive core banking system. We’ll detail the five core features that make these systems invaluable, from loan origination to servicing. We’ll also discuss the numerous benefits these systems offer, such as enhanced efficiency, improved accuracy, and an optimal customer experience for both staff and loan applicants.

Additionally, we’ll examine how this software supports Canadian banks and lenders, ensuring regulatory compliance and providing access to a powerful collection of unique lending products designed for the rapidly evolving market. Finally, we’ll offer guidance on choosing the right loan management software for your financial institution, ensuring you have the insights needed to make a well-informed decision.

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5 Core Features of Loan Management Software

Often integrated as part of a broader core banking system that includes retail banking, Guaranteed Investment Certificates (GICs) and term deposits, investment management, and client management, loan management software is an indispensable tool for Canadian banks and lenders. It encompasses a range of functionalities that streamline and enable financial institutions to efficiently manage the entire lending lifecycle.

There are five core features of a loan management system that provide the functionality banks and financial institutions need to effectively manage the entire lifecycle of a loan or mortgage product: origination, underwriting, approval, funding, and servicing.

While each loan management system may differ, a comprehensive solution will ensure that every step of the loan management lifecycle is optimized for efficiency and accuracy.

1. Loan and Mortgage Origination

The loan origination process is the first critical step in lending. Origination is where it begins, covering everything from collecting personal information from a loan applicant to performing an initial assessment. During this stage, a loan management system captures a wide array of data essential for evaluating the borrower’s creditworthiness and the loan’s viability. This includes personal identification details, such as name, address, and Social Insurance Number (SIN), as well as financial information like income, employment history, credit score, and existing debts.

In addition to these basic details, the system also gathers information related to the specific loan product, including the requested loan amount, loan type (e.g., mortgage, personal loan, auto loan), interest rate preferences, and collateral details, if applicable. The software may also collect documents such as tax returns, pay stubs, and bank statements to verify the applicant’s financial situation.

Traditionally, this stage can be time-consuming and susceptible to human errors. However, modern loan management software often automates many of these origination tasks. For example, it can automatically validate data, cross-reference information with external databases, and flag any discrepancies for review. This ensures a faster and more accurate transition from the original application to pre-approval, reducing the likelihood of errors and delays.

Moreover, the software embeds regulatory compliance requirements into the process, helping Canadian banks adhere to strict standards while minimizing risk. By automating the collection and validation of information, the system not only enhances operational efficiency but also ensures that all necessary data is accurately captured and stored, facilitating smoother downstream processes such as underwriting and approval.

2. The Underwriting Process

The underwriting process focuses on assessing a loan applicant’s creditworthiness and determining risk. Loan management software streamlines this by automating the evaluation of key factors, such as credit scores, personal income, and existing debts. The system integrates with industry credit bureaus, including Equifax and TransUnion, to quickly retrieve credit reports. This data is analyzed using predefined criteria and risk assessment models, ensuring a consistent, accurate, and efficient evaluation process.

Additionally, the software simplifies income and employment verification by automating the collection and validation of necessary documents, such as pay stubs and tax returns. It applies relevant regulatory and internal compliance requirements, maintaining a detailed audit trail and managing workflows. This results in a faster, more accurate underwriting process while ensuring adherence to regulatory standards.

3. The Approval Stage

Following underwriting, the approval stage is where final decisions are made regarding the loan or mortgage. Loan management software often automates the approval of routine applications that meet predefined criteria, significantly speeding up the process. For more complex cases that fall outside standard parameters, the software flags these for manual review by loan officers or underwriters. This ensures that each decision is carefully considered and aligns with the financial institution’s risk management policies. By streamlining the approval process, the software balances efficiency with thoroughness, ensuring both quick turnaround times and adherence to established guidelines.

4. Funding & Disbursement

Once a loan is approved, the focus shifts to funding. Loan management software automates the disbursement of funds, ensuring accurate and timely transfers to the borrower’s account. It handles all aspects of disbursement, from calculating loan amounts to scheduling payments. Additionally, the software provides comprehensive tracking and reporting features, creating a transparent audit trail that supports compliance and aids in financial planning. This automation reduces errors, speeds up the disbursement process, and ensures that all transactions are well-documented for future reference.

5. Loan Servicing & Repayment

The final core feature of loan management software is servicing, which covers all post-disbursement activities. This includes processing payments, providing customer service, and managing borrower accounts throughout the life of the loan. The software ensures that payments are processed on time, interest is calculated accurately, and any customer inquiries are handled efficiently.

Loan management software also plays a crucial role in managing borrower accounts by tracking payment histories, updating balances, and recalculating payment schedules as needed. It can automatically adjust for changes, such as interest rate fluctuations or payment deferrals, ensuring that the loan remains on track. Additionally, the software generates detailed account statements and reports, providing borrowers with a clear understanding of their loan status at any given time.

Many systems offer customer-facing portals, allowing borrowers to manage their loans online. These portals enable borrowers to make payments, review account details, and access important documents, enhancing the overall experience and reducing the burden on customer service teams. By streamlining these activities, loan management software helps financial institutions maintain strong relationships with borrowers while ensuring efficient and compliant loan servicing.

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Key Benefits of Loan Management Software

Loan management software and systems offer a host of benefits that extend beyond simple task automation. For Canadian banks and lenders, these systems are essential tools for enhancing operational efficiency, improving accuracy, and ensuring regulatory compliance. By streamlining the entire loan lifecycle—from origination to servicing—these systems reduce manual errors, accelerate processing times, and enable staff to focus on higher-value tasks.

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Enhances Operational Efficiency

Loan management software automates many of the repetitive and time-consuming tasks involved in loan processing. This not only speeds up workflows but also significantly reduces the likelihood of human error. Tasks that once took days can now be completed in hours, freeing up valuable time for bank staff to focus on customer service and business growth.

Improves Accuracy and Consistency

With predefined criteria and automated checks, loan management software ensures that all loan applications are processed consistently and accurately. This reduces the risk of errors that could lead to compliance issues or financial losses. The software’s integration with credit bureaus and other data sources further enhances the accuracy of the information used in the decision-making process.

Embeds Regulatory Compliance Features

Operating in a heavily regulated environment, Canadian financial institutions must prioritize compliance. Loan management software is designed to embed regulatory requirements into every stage of the loan process, helping institutions adhere to local and national laws, thus reducing the risk of fines or penalties.

Provides a Better Customer Experience for Lenders and Borrowers

The automation and efficiency provided by loan management software translate into a superior experience for borrowers. Faster processing times, accurate information, and easy access to account details all contribute to higher customer satisfaction. Borrowers can manage their loans more easily, and banks can respond to inquiries more quickly and effectively.

Enables Scalability, Flexibility, and Growth

As financial institutions grow and their lending portfolios expand, loan management software can scale to meet increasing demands. These systems’ flexibility allows for adding new loan products, integrating with other banking systems, and adapting to changing regulatory requirements. Institutions can explore various powerful lending product types, including mortgages, auto loans, personal loans, small business loans, lines of credit, and commercial real estate loans.

How to Choose the Best Loan Management Software & Prepare for the Future of Lending

Although it might not feel like it, the financial landscape is rapidly evolving. Selecting the right loan management software is critical to ensuring your institution remains competitive and ready for the future of lending. As the industry shifts toward cloud-first infrastructures, digitization accelerates, and customer expectations continue to rise, your institution must be equipped with a system that not only meets current needs but also has the capabilities to adapt to future challenges.

In this section, we’ll briefly explore some key considerations when selecting loan management software.

A Cloud Banking Infrastructure Is Increasingly Important

The shift towards cloud-based and cloud-native core banking and lending systems is revolutionizing the operations of financial institutions. Cloud banking infrastructure offers enhanced security, scalability, and accessibility. When evaluating loan management software, prioritize those built on cloud-based platforms. These systems can easily scale to meet growing data demands, integrate with other cloud services, and provide seamless updates, ensuring your institution remains agile in a rapidly changing market.

Application Programming Interfaces (APIs) Provide Opportunities for Open Banking

As customers increasingly seek personalized and seamless financial services, open banking is becoming more critical. With an open banking framework legislation finally announced in Budget 2024, a functional open banking system in Canada still faces a slew of complex challenges. While some fintechs and industry experts remain skeptical about its progress, it’s no secret that open banking is coming to Canada.

Modern loan management systems should offer robust integration capabilities, enabling financial institutions to connect with a wide range of third-party providers, including fintechs and neobanks. These integrations, often facilitated through APIs, allow institutions to offer innovative services, such as real-time credit assessments, automated financial advice, and personalized loan products. By selecting a loan management system that leverages an API and supports open banking, your institution can stay competitive and capitalize on new opportunities in the digital lending space.

Look for a Trusted System with a Good User Experience and Comprehensive Support

The usability of the software and the quality of vendor support are crucial for smooth implementation and ongoing operation. Look for software that provides an intuitive interface for both staff and customers, along with comprehensive training and support services. This ensures your team can maximize the software’s benefits and deliver excellent service to borrowers.

Opt for Easy Configuration and Scalability

As your financial institution grows, your loan management software should be capable of scaling and adapting to new requirements. Opt for a system that is easily configurable and allows you to add new features or modules. This flexibility will enable your institution to respond swiftly to market changes and expand its offerings without the need for a complete system overhaul.

Consider Cost and Long-Term ROI

While the initial investment in loan management software can be substantial, it’s essential to consider the long-term return on investment (ROI). Assess the software’s potential to reduce operational costs, enhance efficiency, and boost customer satisfaction. A solution with a strong ROI will not only pay for itself over time but also contribute to your institution’s overall growth and success.

By carefully considering these factors, your financial institution can select a loan management system that not only meets your current needs but also positions you to thrive in the future of lending. Investing in the right technology today will ensure your institution remains competitive in a rapidly evolving financial landscape.

For information on Portfolio+ loan management software and to request a demo of our lending software, cloud-based banking solutions, or core banking system, contact us today!

Sources:

https://financialpost.com/fp-finance/banking/open-banking-big-changes-how-canadians-bank  (Retrieved August 14, 2024)

https://www.canada.ca/en/department-finance/programs/financial-sector-policy/open-banking-implementation/budget-2024-canadas-framework-for-consumer-driven-banking.html (Retrieved August 14, 2024)

https://www.mckinsey.com/industries/financial-services/our-insights/banking-matters/the-power-of-digital-lending (Retrieved August 13, 2024)

https://en.wikipedia.org/wiki/Loan_origination (Retrieved August 13, 2024)

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The POD model is a software development strategy that focuses on creating small, self-sufficient teams to work on specific tasks or requirements for a project. This approach is designed to improve efficiency, collaboration, and agility in software development.

Embracing the Spotify Model:

The Spotify model, renowned for its emphasis on autonomy and cross-functional collaboration, serves as a blueprint for Portfolio+’s transformation. In this model, cross-functional teams, or PODs, are responsible for specific aspects of the business. Each POD operates to achieve clear objectives tied to product development and customer knowledge. “Innovation is not just about keeping up with the times; it’s about setting the pace. At Portfolio+, we have embraced our version of Spotify’s innovative approach to work, leveraging product and customer knowledge to fuel our transformation. This journey empowers us to stay ahead, exceed expectations, and lead the way in our industry,” says Steven Thomas, Chief Technology Officer at Portfolio+ Inc.

The Role of Product and Customer Knowledge:

Effective decision-making and customer-centricity are at the heart of Portfolio+’s transformation. Central to this process is the harnessing of product and customer knowledge. By understanding its products and customers, Portfolio+ can make informed, data-driven decisions that drive growth, innovation, and customer satisfaction.

Introducing the Portfolio+ POD Structure:

The POD structure, a concept gaining popularity in modern organizations, is the cornerstone of Portfolio+’s transformation. In this structure, cross-functional teams, or PODs, take responsibility for specific aspects of the project. Each POD operates to achieve clear technical, product and customer knowledge objectives.

Critical Components of Portfolio+’s POD Structure

Cross-Functional Expertise:
Each POD at Portfolio+ has members who have diverse skills and expertise, including product specialists and customer experience champions. This cross-functional approach ensures a holistic view of product development and customer engagement.

Customer-Centricity:
Portfolio+ PODs are empowered to make decisions with a deep understanding of customer needs and preferences. The teams are coached to prioritize customer satisfaction and work to align product development and services accordingly.

Data-Driven Insights:
Portfolio+ equips each POD with an understanding of product and customer information so that appropriate decision-making takes place. Under this new structure, teams can use data analytics to uncover trends, identify opportunities, and refine strategies.

Benefits of the POD Structure

Informed Decision-Making:
By embedding technical, product, and customer knowledge within each POD, Portfolio+ ensures that decisions are made with a deep understanding of market trends, customer expectations, and product performance.

Agile Product Development:
PODs can quickly adapt their product strategies and features based on customer feedback and market insights, ensuring that Portfolio+’s offerings remain competitive and relevant.

Enhanced Customer Engagement:
Customer-centric PODs are better equipped to deliver exceptional experiences, resulting in higher customer satisfaction and loyalty for Portfolio+.

Challenges and Adaptations

As with all major undertakings, transitioning to a POD structure will have its challenges. Portfolio+ needed to realign the team and introduce a culture of cross-functional collaboration. To address these challenges, Portfolio+ is implementing the following strategies:

Knowledge Sharing:
Portfolio+ has established knowledge-sharing processes to ensure product and customer insights are readily accessible to all PODs.

Continuous Learning:
Regular training and development programs are in place to empower Portfolio+ team members with the skills needed to leverage product and customer knowledge effectively.

Feedback Loops:
Portfolio+ encourages regular feedback from each POD, customers, and employees, to refine its approach and improve performance continuously.

Portfolio+’s transition to a POD structure, underpinned by a commitment to harnessing product and customer knowledge, is driving a powerful and continual transformation. Portfolio+ is poised to meet and exceed customer expectations. Portfolio+’s journey highlights its dedication to staying agile, innovative, and customer-centric in an ever-changing business landscape. With this approach, along with embracing continual change, Portfolio+ is set to thrive and lead in the financial industry for years to come.

Sources:
https://www.atlassian.com/agile/agile-at-scale/spotify (Retrieved January 10, 2024)
https://blog.hubspot.com/website/pod-model (Retrieved January 18, 2024)

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According to the Canadian Credit Union Association, over 10 million Canadians trust a local credit union or caisse populaire with their finances. While it’s common to find these alternative financial institutions on the corners of many Canadian communities, anyone that has never actually banked with one of these cooperative financial organizations will likely have a few questions about where they came from, why they exist, and what exactly they have to offer. 

In this article, we’ll answer these questions and more, identifying the main difference between banks and credit unions and exploring the important concept of the common bond of association. We’ll also look at the history of credit unions and caisses populaires, how they’re governed and structured, who regulates them in Canada, and why they’re so important to the communities they serve. 

What Is a Credit Union? 

A credit union is a member-owned, nonprofit alternative financial institution and financial cooperative (co-op) that offers its members the same traditional banking products and financial services as the big banks. Credit unions offer deposit accounts like chequing and savings accounts, online and mobile banking services, registered and non-registered investments, credit cards, lines of credit, business loans, consumer loans, and even mortgages. Much like traditional chartered banks, many credit unions also operate on a branch network, maintaining a brick-and-mortar branch or banking centre in their communities where members can conduct financial transactions in person, make deposits or withdrawals, open and close accounts, and seek financial and investment advice. 

Known in Quebec and in other French-speaking regions of Canada as caisses populaires, these member-owned, nonprofit financial cooperatives are essentially the francophone equivalent of credit unions. 

Although they offer the same financial products and services as big banks, credit unions really are quite different in a number of ways. They’re governed and structured differently, they’re driven by a different purpose than banks, and their commitment to their local rural or urban communities are generally centered around one thing—the financial wellness of their members. 

This member-first approach is central to how a credit union works. But before we explore how a credit union works, it’s important to understand what exactly brings credit union members together in the first place. After all, what unifying foundation could possibly drive near strangers together to pool their financial resources in support of each other and their community?

This unifying foundation is rooted in a concept known as the common bond of association—a concept that still forms the legal foundation for credit unions across Canada today. 

What Is a Credit Union’s “Common Bond of Association”? 

One particularly unique aspect of credit unions is the concept of the common bond of association or simply the common bond. 

The common bond of association is a term that represents a unifying social connection between all members of a credit union. By capturng a set of characteristics individuals in a specific credit union share, it’s this common bond that is used to represent a credit union’s field of membership. In order to be eligible to join a credit union in Canada, individuals must typically share this common bond with the other members. 

A credit union that requires its members to share a common bond is also known as a “closed bond” credit union. While many credit unions originated as closed bond credit unions, serving only members that shared in their common bond, the majority of credit unions in Canada today are now “open bond” credit unions, providing their services to members throughout their entire community. The common bond of association can be based on a number of unifying concepts, including living in a specific geographic region, working in the same industry, sharing the same profession, attending the same school, belonging to the same church, or being a part of the same religious, ethnic, or cultural group. 

It’s the common bond that brings together, say, Nova Scotia’s lobster farmers, Ontario’s police officers, or British Columbia’s teachers. The common bond of association leverages a shared sense of community distilled into a few simple characteristics. This ultimately forms a trusted foundation where members are willing to share in a level of collective, cooperative financial responsibility where they save money together and lend money to each other at reasonable interest rates. 

The concept of the common bond is rooted in the philosophy of trust and cooperation that forms the operating principles for credit unions and their members. These principles are based on the ethical values of self-help, responsibility, democracy, equality, equity, and solidarity. 

Although credit union mergers throughout Canada have arguably eroded some of the origins of the common bond among many larger credit unions—and although recent changes to provincial legislation across the country has allowed for more flexibility in the common bond of association in the modernization of credit unions—it still remains an important and effective concept, one that has played an important role in the development of credit unions, caisses populaires, and financial cooperatives. 

While its importance has arguably diminished, the common bond of association is still considered a mandatory requirement and a fundamental principle of the credit union system. In Canada, it is still referenced in important provincial legislation, including the Credit Union Act (Alberta), the Credit Union Incorporation Act (British Columbia), and the Credit Unions and Caisses Populaires Act (Ontario).  

A Brief History of Credit Unions

Exploring the history of credit unions can be helpful in understanding how these cooperative financial institutions originated, and it can provide insight into why they continue to exist today. 

Canada’s credit unions can be traced back to nineteenth-century Europe, with the first successful credit unions emerging in Germany in the 1850s. These original financial cooperatives were organized by the German lawyer, politician, economist, and cooperative pioneer Franz Hermann Schulze-Delitzsch, and they were based on two pilot projects aimed at providing local participants who were excluded from traditional banking with the opportunity to borrow from their collective pool of savings. In these cooperative banks—or peoples’ banks, as they were known—subscribers made small deposits and received access to credit and dividends. 

The first credit unions were initially situated in urban locations, serving local traders, merchants, artisans, and other skilled workers, and ultimately relied on commercial activities. 

Around the same time, another German cooperative pioneer, Friedrich Wilhelm Raiffeisen, founded the first rural credit union. This credit union was created to address the financial challenges of the poor individuals living in a rural area of Germany by leveraging what is known as “social capital” and exploiting the deep Christian values of the village. Relying heavily on the common bond of association—a concept credited to Schulze-Delitzsch—these individuals living in rural Germany had smaller incomes that were both seasonal and less predictable.

These two models quickly spread throughout Germany and the rest of Europe and by 1900 had made their way to North America. 

Beginning with just a ten-cent deposit and driven by a growing concern for unfair lending practices, the first credit union in North America was founded in 1900 and opened in 1901. It was a single caisse populaire in Lévis Quebec, Canada, founded by Alfonse Desjardin and his wife, Dorimène Roy Desjardins. 

Today that organization is known as the Desjardin Group.  

What’s the Difference between a Credit Union and a Bank? 

In terms of financial products and services, banks and credit unions are virtually the same, with the exception that banks serve customers and credit unions only serve their members. Unlike banks, however, credit unions are not driven by profits. Other than differences in their governing structure, ownership, and fundamental purpose, this is one of the most important differences between credit unions and the big banks. 

A bank is a business. Corporate banks are primarily focused on driving growth, hitting revenue targets, and maximizing profits and returns for their investors and shareholders. They do this in a number of ways, but one primary way is through interest income, where banks take consumer deposits at a low interest rate in exchange for a security and lend out those funds to other consumers at a higher interest rate in the form of financial products, like loans and mortgages. The difference between interest paid on deposits and the interest received on loans and mortgages is the interest spread, and that interest spread is the bank’s profit. 

Now, while credit unions operate in much the same way, their purpose is not to maximize profits—their purpose is simply to serve their members. 

Credit unions are focused on supporting their communities by promoting the financial well-being of their members, and any profits they generate are returned to their members in the form of dividends or improvements to their services. This includes lower service fees and lower interest rates on loans and mortgages. 

A credit union’s profits are also used to support their communities in other ways, including funding special projects or initiatives, making charitable donations, and even providing scholarships and bursaries. 

How Does a Credit Union Work?

Credit unions are created by their members and owned by their members. On the most basic level, individuals voluntarily pool their money together and essentially buy shares in a credit union. This pool of money is used to provide financial services to one another. Since credit unions are nonprofit financial cooperatives, any profits that are made by the credit union are reinvested in the credit union or used to benefit the member-owners. These benefits can take a number of forms, including dividends that are returned to the members, technological or credit union software improvements, lower service fees, and better interest rates on loans and mortgages.

Since credit unions are jointly owned, they are also democratically controlled. That means as partial owners, members of a credit union have a right and a responsibility to elect and maintain the governing structure of their organization. Credit union members democratically elect a volunteer board of directors that provides support and assistance to the organization’s chief executive officer. The board of directors is ultimately responsible for overseeing the operations and governance of the credit union, approving budgets, and ensuing the organization’s success. 

In addition to the members and board of directors, credit unions also have a management team that is responsible for the day-to-day operations of the credit union, managing the team of professionals that provide financial services and financial support to its members. It’s the management team’s responsibility to ensure that the credit union is meeting the day-to-day needs of the financial institution’s members. 

Special committees may also be elected or formed in order to oversee special projects or initiatives, including internal reviews, software implementations, regulatory initiatives, governance concerns, and other internal or community-based projects or initiatives.  

Together, these four elements—members, a board of directors, a management team, and special committees—form the typical governance and operating structure of a credit union. 

How Are Credit Unions Regulated? 

While credit unions can be either provincially or federally regulated, most credit unions operating in Canada today are provincially regulated with only two exceptions: Coast Capital Savings and UNI Financial Corporation.  

Credit unions and caisses populaires in Canada were exclusively regulated by their respective provinces until 2012, when the Government of Canada announced a framework that allowed provincial credit unions and caisses populaires to continue operations as federal credit unions (FCUs). The introduction of the new legislative framework, which resulted in amendments to the Bank Act and allowed for cooperative ownership, was intended to “promote the continued growth and competitiveness of the sector and enhance financial stability.” 

While each province or territory may have more than one body responsible for regulating financial institutions, the following list includes each province or territory and its respective regulator responsible for overseeing credit unions or caisses populaires (see here for a full list of oversight bodies, including those for Canada’s three territories):  

• British Columbia: BC Financial Services Authority (BCFSA) 
• Alberta: Alberta Treasury Board and Finance
• Saskatchewan: Financial and Consumer Affairs Authority (FCAA)
• Manitoba: Financial Institutions Regulation Branch (FIRB)
• Ontario: Financial Services Regulatory Authority (FSRA)
• Quebec: Autorité des marchés financiers (AMF)
• New Brunswick: Financial and Consumer Services Commission (FCNB)
• Nova Scotia: Nova Scotia Securities Commission
• Prince Edward Island: Office of the Superintendent of Credit Unions
• Newfoundland and Labrador: Regulatory Affairs Branch

As of December 2022, there were 420 credit unions and caisses populaires in the Canadian credit union system, according to the Canadian Credit Union Association. This includes 207 credit unions with 1,669 locations and over 6 million members, and 213 Dejardins caisses populaires with 530 locations and nearly 5 million members. 

Together, the credit union system in Canada includes over 10 million members. 

Are You Looking for Credit Union Software? 

Portfolio+ has a long history working with successful Canadian credit unions and understands the unique technological challenges of these nonprofit financial cooperatives. 

If you’re interested in starting a credit union in Canada, updating pre-existing credit union systems and technology, or simply learning more about open banking, cloud migrations, and how Portfolio+ credit union software can help make your organization more efficient, contact us today. 

Beyond the Banks 

What do the credit unions of the future look like? Addressing the challenges of an aging membership demographic and the need for innovation and technological modernization in the credit union system, this eBook explores the future of credit unions in Canada and the key technologies that could potentially reshape the credit unions of tomorrow.

Click to Download E-Book

Sources: 

https://en.wikipedia.org/wiki/Bond_of_association (Retrieved April 21, 2023) 

https://en.wikipedia.org/wiki/History_of_credit_unions (Retrieved April 21, 2023)  

https://www.ontario.ca/laws/statute/20c36 (Retrieved April 25, 2023) 

https://www.ontario.ca/laws/statute/94c11 (Retrieved April 25, 2023)

https://kings-printer.alberta.ca/1266.cfm?page=c32.cfm&leg_type=Acts&isbncln=9780779836932&display=html (Retrieved April 25, 2023)

https://www.bclaws.gov.bc.ca/civix/document/id/complete/statreg/96082_01 (Retrieved April 25, 2023) 

https://gazette.gc.ca/rp-pr/p1/2012/2012-07-07/html/reg4-eng.html (Retrieved April 25, 2023)

https://ccua.com/about-credit-unions/facts-and-figures/national-system-results/ (Retrieved April 25, 2023) 

https://www.gov.nl.ca/dgsnl/department/branches/cca/ (Retrieved April 25, 2023)

https://en.wikipedia.org/wiki/Credit_unions_in_Canada (Retrieved April 25, 2023) 

https://en.wikipedia.org/wiki/Alphonse_Desjardins_(co-operator) (Retrieved April 26, 2023)

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Exclusively designed for seniors or individuals aged 55 years and older who either already own their home or are close to paying off their mortgage, a reverse mortgage is a loan that allows homeowners to borrow money against the equity in their homes. In contrast to a conventional mortgage, a reverse mortgage does not require borrowers to make monthly payments. Rather, borrowers are only required to pay back their loan in full when they permanently move out or sell their home. Considered an innovative lending product, a reverse mortgage allows seniors and older homeowners to borrow up to 55 percent of the current value of their primary residence, while still retaining ownership and title of their home.

A reverse mortgage can be a valuable retirement planning solution for homeowners that have most of their net worth tied up in the equity in their home. It provides a source of tax-free income, while also allowing older homeowners to enjoy retirement in the comfort of their own home.

In this article, we’ll explore how reverse mortgages work, what lenders offer them, and why they are becoming an increasingly popular and important retirement planning solution for Canadians.

How Does a Reverse Mortgage Work?

While eligibility requirements for a reverse mortgage can range from lender to lender, there are basic requirements that borrowers must meet. In order to be approved and receive funding for a reverse mortgage in Canada, borrowers (and anyone else listed on a home’s title) must be at least 55 years of age, and they must own their home. The home must also be the borrowers’ primary residence—meaning that they live in the home for at least six months of the year. Although these are basic requirements for Canadian borrowers, lenders may have their own additional eligibility requirements, which may include a minimum appraisal value of a home. Before receiving funding, borrowers are also required to pay off and close any outstanding lines of credit or loans that are already secured by the home.
Borrowers that meet the eligibility requirements on a reverse mortgage will have the ability to borrow up to 55 percent of the home’s current value, and they will have several options for how they want to receive their funds.

Before we explore payment options, we’ll use an example to illustrate how the maximum amount homeowners can borrow on a reverse mortgage is calculated.

Meet Drew and Parker. Drew and Parker own a home together. Drew is 68, and Parker is 66. They’re both retired. They have completely paid off their original mortgage on a home they purchased for $150,000 in 2002. The home is still their primary residence, and it now has a current value of $900,000. They do not have sufficient retirement savings to maintain their current lifestyle, and a considerable amount of their net worth is tied to the equity in their home. Since they no longer have regular jobs, they would like to unlock some of the value in their home to supplement their current income. With the current value of their home, they could potentially borrow up to $495,000 with a reverse mortgage (55 percent of $900,000).

While 55 percent is the maximum amount homeowners can borrow on a reverse mortgage in Canada, there are other factors lenders will consider when determining each individual borrower’s maximum amount. The maximum amount homeowners can borrow depends on several factors, including the homeowner’s age, the appraised value of the home used to secure the loan, the property location, the type of home, and whether the home’s original mortgage has been completely paid off or is approaching maturity.

Reverse mortgage products can also differ from lender to lender, and some lenders may even offer multiple reverse mortgage products. So, the maximum amount a homeowner can borrow may depend on additional factors, including specific product details and unique lender requirements.

Although borrowers aren’t required to make any monthly payments on a reverse mortgage, they will want to consider how they would like to receive their reverse mortgage payments from their lender. They should also be aware of what options they have if they choose to repay their loan.

What Are the Payment Options and Repayment Options for Reverse Mortgages?

Once borrowers are approved for a reverse mortgage, they will typically choose between three different funding or payment options: a single lump sum payment, regular monthly or quarterly payments, or a unique combination of the two. Lenders may choose to offer these funding options through different reverse mortgage products, and those products could include differences in eligibility requirements, interest rates, and repayment options.

When it comes to reverse mortgages, borrowers do not have any restrictions on how they choose to use their funds. So, while a brand-new jet ski isn’t out of the question, there are some other particularly beneficial ways for borrowers to use their funds. Reverse mortgages are often used to pay off other debts, finance home renovation projects that can increase a home’s value, pay for medical expenses, or even access capital for other opportunities.

In recent years, the financial industry has even seen a growing trend of older homeowners using reverse mortgages to help their children or grandchildren with a down payment so they themselves can enter Canada’s competitive real estate market. That’s because the rapid increase in home prices in the early 2020s that drove up equity for older homeowners also had an inverse effect, pricing many younger potential homebuyers out of the market.

Although homeowners can use the funds any way they wish, reverse mortgages are still most often used to help seniors and older homeowners cover the increased cost of living by converting a home’s equity into a regular, tax-free income. When used as a supplemental source of income, a reverse mortgage can provide older homeowners with the opportunity to convert equity into cash without having to sell their home. Receiving payments that simulate regular income allows those homeowners to continue living in their home where they can enjoy retirement while remaining financially secure.

The mortgage must only be paid back when borrowers move out of the home, sell it, or the last borrower on the home’s title dies—in which case, the estate is responsible for repaying the amount owing. If the home is sold, borrowers move into permanent care, or borrowers die, there may be certain requirements for when the full amount must be paid back. The timeline for repaying a reverse mortgage in these circumstances can typically range from 180 days to a year, and most heirs will choose to repay the loan by selling the home.

For borrowers that choose to repay their reverse mortgage, repayment options are flexible. Borrowers can repay their interest and mortgage in full at any time, or they can also choose to pay just the interest or the interest and a portion of the principal. Some reverse mortgages even come without prepayment fees or penalties.

What’s the Difference between a Reverse Mortgage and a Home Equity Line of Credit (HELOC)?

While both a reverse mortgage and a home equity line of credit (HELOC) are lending products secured by a residential property, there are a few key differences between them. Where a reverse mortgage allows borrowers to accept a lump sum payment, regular payments, or a combination of the two, a HELOC offers borrowers a revolving line of credit that is often combined with the borrowers’ mortgage where funds can be withdrawn anytime.

With a reverse mortgage, borrowers are not required to make any payments until they permanently move out of the home, the home is sold, or the borrowers dies. Conversely, with a HELOC borrowers are required to make minimum monthly payments on the interest owing—an arrangement that is more like a credit card, line of credit, or a traditional loan.

Reverse mortgages belong to an innovative group of lending products known as real estate secured lending (RESL) products. In addition to reverse mortgages, RESL products also include home equity lines of credit (HELOC), combined loan plans (CLPs) that include a traditional amortizing mortgage blended with a revolving or non-amortizing home equity line of credit, and mortgages with shared equity features.

RESLs have unique risk management considerations for lenders, and in Canada they are subject to maximum loan-to-value (LTV) ratio limits.

Rising Costs of Living Will Continue to Drive Demand for Reverse Mortgages in Canada

While reverse mortgages were once considered a last resort for seniors and older homeowners, Canada’s housing boom that was triggered by the pandemic in the early 2020s has largely eroded some previous unfounded stigmas and misconceptions about this unique lending product and retirement planning solution. Among those misconceptions was the belief that at the end of a reverse mortgage, the lender would own the home. But that’s not the case.

During the pandemic a unique combination of factors, including near-zero interest rates, a short supply in the housing market, and skyrocketing home prices, drove up equity for many older homeowners. As home prices skyrocketed, so did demand for reverse mortgages. That was likely because the higher prices of homes across Canada meant that many older homeowners had significantly more room to borrow with a reverse mortgage, and the low interest rates made it an attractive option. In addition, many seniors faced concerns with safety and outbreaks in Canada’s long-term care homes.

Now, reverse mortgages are more popular than ever.

HomeEquity Bank, Canada’s largest and first reverse mortgage provider, reported over $1 billion in reverse mortgage originations in 2021. Equitable Bank, Canada’s only other provider of reverse mortgages as of 2022, experienced a similar spike as its reverse mortgage assets grew 262 percent year over year from 2021 to 2022.

As the Canadian housing market lost momentum and began a much-needed correction in 2022, record high home prices began to slip. By August 2022, inventories were climbing, prices were sliding, and sales had plummeted in major Canadian cities, contributing to the MLS Home Price Index falling 13 percent (or $178,000) to $1.16 million.

But despite falling home prices and rising interest rates, reverse mortgages are here to stay.

With limited income, the central bank hiking interest rates, and record high inflation continuing to drive up the cost of living in Canada, many older homeowners may be weighing other financial options to stabilize and supplement their income.

With these conditions affecting Canadians across the country, the demand for reverse mortgages is likely to continue to grow as more and more financial advisors and homeowners begin to consider reverse mortgages as a valuable tool in retirement planning.

Why Don’t More Banks Offer Reverse Mortgages?

Despite its ability to offer seniors and older homeowners access to untapped equity and supplemental tax-free income, reverse mortgages are still only offered by two Canadian federally regulated financial institutions: HomeEquity Bank and Equitable Bank.

That could soon change.

With home prices today accounting for a much larger chunk of an individual’s portfolio than it did in the past, reverse mortgages are becoming an increasingly important retirement planning solution for aging homeowners and their financial advisors.

If you’re a financial institution interested in providing reverse mortgages to Canada, contact Portfolio+ for information about our financial technology and mortgage software.

Sources:
https://globalnews.ca/news/7602336/the-pandemic-housing-craze-is-fuelling-another-boom-reverse-mortgages/ (Retrieved August 11, 2022)
https://www.homeequitybank.ca/media/press-releases/homeequity-bank-surpasses-1-billion-in-reverse-mortgage-originations-during-2021 (Retrieved August 9)
https://financialpost.com/fp-finance/banking/equitable-posts-best-earnings-ever-as-mortgage-business-stays-strong (Retrieved August 12)
https://www.canada.ca/en/financial-consumer-agency/services/mortgages/reverse-mortgages.html (Retrieved August 10)

The post What Is a Reverse Mortgage? appeared first on Portfolio+.

Banks and financial institutions know that the right GIC software is one of the most critical components of a core banking system. It not only provides a trusted foundation for creating and offering a diverse range of deposit products that appeal to a wide range of investors, but its underlying technology can connect financial institutions with key industry partners and ensure compliance, security, and efficiency in GIC operations. This financial software is particularly important today, as more and more Canadians are choosing to move their money and excess savings into the safety and security of GIC investments.

While guaranteed investment certificates (GICs) have long been a staple of both risk-averse investors and investors with a shorter investment time horizon, the recent growing popularity and resurgence of GICs is a financial investment trend that’s being driven by a complex combination of economic factors. These factors include rising interest rates, record-high inflation, market volatility, a unique yield-curve inversion, and ongoing economic uncertainty. As some Canadians are shifting their investments into GICs and term deposits to avoid the volatility of stocks and equity markets, others are simply moving their excess savings into these trusted investment vehicles because they are safe, insured, and provide a guaranteed return on investment. Banks and financial institutions that have already implemented a powerful GIC software solution have been able to effectively respond to the dramatic increase in demand for GICs and fixed-term deposits with minimal effort and resources, and they are capitalizing on the trend by leveraging some key features of GIC software, like powerful automation technology and the ability to optimize interest rates in response to both demand and central bank rate hikes. By leveraging the right GIC software, financial institutions can effortlessly increase sales of fixed-term deposits and ultimately gain access to a secure, stable, and reliable source of funding to support their lending activities. 

While the most basic GIC software solutions can help eliminate time-consuming manual processes and reduce errors associated with data-entry, the best GIC software solutions provide a platform for banks and financial institutions to leverage automation technology, customize products, and raise hundreds of millions of dollars’ worth of GICs and fixed-term deposits in just a matter of months—sometimes even a matter of weeks. Through integrations with financial networks and automation, the best solutions can provide banks and financial institutions with streamlined access to billions of dollars in funding every year.

So, what are the five best GIC software features banks and financial institution leaders should look for when replacing or considering a new GIC or term deposit system?

The best GIC software software systems automate GIC processing, integrate with other core banking systems and industry partners, connect financial institutions with the industry’s vibrant deposit broker network, and provide valuable product customization features that allow banks to tailor GIC product types and create a wide range of GIC investment opportunities for consumers. In addition, they also provide regulatory compliance and reporting features to ensure that financial institutions remain compliant with industry regulatory requirements. 

For banks and financial institutions, here are the five best GIC software features that will help make selling, processing, and managing GICs easier and more efficient: 

• Automated GIC Processing 

• Integration with Existing Core Banking Systems 

• Connection to the GIC and Term Deposit Broker Network 

• GIC Product Customization 

• Regulatory Compliance  

This post will explain what GIC software is, and it will discuss each of these features so you can better understand how they provide a comprehensive technological foundation for banks and financial institutions offering term deposits and GICs to support their lending activities.

What is GIC Software?  

GIC software, sometimes called a GIC system or term deposit system, is a core banking application used by chartered banks, credit unions, and other financial institutions that provides the ability to create, manage, and automate the processing of guaranteed investment certificates or GICs and fixed-term deposit investment products. The financial technology is often integrated as part of a wider core banking system that includes lending and mortgage software, retail banking software, client management technology, as well as credit processing, accounting, general ledger functionality, and reporting. 

GICs and fixed-term deposits are important products for Canadian financial institutions because they can provide a predictable source of funding that can be used to offer mortgages and other lending products. GICs and term deposits also play a critical role in a financial institution’s ability to forecast cashflow and manage liquidity risk. 

While GIC software can be included as part of a larger core banking system, it can also be deployed as a standalone software solution that integrates with a bank or financial institution’s pre-existing systems. 

The 5 Best GIC Software Features

1. Automated GIC Processing 

One of the most valuable features of any GIC software system is automated GIC processing capabilities—that’s its ability to automate and streamline the processing of GICs. This includes the automatic processing of the otherwise time-consuming, manual processes involved with managing these types of investment products, like opening new accounts, processing transactions, renewing expiring deposits, calculating interest rates and agent commissions, and rolling over GICs and deposits that have reached maturity. These systems will handle all of these automated processes, and they will do it in bulk, too, allowing financial institutions to process transactions and manage a large number of GICs and term deposits simultaneously. 

These automated processing features streamline the GIC sales process, while also reducing errors and improving efficiencies by removing the administrative burden of managing these types of investments manually. Automated GIC processing is often the most important feature for banks and financial institutions that are considering a new GIC software solution.   

2. Integration with Existing Core Banking Systems

Since GIC software is an important component of a core banking system, its ability to integrate with a bank or financial institution’s existing core banking systems is often crucial in ensuring that customer data can be shared safely and securely between systems. This integration not only eliminates the potential for delays, errors, and inaccurate data caused by manual data entry, but it can help improve customer service by providing a more complete view of customer’s financial health, allowing banks to view customer deposit product information alongside other core banking products, including retail banking accounts, credit facilities, and mortgage and lending products. Integration with online banking and mobile banking applications will also ensure customers can view and manage their GIC investments at any time. 

3. Connection to the GIC and Term Deposit Broker Network 

Automated GIC processing and core banking integration features are most valuable when financial institutions can attract customer deposits on a massive scale. That’s why one of the best features of a GIC system is its ability connect to Canada’s GIC and term deposit broker network.

By connecting to the GIC and deposit broker network through integrations with third-party systems, like the CANNEX financial network, banks and financial institutions can extend their deposit business to a much larger market and offer nominee name deposit. This not only allows financial institutions to scale their deposit business, but it also helps diversify their funding sources and effectively shifts timely customer relationship management activities to deposit broker professionals that specialize in personalized financial services. 

4. GIC Product Customization

While automation, integration, and the ability to access a large market are some of the most important GIC software features for banks and financial institutions, in order to leverage the true value of these features it’s equally important to ensure that GIC investment products are designed for a wide range of investors. Offering flexibility between things like term lengths and interest rate calculations, GIC product customization allows financial institutions to offer many different types of GICs and term deposits.

Effective GIC product customization features will allow banks to customize term lengths and interest rate calculations to create countless product options ranging from less than one year to ten years. In addition to non-redeemable, redeemable, and cashable deposit product options, GIC product customization features should allow banks and financial institutions to create the following GIC product types: 

• Fixed-rate GICs
• Adjustable-rate GICs
• Step-rate GICs
• Market-linked GICs
• Registered GICs 
• Non-registered GICs
• Foreign Exchange GICs

5. Regulatory Compliance

Features designed to streamline the GIC sales process are valuable for promoting and scaling business for GIC deposits issuers, but chartered banks and financial institutions accepting deposits from the public must also ensure their GIC software includes comprehensive regulatory compliance and security features. 

Data encryption technology, system monitoring and alerting, user access controls, detailed auditing functionality, and customized reporting capabilities can all help financial institutions maintain compliance with industry regulators. 

Since all chartered banks and financial institutions that accept deposits from the public are required to be a member of the Canada Deposit Insurance Corporation (CDIC), a Crown corporation that provides deposit insurance to member institutions, GIC software used by chartered banks and financial institutions must also provide a way to meet the CDIC’s Fast Insurance Determination data and system requirements. This process ensures that in the unlikely event of a bank failure, CDIC can immediately step in and take control of a financial institution’s data. Within hours CDIC must be able to connect to financial institution’s system, access its deposit and liability information, and load it into the CDIC’s payout application. GIC software must include functionality to streamline this process. 

The Best GIC Software Improves Efficiencies and Is Essential to Banks and Financial Institutions

While every financial institution is different, chartered banks and financial institutions can streamline their GIC and deposit business and gain access to a secure, stable, and reliable source of funding by implementing a term deposit solution that includes these 5 best GIC software features: automated GIC processing, integration with existing core banking systems, the ability to connect to the GIC and term deposit broker network, GIC product customization features, and regulatory compliance functionality. 

These features collectively provide a solid platform for banks to take advantage of valuable automation efficiencies and respond to dramatic increases in product demand, like the recent resurgence of GICs that’s been driven by a complex mix of economic factors, like elevated levels of inflation, central bank rate hikes, and ongoing economic uncertainty.  

Although the right GIC software can provide the ability to quickly respond to unusual or unpredictable increases in demand with minimal resources, it’s also simply a fundamental system that the banking industry has relied on for years. GIC software is essential to banks and financial institutions.  

If you’re interested in learning more about Portfolio+ or how Portfolio+ GIC software can help make your financial institution’s deposit business more efficient, contact us today. 

Sources: 

https://www.bankofcanada.ca/rates/banking-and-financial-statistics/chartered-bank-selected-liabilities-month-end-formerly-c2/ (Retrieved February 17, 2023)

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