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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 The rise of open banking, real-time payments, and fintech partnerships means that outdated, rigid systems can no longer meet market demands.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:
- 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.
- Modular Core Banking Platforms: More adaptable systems with independent modules that manage different banking functions, allowing for incremental updates without affecting the entire system.
- 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.
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Reuters: COBOL’s Role in Banking (Updated)
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