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Software-defined banking: explained

Aoife Loy
Aoife Loy
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What’s this all about?

As banks continue to grapple with outdated technology, many are looking at shiny new solutions. But even brand new technology might not prevent legacy issues from being introduced. In the following article, we explain where software-defined banking fits in, describing how it works, what the benefits are and why it’s so important.

Read on if you:

  • Want to understand how the software-defined bank addresses the challenges banks face
  • Are keen to delve into the design principles behind software-defined banking
  • Want to know why the software-defined bank matters

It’s no secret that today’s financial institutions face numerous challenges.

For established banks – the sky-high costs of maintaining their current systems; the difficulty of finding skilled talent to do so; limited ability to join up their data; disintermediation by fintechs and restricted capacity for innovation.

For the neo-banks – acquiring customers is no problem. Profitability, on the other hand, is another story.

Let’s not forget about the lenders and loan servicers which have struggled with a low-interest-rate environment and the cost to serve.

Much of traditional banks’ approach to innovation has been fragmented because their geriatric technology is fragmented. Bolting on a glossy front-end doesn’t make up for a creaking, cobwebbed underbelly. Year after year, industry reports call for financial institutions to overhaul their core technology.

Indeed, digital transformation has long been on the agenda but has so far had underwhelming results. A 2019 report found that only 17 per cent of banks have succeeded in digitally transforming at scale while the majority are not confident that digital transformation has successfully impacted their organisational objectives. Indeed, many are now looking at replacing their core systems, building and migrating, or establishing a greenfield challenger bank. Another report found that the top innovation strategy in 2019 focused on the latter (36 per cent).

But when it comes down to it, even brand new technology might not prevent legacy issues from being introduced. Flashy is no good if it doesn’t get to the root of banks’ underlying issues. Let’s dig into why.

The Jenga Bank Versus the Ideal Bank

The classic game Jenga is a fitting analogy for the fragility of the patchwork environments typically associated with old banks. As a solid block of joined-up pieces, it’s a stable structure. But, over time, we need to make changes. So cautiously, carefully, we wiggle a piece here, tweak another there and then… Chaos.

SOFTWARE-DEFINED BANKING
Changing legacy banking technology is like Jenga

As we built our platform, we set out to prevent this scenario. But equally, we wanted to create an infrastructure that supports the ideal bank, which we define as follows:

  1. End-to-end so its capabilities are built to work together
  2. Customer-centric
  3. Does the basics well
  4. Adaptable to change
  5. Built on data
  6. Able to breed innovation
 

This enables an approach rooted in customer advocacy, whereby a financial institution can actively seek out the best outcomes for customers, promoting ease and convenience as well as optimal management of their entire financial lives.

What’s the deal with software-defined banking?

So what makes a bank ‘software-defined’?

Essentially, software-defined banking builds on the orchestration capabilities of the cloud. Cloud orchestration refers to the arrangement, coordination and management of automated tasks. 

Let’s examine this across the four stages of getting a bank or lending proposition off the ground: 1. Build, 2. Deploy, 3. Operate, 4. Change.

1. Build

In the cloud, a set of code builds the system automatically using standard automation tools.

2. Deploy

The system is deployed as a fully capable bank but with generic product offerings and configurations.

3. Operate

Automation is used to respond to common error conditions and monitoring is leveraged to drive proactive incident response.

4. Change

Applying changes to a bank’s applications and infrastructure is defined in code. Change can occur in real-time.

TL;DR? What makes a bank ‘software-defined’ is the combination of software-defined infrastructure, deployment, operation and change. 

Essentially, software-defined banking builds on the orchestration capabilities of the cloud. Cloud orchestration refers to the arrangement, coordination and management of automated tasks.

What’s so good about a software-defined banking Platform?

Flexible and easy to change

The bank or lender is underpinned by a flexible platform able to adapt easily to changes in the market and react to customer demands. The LEVERIS platform is also built on modular, microservices architecture so change can be conducted per element and only applied to the relevant modules.

Customer-centricity

Crucially, the software-defined bank is built with the customer at the centre. That could mean a lot of style and not a lot of substance. But in fact, it comes down to one important aspect: the basics done well. In other words, the core products and services are delivered to a high standard through a mobile app or web portal.

At the same time, the software-defined bank is built on data, with a Single Customer View (SCV) and the capacity to utilise it.

Fast and enables innovation

For a big bank on legacy software, product configuration can be a minefield – a costly, time-consuming one at that.

For a software-defined bank, creating or changing a new product can be achieved quickly, cost-effectively and with minimal complexity. It’s a matter of changing the variables in the product configurator using a back-office UI module.

Take a complex loan product, for example, with multiple parts. Each part can be parameterised independently for repayment, calculation, term and rate.

Extensible

The environment also makes use of APIs universally which connect agnostically, making the software-defined bank also extensible.

What makes a bank ‘software-defined’ is the combination of software-defined infrastructure, deployment, operation and change.

Where’s the ‘but’?

Of the many other benefits of the software-defined bank, what really sets it apart is its ability to change and adapt in real-time.

Here comes the ‘but’.

A software-defined bank cannot be achieved on a legacy system or indeed any system that is not end-to-end.

Glueing new bits onto an ageing core or implementing short-term fixes simply kicks the can down the road – as we’ve explored elsewhere. Similarly, proprietary programming methods create issues for banks, like making it hard to find talent. And new technology can fall prey to some of these problems.

That’s why we built the LEVERIS platform: to stand up digital-first, customer-centric financial services which can be maintained and extended without issue. At the same time, it enables innovation so any bank or lender can become advocates for their customers.

For more on the software-defined bank, read our whitepaper.

Aoife Loy
Aoife Loy
Aoife is Lead Content Marketer at LEVERIS. She writes about our mission and approach to technological innovation.
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