How To Design The IT Architecture of a Digital Bank
The evolution of banking has gone digital, so banks need to design core banking systems architecture for the online and mobile environments that support their customers' needs. Learn how to design a digital banking IT architecture that works for the bank and its customers.
Necessary IT architecture is vital in the process of making a bank digital. According to Forbes, digital transformation remained an important trend in banking in 2021. Digital technology continues to reshape banking services at every level.
Therefore, banks should embrace digital transformation to provide customer services. It will translate into greater customer experience besides increasing operational efficiency. Also, the IT infrastructure of a digital bank should be responsive to client needs.
More importantly, banks should endeavor to sustain digital transformation to reap the benefits. For instance, employees can be relieved of some pressure by automating certain banking tasks. In return, their productivity and efficiency increase.
In this article, you will learn how to design your secure, scalable and flexible IT architecture for digital banking. You will also learn about the viable solutions for IT architecture design in the current market, considering the right mix of cloud or on-premise software solutions.
Let's start by looking at the basics of IT architecture for digital banking.
What Is IT Architecture For Digital Banking?
IT architecture for digital banking refers to the use of a set of rules or frameworks that enable a list of banking services. These services can be for the banks' or customers' internal use.
IT architecture involves all those frameworks enabling digital banks to run their operations smoothly.
Digital banking is revolutionizing banks' operations, and their technology solutions must keep up. Banks get challenged to build their IT architecture for digital banking in ways that allow them to gain a competitive edge.
Cloud solutions are emerging to provide the agility, flexibility, and scalability banks need to grow profitably. However, as the industry continues to mature, there is also a need for greater security and compliance. Banks' IT is required to strike the right balance of these competing needs based on the requirements of their end users.
Blockchain technology offers banks new opportunities to increase revenue and profitability through new business models. Blockchain-based initiatives provide improved liquidity, cost savings, and operational efficiencies while reducing costs and risks associated with legacy banking solutions.
Many banks are looking to blockchain as the solution for streamlining existing processes and enabling new business models. Banks' IT must be designed with the ability to adapt its architecture to meet the needs of its customers.
Here is how to design the Information Technology architecture of an online bank.
Digital Banking IT Infrastructure Layers
There are four digital banking IT infrastructure layers banks can adopt. Here are details about each IT architecture layer.
Back End Layer
The core banking systems architecture involving back-office processes stores and manipulates customer data. Therefore, all information about client transactions, accounting systems, and loan issuing are part of this core IT layer. It ensures that the basic operations of a digital bank run smoothly.
Banks may use an in-house online banking architecture or source it from service providers. But modern service providers and Fintech services are more innovative. They provide flexible and cost-effective core banking systems customized for digital banking.
In addition, the providers are keen on constantly developing their software and core banking technology. Thus, it provides an effective and tailored customer experience.
Many customers still need to be convinced about digital banking. So, banks should assure clients of digital banking safety. Then they can develop the architecture of a digital bank and roll it out.
The software layer links the front end with the back end, plus the rest of the banking applications. It is responsible for interpreting, managing, and transmitting information between the front and back end.
Several technology providers can offer necessary middleware software. That includes business applications for card issuing, instant notifications, and more. It connects various levels, eliminating the need for a central banking system.
The layer provides the platform through which clients can interact with the bank. It includes online, web, or mobile banking app architecture networks for digital banking. Digital banks should ensure the interface is user-friendly for exceptional customer experience.
Digital banks may develop their in-house front-end or in-source them from third-party software providers. An in-sourcing interface may be preferable due to its flexibility, lower costs, and ease of customization.
Some of the front-end platforms include:
- Third-party payment gateways
- Mobile banking channels
Bank API Layer
It is a layer that forms a linkage between internal and external applications. Hence, this layer seamlessly integrates the services of third-party application providers.
Incorporating third-party applications is an essential part of the Information Technology architecture of an online bank. Digital banks need proper investment in the API layer before they become fully integrated. Through API access, digital banks can reap the maximum benefits of collaborations.
Microservices Architecture in Banking
Microservices architecture is a fundamental style for distributed systems. It is a method of building applications that decouples the components of an application and allows them to self-configure, self-heal and scale independently as the system scales.
Microservices architecture provides the agility and flexibility necessary to meet the needs of banking customers while addressing regulatory compliance issues, improving performance and lowering costs. By building applications on microservices architecture, banks can provide end users with a better user experience. Also, the ability to interact with their bank more straightforwardly. Furthermore, banks can integrate new business models into their current systems. It presents a new opportunity for banks to increase revenue.
Technology Stack for Digital Banking
Architecture of a digital bank should guarantee security and privacy requirements while meeting the demands of today's examples of digital banking customers. The technology stack for digital banking depends on how well IT is structured to respond to current and emerging requirements. Banks need a technology stack that can support their strategic goals and allow them to adapt to changes like mobile banking app architecture in the market environment. Here is the technology stack for digital banking.
1. Java and Spring Framework
Java and Spring Framework are widely used in banking applications. Java is a general-purpose programming language for developing applications and Server-side components such as servlets, JSPs, JSF, and Struts. The Java IDE covers a wide range of functionality. Developers widely use it to build applications in Java. Spring Framework supports building modular Java and XML solutions that can run in the cloud or on-premise.
2. Hibernate and Spring JDBC
Hibernate is a Java open-source persistence framework used to persist data in the relational database. Spring JDBC provides the functionality necessary to send and receive data from the database. Most banks adopt a hybrid approach to their application architecture with a mixture of on-premises and cloud-based offerings.
Zimbra is an open-source email, calendaring and collaboration suite that offers secure e-mail, fax, contacts management, scheduling, file sharing and collaboration capabilities for departments or organizations of all sizes. The suite is written in Java and uses a REST API to interact with the various components of the suite.
MongoDB is a document-oriented database popular for online transaction and analytical processing. MongoDB is compatible with JSON and the JSON specification makes it easy to use any programming language without modifications.
Java Persistent Objects is a Java API for persistence. JPA is a standard for using an object model in Java to represent persistent data. In many cases, such as web development, JPA provides the easiest way to access and modify data. This API gets successfully used in a variety of applications. Some popular frameworks that use JPA are Java EE, Spring Framework, and Spring Boot.
How to Design Your IT Architecture for Digital Banking
Digital Banking Architecture platforms must adhere to best practices for security and comply with regulatory guidelines. The IT architecture of a digital bank must be flexible, scalable, secure and manageable. The major challenges that digital banking faces include increasing regulatory compliance, adapting to changing customer needs, and creating a competitive edge against your competitors.
Banks are required to maintain compliance with security regulations. Security of the IT infrastructure is essential to protect sensitive customer data, comply with regulatory requirements and ensure that the bank has a secure IT environment. Banks must ensure that their cloud providers have adequate cyber-security controls and practices. Cloud solutions can help banks improve their security posture by distributing workloads across multiple data centers.
Digital banking platforms must support compliance with regulations such as UDAAP or GDPR. An organization may use one or more tiers of security controls, depending on its risk profile and business needs. Security includes encryption at rest and in transit, digital identity and privacy management, user authentication and authorization, website security, application security, and security monitoring capabilities. In particular, banks should have a secure digital banking platform with appropriate isolation of consumer data. A bank's digital banking platform must also consider any compliance standards or guidelines to which the bank's activities are subject.
Data encryption technologies, API, and AI can help digital banks enhance their security. These tools can keep customer information secure as they move across multiple channels, devices, or apps and also manage data internally.
2. Standards Compliance
Compliance refers to an organization's ability to comply with regulations required by its operating environment, such as laws and internal policies. An IT architecture for digital banking should conform to the technology standards, especially in customer-facing applications. Many banks are required to use the PCI DSS for their core systems.
Ensuring compliance is easiest with tech tools like automation and AI. They can take care of manual tasks while also tracking compliance procedures in one location.
Agility refers to responding quickly and effectively to change. One example of a change that requires agility is the need for an increase or decrease in a system's capacity or ability to handle new types of data or workloads. It can be an issue for traditional banking systems, as they involve time-consuming manual work.
Cloud technologies, robotic processing automation (RPA), API, AI, and machine learning are some of the best tech for operational agility. They provide a robust management solution and predictive insights, allowing banks to streamline operations to maximize efficiency.
Flexibility refers to the ability to adapt to environmental changes. Flexibility is important for a bank because it must be capable of adapting to new regulations or customer needs and must respond quickly.
Microservice architecture is one popular example visible in many digital business sectors. It is used in other industries to make IT architecture systems more flexible by using independent services that are lightweight and require low overhead.
Scalability is the ability of a system to process an increasing number of transactions without growing in size too slowly. Banking applications must be capable of handling both increasing and decreasing workloads. Banking applications must have the ability to handle workload peaks, such as the need for more transactions during peak months, and be able to reduce capacity during periods of low usage.
Cloud services are an ideal solution for increasing scaling capabilities. The best part is that the cloud doesn’t require as much management as a large-scale storage infrastructure would.
6. Risk Management
Risk management refers to managing the risk associated with a set of activities. A bank must develop and implement processes for managing risk. These processes should help ensure that the bank can respond effectively when risks materialize, such as a vulnerability in a software component or an unexpected increase in workload.
Your best options for managing and minimizing business risks are AI, machine learning, and cloud computing technologies.
Maintainability refers to the ability of a system to be modified to meet the future needs of an organization. Digital banking platforms must allow rapid deployment of new applications and capabilities. Cloud-native technologies for digital banking architectures are one solution that ensures continuous development and software development and creates new environments using code.
A system's usability is defined as the ease of using a system or the extent to which users can effectively use it. Usability refers to the ease with which users can access, use and understand a system.
Technology tools such as APIs allow banks to participate in digital ecosystems. They enable banks to integrate their products and services with third-party applications. This lets the bank provide a seamless service to customers across various devices, channels, apps, and services.
Reliability means that a system will perform its intended functions without failure. While security and manageability are important, reliability is the key to a successful IT architecture for digital banking.
The basics of building modern digital banks are largely similar. However, each bank can adopt a different tech stack. While some banks will opt for in-house developed capabilities, others outsource their IT architecture.
A digital bank should design an IT infrastructure that seamlessly shifts between various layers. So, employees and users can effortlessly interact with the IT architecture.
Developing a bank's IT architecture should consider precise business objectives. In that way, the bank can achieve the intended outcome from its shrewd investments.
Also, the bank should consider the worthy proposals appropriate to the target audience. A thorough assessment of the bank's business history, operations, strategy, and capabilities is necessary.
Consequently, the bank architecture lays the foundations for future data and technology architecture. Technology architecture will aid practical and physical applications, data components, and the vision of bank architecture.
The IT architecture is usually centered on the following core IT architecture principles:
- Infrastructure scalability – Ensures that existing bank business operations are adaptable and agile to shifts in market dynamics.
- The solution's flexibility – To enable incorporation with other platforms and evolving technologies. All this with minimal changes and interruptions to processes while supporting new business ideas.
- System resilience and robustness – Has brief but clear IT governance to address various technological and cybersecurity threats.
- A bank will realize a future-proof technology stack if it implements these principles. Such technology will also be flexible to internal and external change and interruption.
Banks can adopt modern digital innovations like artificial intelligence (AI), natural language processing, and data analytics as part of their IT strategy. The innovations will enhance customer experience besides cutting operational costs.
To ensure the system is reliable, consider solutions like blockchain and RPA. Blockchain can eliminate the need for intermediaries while still keeping the system secure. And RPA can deal with tedious processes with better precision and accuracy.
Digitized Banking Architecture Technology Roadmap
A bank needs to prepare its IT architecture and operations based on well-defined business purposes and worthy propositions appropriate to its target audience to accomplish the desired outcome and make practical financial investments.
Beyond the fundamentals of organization and innovation design, you should think about integrating extra kinds of digital innovation into your IT strategy, with the core goal of enhancing customer experience, decreasing functional prices, or boosting risk management. AI, natural language processing, robotics, and real-time data analytics are among the latest growth areas.
Suppose you don't range your digital financial business from the very beginning but have already inserted some technology in place. In that case, it's essential to think of any type of space in today's IT landscape and how to fix them.
You also need to consider the challenges and limitations that your digital banking architecture may encounter in the future. These can include:
- Managing cybersecurity risks
- Processing transactions and other updates in real-time
- Upgrading legacy systems
- Minimizing transaction processing risks
- Understanding potentially disruptive impacts of processes or technology
- Integrating legacy systems with new technologies
- Understanding different cost drivers
- Ensuring seamless user experience across devices and platforms
- Complying with internal controls, compliance, and regulatory agenda
Lastly, when it concerns an online bank's tech stack, there is no one-size-fits-all service, specifically when changing typical old frameworks. You'll typically require a complete makeover strategy and roadmap to develop your bank properly.
Digital banks need a vision of the future and a strategic plan that gets them there. Of course, moving from vision to action may be easier said than done. Hence, only a roadmap can outline and prioritize a bank's digitization initiatives.
Every strategic plan in an organization requires practical and flexible planning to succeed. That is what a roadmap is all about. A roadmap for digital banking architecture will utilize precise technology solutions to bring together short-term and long-term goals.
A digital banking technology roadmap provides a common understanding for effective alignment and scheduling of changes. It also provides corrections for unforeseen changes in technology and market dynamics.
Want some real-world examples to understand the IT architecture for digital banking better?
Check these examples.
- PayPal (Third-party platform and system integrations)
- Monzo (Microservice core banking system)
- BBVA, Banco Bilbao Vizcaya Argentaria (Third-party platform and system integrations)
- Nubank (Fintech-friendly regulatory agenda and customer data usage)
- TymeBank (Linking core banking platforms and interfaces and combining online and offline customer interaction)
- Liv. (Third-party partnership integration)
- TMRW (Technology partnerships and data analytics)
The banks deal with some routine, easy-to-digitize operations. Automation of such tasks will save time and improve service delivery. Overall, digital banks provide a more remarkable customer experience.
Digital banking platforms must be flexible and resilient. It is important to consider the use cases of digital banking platforms and the applications you will run on them. The architecture for digital banking must be designed with security and compliance in mind.
This architecture should allow your bank to be agile, flexible, and secure. It must also make it easy for the IT team to manage the platform and deploy new applications rapidly.