How To Design The IT Architecture of a Digital Bank

How To Design The IT Architecture of a Digital Bank

Banks that digitally transformed their customer solutions and business capabilities have reaped the rewards: a superior banking customer experience and efficient operations.

A typical digital banking experience features:

  • 24/7 real-time and on-demand customer service
  • Flexible IT infrastructure
  • A 360-degree view into customers
  • Effective omnichannel stage management

Banks still have trouble sustaining their digital transformation efforts though, why? Simple, because they still behave like banks.

Any bank that is truly committed to sustained growth and digital transformation would be behaving like a neobank.

Neobanks are disruptive challenger banks obsessed with delivering exactly what their target audience needs from them. Everything about a neobank is customer-centric - including its IT architecture.

Banking IT architecture has always been planned from a product standpoint, resulting in a product-oriented service approach. However, to provide a better customer experience, digital banks should build their IT infrastructure with the client in mind... like neobanks.

If a bank wants to remain relevant to its customers, it must commit to an innovation-driven mindset that allows the bank to continuously deliver engaging digital banking products and services tailored to its customers.

This means a bank's IT infrastructure and architecture must enable the bank to achieve those strategic objectives.

In this post, we go further into the technological foundations of a digital bank and share some of our best practices for establishing a digital bank's IT infrastructure.

Digital Banking IT Infrastructure Layers

Back-end: Running on the Core Banking System

All back-office procedures, the core banking system (CBS), and customer information are all part of the back-end.

Customer information, payment transactions, loan issuing, and deposits are all managed by the back-end. A bank's core banking system is its technical heart. Most traditional and digital banks don't keep their own core banking systems. Instead, they use existing solutions from service providers.

A new generation of core banking system providers has arisen in recent years, better suited to the demands of digital banking. These modern suppliers often offer more flexibility, scalability, and interconnectivity at a much lower price to both start-ups and traditional banks.

Modern core banking technology is cloud-native, allowing for automated capacity scalability, continuous software development and deployment, and the instant creation of new environments via code.

It also provides a single customer perspective that is distinct from basic banking platforms or data warehouses. This offers a more effective and personalized customer experience and improved business and product performance insights. The technology is also reusable across all channels, allowing for the creation of "product factories" with clean, standardized integration.

Related: 4 Hyper Automation Benefits in Banking

Middleware Layer

Middleware is the software layer that connects the backend, frontend, and business applications.

Middleware connects all levels and eliminates the requirement for the central banking system to be involved in every single client contact. Middleware and operating systems, as well as related business applications for payments, card issuance, real-time notifications, and other services, are available from technology suppliers like Backbase.

Front-end: Providing the Banking Customer Experience

The customer experience is provided via the front end, which is the visual layer through which consumers engage with the bank.

Mobile and digital banking channels, as well as third-party channels including payment gateways, financial markets, and ATMs, are examples.

Digital banks can build their front-ends in-house or outsource them to third-party software and BaaS providers, who often provide customizable white-label solutions. In-sourcing is a viable option depending on the amount of customization required, timing, cost, and flexibility.

Related: Top 10 Digital Banking Design Trends in 2022

Bank API Layer: Connecting Internal and External Applications

The API layer, also known as the integration layer, is an additional layer that allows you to interact with third-party application providers and effortlessly integrate their services.

Third-party integration has become a fundamental aspect of banking, resulting in significant API layer investments thanks to the introduction of open banking, composable banking, and super applications. The API layer is often used as a sandbox for testing new services in a controlled environment. Before going on to full integration, third parties usually evaluate responsiveness in the sandbox.

API access and clear and concise documentation are important for making the best use of (future) collaborations.

Related: 4 Reasons Why Banks Require an API Strategy

How To Design The IT Architecture of a Digital Bank

In our previous article, we addressed how to pick the proper IT vendor. But this time, we'd want to address the following question: How can we ensure that we're taking the proper approach?

While the basic blocks for all modern digital banks are generally the same, we've seen that there are a variety of ways to set up the tech stack.

Everything is conceivable, from developing all capabilities in-house to completely outsourcing your IT infrastructure.

We recommend that you focus on making the transition between the front, middle, and back-end seamless for both the user and the employee when you build your digital bank's IT architecture. We also want to make sure that the bank's basic functions are quick and easy to change.

A bank must plan its IT architecture and operations based on well-defined business objectives and value propositions relevant to its target audience in order to achieve the desired outcome and make sensible investments.

This requires a thorough assessment of the bank's business history, strategy, organizational structure, procedures, and required skills. In other words, the business architecture lays the groundwork for the later data and technology architectures, which will enable the business architecture's logical and physical applications, data components, and vision.

Learn more about how Product Discovery can help your digital transformation capabilities here.

In most cases, the IT architecture should be based on a few key IT architectural principles:

  • System resilience and robustness with clear IT governance to prepare for a variety of technological and cybersecurity hazards, as well as a large computational burden in general.
  • Flexibility of the solution to interface with a variety of platforms and developing technologies with few adjustments or irreversible interruptions to essential activities and, as a result, to support new business objectives.
  • Infrastructure scalability to facilitate the rapid expansion of present bank operations by assuring flexibility and agility in design in response to changing market dynamics.

By following these principles, the bank will be able to build a future-proof technology stack that can adapt to changes and disruptions both inside and outside the bank, while also cutting down on the amount of time and money it takes to build custom software.

Beyond the fundamentals of business and technology architecture, you should think about incorporating additional types of digital innovation into your IT strategy, with the goal of improving customer experience, lowering operational costs, or improving risk management. Artificial intelligence, natural language processing, robotics, and data analytics are among the latest developments.

Related: 4 Benefits of Hyper Automation in Banking

If you're not starting from scratch with your digital banking business but already have some technology in place, it's vital to think about any gaps in the present IT landscape and how to remedy them.

Finally, when it comes to a digital bank's technological stack, there is no one-size-fits-all solution, especially when it comes to replacing antiquated traditional infrastructures. To effectively evolve your bank, you'll often require a complete transformation plan and roadmap.

How Sitech Can Help

We support our customers in creating IT strategies and building IT architecture and infrastructure, based on our proven track record in handling core banking deployments and end-to-end migration of banking and payment services.

Our team of specialists draws on their extensive expertise in technology strategy, enterprise architecture, and core banking solutions, as well as our strategic partnership with the world's leading engagement banking platform - Backbase.

Sitech is a leading IT strategy consultancy and software development agency specializing in fintech and banking. We provide end-to-end consultancy support to our customers in the design, development, and expansion of digital banks, as well as the transformation of legacy institutions.

Contact us today for a free consultation!