Posted by: Christian Reeves
International Bank License, Offshore Bank License, Software, US Bank License
In this post I’ll list the common functions of a banking core system. The intent is to give the reader some ideas and direction in selecting their core system. If you’re setting up a new international bank, the most expensive and time consuming process will be selecting and implementing your core system.
Note that I am in the business of setting up international banks and assisting buyers to acquire international banks in various jurisdictions. We are not tech experts nor do we sell any particular system or make a commission from any core system. I write this to give those who are entrepreneurs, but not necessarily banking experts, a point of reference.
Also, this is more of a list and bullet points on the various components of a core banking system. While I generally try to tell a story with my articles, I could not do that here or it would be a 100 page dissertation certain to put the reader to sleep. I hope you can get some value and direction from this post.
Without any more ado, here are the common functions of a banking core system.
A banking core system serves as the backbone of a financial institution, providing a centralized platform for managing various banking activities. It facilitates fundamental operations like account creation, fund transfers, and transaction processing while offering an array of features to support different types of accounts such as savings, checking, and loans. These core systems are designed to be scalable and robust, capable of handling massive volumes of transactions while maintaining high levels of security and reliability.
In addition to transactional capabilities, a modern banking core system is also equipped with advanced functionalities for regulatory compliance, risk assessment, and customer relationship management. Compliance features like Know Your Customer (KYC) checks, Anti-Money Laundering (AML) monitoring, and Bank Secrecy Act (BSA) adherence are integrated into the system to ensure that the financial institution operates within legal boundaries. Sophisticated analytics and reporting tools provide actionable insights, while real-time monitoring enables quick detection and resolution of fraudulent or suspicious activities. This comprehensive ecosystem allows banks to offer seamless, efficient, and secure services to their customers.
The basic functions are as follows:
- Account Creation and Management: Enables setting up different types of accounts like checking, savings, fixed deposits, etc.
- Fund Transfers: Supports internal and external fund transfers including wire transfers.
- Transaction History: Records and manages a log of all transactions, accessible to both bank employees and customers.
- Balance Inquiry: Allows customers to check the status of their accounts.
- Overdraft Management: Automatically checks for overdraft limits before approving transactions.
- Reporting: Generates mandatory regulatory reports.
- Audit Trails: Keeps secure and unalterable logs of all transactions for compliance.
- Risk Assessment: Assesses risk associated with transactions or customer behavior.
- Policy Management: Manages internal policies and ensures compliance with external rules.
KYC (Know Your Customer)
- Customer Identification: Collects and verifies identity documents.
- Customer Profiling: Builds profiles based on customer’s transaction behavior, risk factors, etc.
- Ongoing Monitoring: Continually monitors customer accounts for suspicious activities.
AML (Anti-Money Laundering) & BSA (Bank Secrecy Act)
- Transaction Monitoring: Flags unusual transactions that may indicate money laundering.
- CTR and SAR Reporting: Generates Currency Transaction Reports (CTR) and Suspicious Activity Reports (SAR).
- Sanction Screening: Checks against lists of individuals or entities that are subject to financial sanctions.
- Loan Origination: Manages the process of initiating a loan.
- Credit Scoring: Evaluates the creditworthiness of the customers.
- Loan Management: Manages the lifecycle of the loan including payments, amortizations, etc.
- Collections: Manages late payments and other issues with loan collection.
Requirements to Connect into the Federal Reserve for Fedwire
Note: This information is subject to change and should be verified with the Federal Reserve or appropriate regulatory bodies.
- Eligibility: Only depository institutions are generally eligible for a Fedwire account.
- Documentation: Submission of required documents like organization charters, licenses, and compliance reports.
- Technical Infrastructure: Must meet hardware, software, and network infrastructure requirements to connect securely to Fedwire.
- Testing: Required to complete end-to-end testing with the Federal Reserve.
- Security: Implement robust cybersecurity measures to ensure secure data exchange, possibly including VPN tunnels or other secure data transmission methods.
- Compliance: Must comply with all regulations including those around AML, KYC, and BSA.
- Legal Agreements: Execution of the required legal agreements with the Federal Reserve.
- Fees: Payment of any relevant setup and ongoing fees.
Consult the Federal Reserve’s guidelines and documentation for the most current and detailed requirements.
Functions of a Banking Core in Compliance
Compliance in a banking core system is crucial for meeting legal requirements and maintaining the integrity and reputation of a financial institution. Below are some of the functions related to compliance, including real-time transaction monitoring:
- Regulatory Reporting: Automatically generates reports required by various governing bodies like the SEC, IRS, and local financial authorities.
- Financial Statements: Generates financial reports such as balance sheets, income statements, and cash flow statements that adhere to regulatory standards.
- Tax Compliance: Manages tax-related documentation and reporting requirements.
- Immutable Logs: Creates and stores immutable logs of all transactions and modifications made within the system.
- User Activity Monitoring: Logs all user activity, including unsuccessful login attempts, for auditing purposes.
- Data Integrity Checks: Ensures that data within the system has not been tampered with and is consistent.
- Access Control: Manages role-based access to different functions and data within the system.
- Operational Policies: Ensures that the bank’s operational procedures are compliant with external regulations.
- Data Retention Policies: Manages the secure storage and deletion of customer and transaction data according to regulatory requirements.
- Credit Risk Assessment: Evaluates the risk associated with lending to particular individuals or entities.
- Operational Risk Assessment: Assesses the risks related to bank operations and suggests mitigating actions.
- Compliance Risk Assessment: Periodically reviews compliance protocols and updates them based on new or updated regulations.
Real-Time Transaction Monitoring
- Fraud Detection: Uses machine learning and rule-based systems to detect potentially fraudulent activities in real-time.
- AML & BSA Monitoring: Monitors transactions for suspicious activities that may be indicative of money laundering or non-compliance with the Bank Secrecy Act.
- High-Value Transactions: Flags high-value transactions for manual review to ensure they comply with regulatory requirements.
- Geographical Tracking: Monitors transactions that involve high-risk jurisdictions or non-cooperative countries.
- Anomaly Detection: Identifies unusual customer behavior or transaction patterns that deviate from established norms.
- Real-Time Alerts: Sends real-time notifications to compliance officers or other responsible individuals for immediate investigation and action.
- Real-Time Analytics: Provides real-time insights into compliance metrics.
- Issue Tracking: Allows compliance officers to track issues, escalations, and resolutions.
- Compliance Scorecards: Offers visual scorecards that grade the institution’s performance in various compliance areas.
These are just some of the many functions involved in the compliance aspect of a banking core system. Each financial institution may customize its core system to meet its specific needs and regulatory requirements.
Automating the Onboarding Process
Automating the onboarding process for a banking core system is critical for enhancing the customer experience, ensuring data accuracy, and maintaining regulatory compliance. Here is a breakdown of the process and requirements for such a system:
- Initial Customer Touchpoint: The process usually starts when a prospective customer interacts with the bank’s online portal, mobile app, or in-branch kiosk.
- Form Filling & Document Upload: The customer fills out digital forms and uploads required identification documents.
- Identity Verification:
- Automated checks against government-issued IDs, tax identification numbers, etc.
- Biometric verification may be included.
- KYC (Know Your Customer) Checks:
- The system performs background checks and scans against sanction lists.
- Risk Assessment: The system evaluates the risk associated with onboarding the new customer based on predefined criteria.
- Account Creation:
- If all checks are successful, the system automatically creates the customer’s account.
- Initial Funding: The customer can then deposit initial funds into the account, often facilitated by the system via bank transfers, credit/debit card payments, or other means.
- Notification & Confirmation:
- The customer receives notifications (email/SMS/app) at every step, concluding with a final confirmation once the account is active.
- Database Management: A secure, scalable, and robust database to store customer data and documents.
- APIs & Integrations: APIs for identity verification services, credit scoring agencies, AML databases, etc.
- User Interface: A user-friendly, accessible interface for both customers and bank personnel.
- Security Protocols: High-level security measures including encryption and multi-factor authentication.
- Backup and Recovery: A solid backup and recovery solution to protect against data loss.
- Form Validation: Real-time validation of information entered into forms.
- Automated Workflows: Rule-based automation for identity checks, KYC procedures, and other compliance tasks.
- Real-Time Monitoring and Alerts: Immediate notifications for any exceptions or suspicious activities.
- Data Protection: Compliance with data protection laws such as GDPR, CCPA, or others applicable to the jurisdiction.
- KYC and AML: Built-in functionalities to comply with Know Your Customer and Anti-Money Laundering regulations.
- Audit Trails: Immutable logs and trails for compliance checks and audits.
- Consent Management: Ability to capture and manage customer consent for data usage.
User Experience Requirements
- Progress Tracking: A mechanism to allow customers to save their progress and return later.
- Multi-Channel Support: Seamless transition between online and offline channels (e.g., starting online and completing in-branch).
- Customer Support Integration: Built-in chat or easy access to customer support for queries or issues during the onboarding process.
By combining these elements effectively, a financial institution can create an automated onboarding system that not only streamlines internal operations but also enhances customer satisfaction and ensures regulatory compliance.
I hope you’ve found this post on the common functions of a banking core system to be helpful. Again, the intent is to give you points to think about when you select the core for your new bank.
For more information on setting up an international bank in Puerto Rico or elsewhere, please contact us at firstname.lastname@example.org