Will Open-Source Core Banking Solutions Have Higher Adoption?

In the past, banks have been hesitant to turn towards open source, core banking solutions. Open source means that the software has a source code that is freely shared with others. Banks in the past have been targeted by hackers numerous times; this aspect has made many hesitant.

Despite this fact, it is interesting to note that open-source vendors, including IBM, Oracle, TIBCO, and even Microsoft are positioning themselves actively in the industry. Is open-source core banking solutions geared to have higher adoption?

The answer seems like it probably will. Open-source is said to have achieved a certain maturity in the market. Its move into the mainstream market has also contributed to improving its chances of adoption in the banking industry.

The most prominent example of this can be seen by the acquisitions made by tech giants that focus on open source.

It can be said that the marketplace is primed and ready. All banks have to do is take the initiative into the open-source core banking solution.

Benefits of Open-Source Core Banking Solutions

While the shift to providing open-source core banking solutions has been slow, the advantages that this mode has to offer cannot be ignored. Banks stand to gain a lot by using or even contributing to open-source. The following are some of the main benefits that they can expect to get by opting for open-source software:

Low Costs

Banks can effectively lower their annual costs by avoiding the software licensing costs that they have to pay to their software vendors. It allows them to not only lower their costs but also offer more value-based services to their customers. It also removes the vendor lock-in clause, meaning that they are tied contractually to work with one particular vendor only.

Reduce the Development Time

For any new offerings, banks can expedite the process by making use of the pre-existing modules on open-source software. They do not have to create everything from scratch, which reduces the development time. It also means that trial and error and testing times can be significantly reduced in this manner.

Easy to Customize

There are a lot of customization options, particularly with opensource software that banks can take advantage of. Based on their needs, they can provide their consumers more. In comparison, getting a software package from a vendor might mean that even if they have a quicker turnover rate, customization will mainly be limited. With open-source, banks get custom-built software that meets all their needs.

Giving Back to the Tech Community

Open source coding means that banks have the freedom to contribute to the software community as well. It builds a good image for them and also establishes their reputation in the industry. On this basis, this is one of the most effective, low-cost ways that banks can improve their corporate image in the banking industry.

Transparency in Functionality

With open-source software, banks can adopt a more transparent approach that is not only intrinsically more secure but also erases the need for competitiveness and secret hoarding. In the past, banks have jealously guarded their proprietary software, doing their best to keep the code a secret. With open-source, they can adopt a more community-minded approach.

Gain from Knowledge

With open-source, banks can learn through the testing and extensions that are built by various contributors outside of the bank. This adds a fresh perspective, expedites problem-solving, and improves knowledge. It also helps them avoid mistakes made by other banks or help them resolve the issues that they are facing.

Removes Barriers to Collaboration

The open-source community promotes collaboration and even removes barriers such as geographical locations. As a result, many banks can get access to skilled talent, knowledge pools, and more that would often not be possible. Banks can also collaborate with other authorities to tackle various shared concerns, including anti-money laundering issues, and to better understand the customer.

These are some of the significant benefits that banks stand to gain from the adoption of open source core banking.

The Challenges of Open-Source Core Banking Solutions

Even though these benefits are extremely attractive, there are still some challenges that banks need to understand. The challenges on faces in this area can be the main contributing factor to reluctance in adoption.

However, by understanding these challenges, banks can actively work to overcome them, look for solutions, or even address the limitations that this option has to offer. The following are the major challenges that banks can face in this area:

Legal and Contractual Challenges

Severalopen-source software has its own license models that can cause legal problems for banks. It is also challenging to ensure that banks comply with the terms and conditions of the given license model.

Uncertainty in this area can cause issues for large banks, but there are tools available that help with this. Software like FOSSA, DejaCode, Code Janitor, and others like them makes it possible to follow-up and monitor compliance requirements on the licenses for open-source.

Lack of Support for Issues

One area where banks face challenges is a lack of proper support for issues, particularly relating to open source. Commercial banks often rely on corporate support to use appropriate open-source tools. It also means that the banks’ own IT teams will have to collaborate with the open source software community actively.

This will be necessary to resolve the issue correctly. Finding a solution in this manner can often be more complicated than addressing the issue with an IT vendor who can often produce better and faster results for the issue.

High-Security Risk

The security risk with open-source coding is very high for banking institutions, especially when the raw code is shared on open source. While further development can lead to secure coding, during the initial stages, the code will be vulnerable, and many skilled hackers can look for loopholes and exploit them in the code. Given this factor, many banks are hesitant to adopt open-source code for core banking solutions.

Given these challenges, banks have been hesitant to adopt open-source core banking solutions.

Slow but Steady Growth

It’s heartening to see that despite the general hesitancy, more banks are contributing to existing projects of open source. Some have even gone one step ahead and tried to develop their software for open-source coding. The following are some of the most prominent examples of this can be seen below:

  • Capital One – They have been offering open source as one of the core elements behind their services. Their digital transformation occurred in the past 6 years, and they have actively adopted open source.
  • Goldman Sachs – They have recently started working on open-source software for their program, Alloy.
  • P. Morgan Chase – They released code for their Quorum blockchain project on GitHub for various enterprises.
  • Deutsche Bank– They have relied on open-source for various projects, including their Plexus Interop and Waltz.

While the move has been slow, it can be said that more banks are adopting. Given this factor, in the future, the adoption of open source core banking solutions will be higher.

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