The Challenges of Core Banking Systems and Blockchain Integration

Image by Pete Linforth from Pixabay

In the ever-evolving world of financial services, core banking systems are the lifeblood of banks. They handle everything from transactions, customer account management, and loan processing to payment settlements. As the demand for faster, more transparent, and secure financial operations grows, blockchain technology emerges as a promising solution. However, the integration of blockchain into traditional core banking systems is not without its challenges. Let’s explore some of the key hurdles banks face when trying to adopt blockchain technology.

Legacy Infrastructure

Many banks operate on legacy core banking systems that have been in place for decades. These systems are often highly customized and deeply integrated into a bank's daily operations. While they are stable, they were not designed to handle decentralized technologies like blockchain.

Integrating blockchain into these outdated systems requires significant upgrades or even a complete overhaul of the bank's infrastructure. This process can be time-consuming, costly, and risky, especially when considering the potential for service disruptions.

Naturally, the existing core banking systems data architectures are designed for the legacy financial and banking products. Even if blockchain can be used for the traditional financial products like shares and bonds, it has already until today enabled many new forms of products and tokens, like utility coins, stablecoins, real world asset tokens, ownership right tokens and so on. But the innovation potential of blockchain has by far not come to an end. Legacy core banking systems therefore face the challenge of being not ready for blockchain on many layers.

Interoperability Between Blockchain and Core Banking Systems

Core banking systems are designed to interact with other financial networks, payment gateways, and services. Integrating blockchain into this ecosystem requires the ability to communicate and transfer data seamlessly between the two systems.

Blockchain networks operate on fundamentally different principles compared to traditional banking platforms. Establishing a secure and efficient means of interoperability is critical but challenging. Banks must ensure that transactions and data can move freely between blockchain networks and their core systems without errors, delays, or security risks. Solutions like atomic swaps or cross-chain protocols may help, but these are still in their early stages of adoption in the banking world.

Lack of data for Bank (risk) management and regulations

As banks have to carefully manage their risks and their profitability, the missing full integration of blockchain data structures into the core banking causes severe problems for the bank’s management. A bank can only accept the full potential of blockchain when all management systems are able to handle the risks and processes comprehensively.

PROSYD CORE BANKING SYSTEM

The PROSYD Core Banking System has been developed to solve these issues. It has been designed from scratch for the requirements of the new age.

Data Architecture for Traditional and Future Finance:

The system is designed to accommodate both traditional financial products and future asset classes such as security tokens, cryptocurrencies, stablecoins, and NFTs. This ensures that banks can easily integrate new asset types as they emerge, making the platform highly flexible and future-proof.

Ready for the Token Economy:

With built-in readiness for the token economy, PROSYD enables banks to seamlessly manage tokenized assets, ensuring smooth integration with real-world applications. This is critical as tokenization continues to redefine asset ownership and trading.

Real-Time Booking Engine:

Unlike legacy systems that rely on end-of-day batch processing, PROSYD’s real-time booking engine allows for instant transaction recording. This eliminates delays, improves customer experience, and reduces operational risks—essential in a world where real-time financial services are the new standard.

Seamless Integration of Layer-1 Blockchains:

The PROSYD core banking system is designed for seamless integration with Layer-1 blockchains, allowing banks to automate financial contracts, smart contracts, and token management. This provides a unified system where both blockchain-based and traditional financial operations can coexist securely.

Synchronization of On-Chain and Off-Chain Activities:

One of the key security and operational challenges in blockchain is the reconciliation of on-chain and off-chain transactions. PROSYD eliminates the need for reconciliation by synchronizing all on-chain and off-chain activities with the core banking database in real-time. This not only enhances security but also prevents operational bottlenecks, ensuring full transparency and reducing the risk of discrepancies.

Automation of Smart Contracts and Financial Contracts:

PROSYD Core Banking System enables the full efficiency potential of blockchain by ensuring that smart contracts and traditional financial contracts are executed without manual intervention, significantly reducing human error and enhancing operational security. This level of automation provides end-to-end trust in the system, increasing both transparency and efficiency.

Deep integration of Risk Management and Profitability Management Systems

PROSYD Core Banking System integrates a comprehensive business data warehouse, which can be perfectly combined with PROSYD Banking Risk Management Systems or with the banks’ existing risk management applications.

Bridge between legacy core banking and blockchain

As the PROSYD Core Banking System is designed to bridge the legacy financial system with blockchain, it can also be used to bridge the existing core banking systems with blockchain applications.