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Open Source Core Banking Software: Benefits, Risks, and Alternatives

Alex Malyshev

Open source code banking software adoption is a crucial part of the current fintech movement. According to a 2018 Fintech Open Source Foundation (FINOS) white paper, banks should use open source “more strategically, efficiently, and extensively” to remain competitive.

The aim of open source fintech solutions is to provide banks and customers with the core banking software and ease they need to operate. Financial institutions can leverage banking software open source technologies to quickly develop customer-centric products while also levelling the playing field. Consumers, on the other hand, can easily compile their financial information from all of their accounts in one place. This was impossible in the past.

Though open source online banking is gaining ground in finance, scaling and implementation will take a lot of time. Many businesses try to run the digital transformation and adopt the products with reliable core banking solutions. As a fintech software provider, we understand such questions and would be happy to walk you through the entire concept, its benefits, risks, and some open-source software alternatives to try out. SDK.finance has experience in developing on-premise products for neobanks. They are designed with a core stack of up-to-date solutions and have a great potential for future updates and improvements by your team.

Open source Digital Core Banking Platform SDK.finance

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What is Open Banking?

Open banking means allowing third parties access to and control of consumer banking. The open banking system is built on 2 pillars: 

  • Legal or regulatory.
  • Technology.

Laws ensure the ethical use of customer’s information while technology powers the interoperability and function of open banking. Technology also entails the use of open API by third parties, typically fintech start-ups and online financial service vendors, to build applications and services that use data or services provided by banks. In other words, “open API” facilitates data exchange between banks and other entities. Of course, this happens only with the client’s consent. 

Two separate FCA authorizations allow third parties to administer two key services under open banking:

  • Account Information Service Provider (AISP): The company can obtain account information from banks and financial institutions.
  • Payment Initiation Service Provider (PISP): The company can start payments into or out of a user’s account.

The providers may do research and get a better understanding of consumers by using the data they have gathered. They may build more relevant customer profiles and rapidly develop or adapt their products and services to the requirements of their users. As a result, the customer experience may be enhanced into improvements of the open source core banking platform.

As part of open banking, most banks offer their customers the ability to transfer funds to other banks’ accounts. This way, users can operate multiple accounts, credit cards, and use products from different vendors in a single app. They can have more options for selecting financial products and, in general, will be able to more easily find those that meet their actual needs. That is especially crucial for neobanks core software, where quick and client-oriented features’ updates directly affect monetization and unit economics

What is Open Core Banking System?

What makes software open source is the license attached to it. We define open source banking software as one that provides users with extensive control over the product, particularly the ability to modify and redistribute it, which is often forbidden by copyright law. When a rights holder decides to remove their software limitations, they do so by obtaining a free software license or open source software license.

freeware banking software

Regional estimates of open core banking solution users in 2020 (in millions)
Source: Statista

The Benefits of Open Source for the Banking Sector

Reduced expenses, more IT adaptability, and faster time to the solution are just a few of the benefits of embracing open source core banking software. Here are some more advantages to note.

Collaboration among institutions

One of the advantages of open banking is that it lets financial institutions learn the details of their customers’ financial status by looking at their entire financial picture, which can help them analyze risk and offer the best credit terms. Simultaneously, it assists the client in gaining a better grasp of their financial status before making any financial decisions.

Alternative payment methods

Most traditional banks are not equipped to handle transactions as quickly as customers desire, giving rise to alternative payment processing systems. Open banking aids fintech with the development of open-source payment software that will promote efficiency and reliability.

Non-traditional financial companies’ impact on selected banking goods and services in 2018

Source: Statista

Improved Customer service and experience

Instead of just permitting in-house transactions, banks may embrace open-source banking to enhance client engagement and retention by better aiding clients with their finances and to deliver personalized financial products and services.

Iterative development and continuous improvement

One important advantage of any open source core banking software is the ability to evolve indefinitely. Whenever a need is identified, different developers can enhance open-source banking software. Bugs and other difficulties can also be swiftly fixed.

Low operational costs and encourages innovation

Open-source software and codes may appear to be free, but they are not. However, they are less expensive than personalized systems. Open-source software helps organizations, particularly those with limited resources, to start small and develop over time.

Risks of Open Banking

Here are a few drawbacks to using open-source software.

Concerns about privacy

Open banking operations rely on data interchange and sharing; without the proper processes to avoid an external breach of API or database, there would be privacy and data theft concerns. Banks and third-party financial institutions must protect their clients’ information and warn them about the downsides of open banking.

Regulatory and compliance concerns

Because open-source is commonly utilized in apps that hold sensitive and personal information, institutions must comply with specific rules and standards. Noncompliance may be an oversight at times, but it is not a viable reason to avoid punishment.

A lack of community support

Because open-source software is intended for community development, any enhancements or updates will be made available to developers interested in the project. If an active community does not support an open-source application, there is a danger of abandonment, damaging your business.

Open Source Banking Alternatives

Given the risks associated with open source core banking software, here are alternatives that can be just as efficient and beneficial to your business.

Banking software with source code

Core banking software with source code

Learn more

Licenses for source code from core banking software vendors are available, modified, and customized for personalized use. 

On-premise is a type of license that includes the banking software source code, which medium to large businesses can use with their IT teams to customize the software for their specific needs. 

On-premise is originally developed by an expert tech firm with 15+ years of experience in the payments and banking industry, so you don’t have to worry about code rots or other flaws which may hinder efficiency.

You don’t have to worry about control or privacy breach as the license gives you complete control over the software operation, infrastructure, and data.

In-house development

With in-house banking software development, you can build your team from the ground up. You will fill open positions based on the specializations and experience required to complete the project. This development team will be in charge of creating one-of-a-kind banking software for your company.

Using in-house development is like hiring full-time employees for your business. You’d have to go through the tedious process of building your development team. Even if your company has its own in-house IT team, you still have to build the product from scratch, and this takes 1-2 years longer than using third-party source code software.

Outsource development

Market-ready platform for neobanks

More details

Outsourcing development is great for mostly small-to-medium-sized businesses on a tight budget but need to get things done quickly.

Global market for outsourced services from 2000 to 2019. (in billion U.S. dollars)

Source: Statista

However, some large tech companies like Google may also outsource their development needs. The problem is that there are too many fintech development companies to choose from, making it more difficult to hire an expert third-party development company. Rather than go through the stress, you can rely on SDK.finance dedicated IT team’s experience and expertise.

Why Should You Choose a Core Banking Software Solution from SDK.finance?

core banking solution from sdk finance

SDK.finance neobank core offers expertise and innovation while utilizing recent cutting-edge technology, with over 15 years of developing fintech platforms and creating payment solutions. The open source core banking solution strongly defines the functionality and flexibility of your neobank. That is why you need to choose the on premise bank solution provider wisely. Find out the key features you will benefit from SDK.finance products:

  • Work with a company that is well-versed in its field

As fintech experts with over 15 years of experience in the industry, we have firsthand knowledge of what it takes to develop real-world payment solutions.

  • Time savings

You can save up to a year on software development by using ready-to-use core banking software solutions with source codes for payment systems, neobanks, money remittance, currency exchange services, e-wallets, accepting online and in-store payments, and other payment-related services.

  • Innovation that adapts to the changing landscape

We leverage cutting-edge technology to create payment systems that reflect modern-day demands, keep you competitive, and offer innovative solutions to fintech challenges.

FAQ

What is Open Banking?

Open banking means allowing third parties access to and control of consumer banking. Laws ensure the ethical use of customer's information while technology powers the interoperability and function of open banking. Technology also entails the use of open API by third parties, typically fintech start-ups and online financial service vendors, to build applications and services that use data or services provided by banks. In other words, "open API" facilitates data exchange between banks and other entities. Of course, this happens only with the client’s consent. 

What is Open Source Software?

We define open source software as software that provides users extensive control over the product, particularly the ability to modify and redistribute it, which is often forbidden by copyright law. When a rights holder decides to remove their software limitations, they do so by obtaining a free software license or open source software license. 

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