The Intersection of Financial Institutions and Technology Leaders

Future-Proofing Your Core With the Digital Twin Approach

January 17, 2025

By Carlos Netto

The financial services industry is at a turning point. As consumers demand seamless, instant transactions, many banks and credit unions are grappling with legacy systems that are ill-equipped to meet modern expectations. The need to modernize core banking infrastructure has shifted from a long-term goal to an immediate imperative. Yet, the challenges of replacing a core system — steep costs, complexity and extended timelines — have left institutions searching for a smarter path forward.

Enter the digital twin approach: a forward-thinking way to strike a balance between immediate modernization needs and future-proofing the core. This strategy offers a practical solution for financial institutions to meet customer demands now while paving the way for a robust digital future.

Core banking systems, many built on common business-oriented language (COBOL) and designed for batch processing, were tailored for a different era when banking hours dictated transaction flows. Fast forward to today, and consumers increasingly expect real-time updates, seamless mobile interactions and payment speeds that align with modern commerce.

Global markets illustrate the stakes of lagging innovation. In Brazil, the groundbreaking instant payment system Pix has shown how quickly consumer expectations can shift. But it has also revealed the strain legacy systems endure under the weight of real-time, high-volume transaction processing. With the emergence of platforms like FedNow in the U.S., American financial institutions are beginning to face similar challenges.

Though legacy systems remain reliable for traditional operations, they falter in adapting to innovations like open banking, real-time payments and cloud-native solutions. Attempts to modernize in fragments often lead to disjointed ecosystems that hinder scalability and efficiency.

The digital twin concept introduces a transformative middle ground. By creating a cloud-based, event-driven replica of core system data, a digital twin enables real-time transaction processing without replacing the core itself. This intermediary layer bridges the gap between customer-facing innovations and the slower, batch-based processing of legacy systems.

At its core, the digital twin is built on cutting-edge technology principles, including:

• Microservices architecture. This comprises dedicated services for account registry, transaction orchestration, balance updates and reconciliation to ensure optimal performance and scalability.
• Application programming interface (API) and event-driven design. RESTful APIs provide synchronous integrations while event platforms like Kafka manage asynchronous processes, ensuring smooth operation even during peak demand.
• Cloud-native deployment. With elastic scalability, disaster recovery capabilities and multicloud compatibility, the digital twin guarantees resilience in the face of fluctuating transaction volumes.

This design empowers financial institutions to meet real-time demands immediately. For example, when a customer initiates a payment, the digital twin validates the transaction within milliseconds, updates the balance and queues updates for the core to process during its next cycle. The result is a frictionless customer experience that doesn’t overburden the core.

As financial institutions navigate their modernization journeys, they should align their strategies with these key trends:

• Scalability through decoupling. Separating real-time transaction processing from the core allows institutions to scale incrementally without overhauling legacy systems. The digital twin’s modular architecture supports phased upgrades, reducing risk.
• Enhanced compliance and security. By employing tokenized account identifiers and encrypted event streams, institutions can meet stringent regulatory standards while mitigating fraud risks.
• Artificial intelligence (AI) integration for smarter insights. Acting as a data aggregation layer, the digital twin enables seamless integration of AI-driven solutions for fraud detection, credit scoring and personalized financial services, without interfering with core operations.
• Ecosystem interoperability. Standardized APIs and event protocols make it easier to connect with payment rails like FedNow and real-time payments, as well as third-party fintech applications.

For technology leaders and strategists, the digital twin offers a pragmatic route to modernization. By mitigating risk, accelerating time-to-market for new products and delivering immediate operational value, it bridges the gap between legacy constraints and future capabilities. While not a replacement for full core transformation, the digital twin empowers institutions to innovate responsibly. It provides the flexibility to adapt to rapid technological advancements while safeguarding existing systems. 

In today’s competitive financial landscape, where customer expectations evolve at lightning speed, banks and credit unions must act boldly. Embracing solutions like the digital twin positions institutions to meet modern demands, reduce operational bottlenecks and prepare for tomorrow’s opportunities. With the digital twin approach, financial institutions can turn today’s challenges into tomorrow’s advantages, creating a future where modernization meets innovation seamlessly.

Carlos Netto is Co-founder and CEO of Matera, a software company he founded over 30 years ago in Brazil. Matera provides instant payments, QR code payments and core banking technology to financial institutions. Carlos is a specialist in digital payments and open banking and was even awarded a U.S. patent for offline QR code payments. Currently, he is leading Matera’s global expansion to North America.