The Intersection of Financial Institutions and Technology Leaders

Struggling to Improve Technology, Financial Institutions Turn to Middleware

By Kiah Lau Haslett

Middleware software may be a solution for community financial institutions that don’t want to replace their core but are looking for faster and cheaper ways to innovate.

Middleware is an adaptive software layer that financial institutions can apply to their core; other applications and technology connect and send data and messages through it using application programming interfaces, or APIs, instead of directly to the core. It functions similarly to a power converter, which can change currents or voltage between a wall socket and an appliance, and a power strip that offers different outlets and ports. 

[Middleware] allows you to do real-time activities and helps with lower code integrations. One benefit is that you can scale a lot faster,” says Mohammad Nasar, a principal in financial services consulting at Crowe LLP. 

There are two types: middleware that facilitates banking as a service partnerships with customer-facing fintechs and middleware that facilitates the bank’s own products and services.

Middleware isn’t intended to displace a financial institution’s core, which serves the vital purpose of being the central system of records, says Joel Legg, vice president of technology at Core10, which makes the Mesh middleware. But smaller institutions that rely on their core provider for services like online banking or payments complain about slow development cycles, an inability to have their project prioritized or costly upgrades and integrations. In fact, 74% of respondents to Bank Director’s 2023 Technology Survey say integrations with a core are a major challenge when it comes to planned upgrades and implementations. Additionally, the speed at which a core processes data and transactions may not be sufficient to support real-time technologies in payments or fraud. 

“Our technology team is tightly constrained by our core. They do not talk to other parties who might integrate with the core,” wrote an independent director at a privately held bank with less than $500 million in assets in the Midwest in the Bank Director survey. “I am pushing them toward middleware to open up opportunities and reduce costs.”

A chief innovation officer at a public Midwestern bank that has between $5 billion and $10 billion in assets wrote in the survey that their institution was installing an integration layer to help connect the cores that ran wealth and credit card operations, which had been a major challenge for that institution.

Middleware also figured into another institution’s longer-term goals to execute “an integrated technology/digital plan” that includes bringing on a digital officer and reassessing its technology team leadership, wrote a chief risk officer at a $1 billion to $5 billion mutual bank in the Northeast. The CRO wrote that the bank will move to a middleware approach in the next two to three years and is developing “a digital transformation plan to re-evaluate our current digital solutions and offerings.

An institution can use middleware to solely pass data from point to point. But it can also use the integration layer to capture the data flowing through those connection points to aggregate and analyze it, Legg says. But to take advantage of those features, technology executives need to articulate API connectivity and data management strategies, says Kris Kovacs, CEO and founder of Constellation Digital Partners, which uses middleware to connect its product to small financial institutions’ cores. This includes figuring out how the institutions want to format and standardize their data, where to store it and what programming configurations they’ll needed. 

That is the approach one institution, a $1 billion to $5 billion publicly held bank in the Pacific West, is taking, according to comments the president shared in Bank Director’s technology survey. The bank implemented a cloud-based lakehouse, an advanced architecture that combines capabilities of data lakes and data warehouses, to speed up processing.  The bank “is building our middleware to enable all of our digital ambitions. The work is big, but the payoffs will be bigger … ”

A technology and data strategy that hinges on middleware means banks and credit unions must properly resource and maintain the software, says Kovacs; it’s not a “set it and forget it” project. He says the role of maintaining and overseeing an integration layer typically falls to IT systems analysts and programmers. In contrast, only 13% of respondents to Bank Director’s 2023 Tech Survey said they had developers or programmers on staff, and 58% see midlevel staffing in these titles as a deficiency in the way their institution allocates resources toward technology and innovation.

While it’s important that financial institutions establish better, faster connectivity, that’s only half the problem, Nasar says. The other half of the problem is making the data usable and understandable by creating a framework and standards for the information. 

What I think is lost, is that I don’t think you’ve fully solved a problem — you’ve only just created a new technological capability to connect your systems,” he says.

To integrate a middleware approach into the broader digital and technology strategy, financial institutions would start with due diligence conversations to learn about prospective vendors’ integration configurations and message sets. The configuration is crucial. Legg says that each core provider has its own interface and approach to data formatting, and there are a variety of API types that a fintech could use. 

It’s also critical that the institution has ongoing oversight and maintenance of the API connections needed to make the middleware function. If an institution’s core makes an update or change, the institution would need to realign the fields in its middleware to ensure the systems are communicating correctly after the update. 

When something breaks in the middle of the night, nine times out of 10, it’s the data. You’ve got these things translating, and when one of them sends something they shouldn’t send, the other one goes ‘Whoa, I don’t know what that is’ and it gets stuck,” Kovacs says.

Kiah Lau Haslett is the Banking & Fintech Editor for Bank Director. Kiah is responsible for editing web content and works with other members of the editorial team to produce articles featured online and published in the magazine. Her areas of focus include bank accounting policy, operations, strategy, and trends in mergers and acquisitions.