Core Banking Digest: Cloud, On-prem, or Hybrid?
The emergence of cloud computing has been a game-changer across practically all industries and sectors, enabling greater agility, improved scalability, and eliminating many of the inefficiencies of service oriented architectures (SOA). Even for the more ‘traditionalist’ financial sector, the adoption of cloud has seen a steady increase in recent years, hastened by a renewed focus on digital transformation.
However, this is not to say that cloud is a one-size-fits-all solution and, indeed, many banks have been slow to migrate from their legacy, on-premises systems (with some notable exceptions such as Capital One).
In this article, we will explore some of the key benefits and risks involved with cloud computing for finance, and examine the different approaches financial institutions have taken; fully cloud, fully on-prem, or a hybrid solution. We also dive into the approaches taken by modern core banking platforms, and how these can support financial institutions.
Cloud in Banking: The Benefits
Utilising cloud computing allows for significant cost savings, as it eliminates the need to develop and maintain bulky physical infrastructure. Beyond the initial capital expenditure, on-premises data centres also require ongoing maintenance, upgrades, electricity, cooling; all of which results in a hefty annual bill.
When using a cloud provider, the majority of these costs have been factored into the service, which is provided via a subscription-based model. The hardware infrastructure is developed and maintained in the provider’s data centres where cloud servers are installed. In this instance, the client pays only for the resources they consume.
As institutions with a global reach, banks are continuously having to balance the scale-up and scale-down of their interoperable service network. For incumbent banks, the aim is to move away from monolithic structures, whilst newcomers will avoid them entirely, instead opting to scale different services independently. Additionally, improved analytical capabilities allow for the rapid creation of targeted propositions.
Financial institutions, particularly incumbent ones, typically feature a complex mix of applications and tools. As such, integrability and interoperability are key concerns when choosing where data should be hosted. Cloud providers typically pre-test and implement major solutions to guarantee they can be used ‘out-of-the-box’, ensuring a seamless integration. Additionally, most development companies now design their tools specifically for cloud hosting.
Cloud in Banking: The Risks
Choosing a cloud provider means outsourcing certain aspects of a business, a concept which can spook the notoriously risk-averse financial services sector. Whilst the technology and security around cloud computing has developed substantially in recent years, banks handle a lot of particularly sensitive information which they may only feel comfortable hosting on-premises (at least until the security of this information can be completely guaranteed in a cloud environment).
A lot of the reluctance to adopt new technologies can be put down to regulatory requirements, as banks face a minefield of rules which they must adhere to in order to legally operate. Importantly, a significant amount of these regulations cover how data is stored and managed.
Although regulators have warmed to cloud, there are still some restrictions which can inhibit cloud migration (for example, a lack of cloud data centres in certain jurisdictions; although this can be overcome by the almost universal coverage offered by the leading cloud providers).
If a significant amount of data is stored solely with one vendor, the process of then switching to another cloud service becomes complicated, if not impossible. The most effective option can sometimes be to procure different cloud services from various providers, such as data-related services from provider A for running the business and analysing logs via provider B.
Transitioning to Cloud – A Hybrid Solution
Adopting cloud computing comes with many benefits; however, this is not to say that it is the right approach for every financial institution in the short term. Many banks have invested a lot of money into building their on-prem solutions, and switching to a newer, cloud solution too soon can result in a negative ROI.
Therefore, a transitionary period is considered the optimal approach, whereby a combination of cloud and on-prem solutions are used. As Tuum CTO Ove Kreison highlighted in a recent panel discussion, many banks have opted for a hybrid solution, whereby aspects such as data and analytics are moved to the cloud, but the handling and storage of more sensitive information is kept on-premises.
By utilising this approach, institutions like JPMorgan Chase and Raiffeisen Bank International have been able to enjoy the benefits of cloud computing while making a gradual, sustainable transition away from their legacy on-prem systems.
Cloud Native Core Banking
The latest generation of core banking providers are born in the cloud, and the previous generations have now migrated there (or are in the process of doing so). However, as previously mentioned, cloud isn’t necessarily the right solution for every institution in the short-term, and core banking providers must be adaptable to the requirements of the business. For this reason, a cloud and infrastructure-agnostic approach is preferred; a platform that is able to support deployment on any cloud and/or on-prem.
The complexities of moving software and data to an outside cloud provider make it a multistage journey, with several considerations to be made. The most successful adopters of cloud computing are those who have performed their due diligence and constructed a well thought-out-strategy on how use of the cloud can support their business objectives.
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