The Cloud in the future of Banking

As digital native challenger banks rapidly araised, it has become imperative for retail banks to move to the cloud to compete. There are numerous benefits associated with cloud migration, but they should also be aware of the pitfalls

Retail banks are moving to the cloud because they have to. They have extremely complex IT environments, a huge amount of legacy debt and are being outflanked by faster-moving, low cost, digital native challenger banks.

Cloud promises a lot of benefits: an end to high levels of capital investment, much greater agility in developing new products and services, faster time to market, potential access to global markets, low fixed costs… Sounds good – but the reality is more ambiguous.

Moving to the cloud represents a disruptive – and costly – change project. It takes time, lots of it, and plenty of money too.

The cost-benefits of the cloud are real, but you can’t materialize them until the full migration has been completed. Until then, costs will actually be higher, as you have to pay for legacy infrastructure right up to the moment when it can be turned off.

All the way through the process of change, you need to manage smooth integration between legacy and new cloud processes, while satisfying regulatory requirements.

It’s a difficult road to be sure, though banks still have to do it, whether they like it or not. The trouble is, by the time they have navigated their way through this complex process, those ‘born on the web’ challengers may be further ahead than before, with a gap that it will be hard to bridge.

So what to do? Let’s take a look at the benefits banks are looking for, and the challenges they have to face.

Unlocking the benefits

Successfully moving to the cloud delivers four essential benefits to banks.

1. Scalability: keeping pace with fluctuating demand without having shortfalls or underused assets. Projects can be launched more or less at once, and pay-per-use keeps costs in line with demand.
2. Cost reduction: because public cloud is a shared platform, kept at best practice level by the provider. IT investments will drop almost to zero, and fixed costs will go down as well.
3. Agility:?will be enhanced at once, with projects now needing much shorter lead times, giving banks the ability to test markets and change direction at speed.
4. Innovation: should become much easier. Cloud enables the creation of collaborative virtual working spaces, where other ecosystem partners can develop and test on near production environments, cutting risk and accelerating time to market.

Cloud enables the creation of collaborative virtual working spaces, where other ecosystem partners can develop and test on near production environments, cutting risk and accelerating time to market.

Everyone wants the benefits, but the reality is a little more nuanced and complicated than it may at first seem.

The main challenge

The nature of Cloud native software is about the very way a bakc’s software is constructed so taht is calable as well as easily adapted or updated. Cloud native softwre is constructer as a series of building blocks rather than delivers as cumbersome sealed monolith, ans this is what gives impetus to getting new banking features in the hands of customers.

There is a major difference between being cloud-native versus running software in the cloud.

What happens after launch? Services already in the market aren’t excluded from benefits cloud has to offer. And even services born in the cloud aren’t immune to market and customer demand. After all, Change is inevitable: change or die.

Cloud-Native software can eliminate the old-world- need for a costly, protracted project to upgrade the software. Effectively, Cloud-native structure entails lots of pieces of manageable code (aka: microservices) rather than enormous clumps of software hosted in the cloud. This allows the development teams to edit only those parts of code henever they need to make a change, rather then haing to wait for a convenient time to take down the whole service.

Taking Care of your Business

Fears of security in infrastructure control have long been citedas “too risky” from many banks’ security officers. Security or Data Privacy breaches make for sensational headlines, enormous regulator fines and erosion of precious brand capital.

Banks have invested heavily in control frameworks to succesfully provide a safe, compliant and trustworth internal operative procedure to ensure that services can operate secuerly and the customers can use them with high confidence.

On the other hand, Cloud Service providers have made huge investments in security of thier data centers as well as around the ecosystem that supports the transmission and storage of customer data. It is in this area that pooled resourced can deliver a security model far greater than any one bank could achieve.

From a supervisor perspective, cloud is the pathway to a financial serivces landscape that regulators care actively proposing. It is essential to Open Banking, wihich opens the market competition at the same time as enabling banks to break down their value propositions and monetize them by APis.

Facing the challenges

That’s because moving to the cloud comes with challenges, as well as benefits, and no bank can gain competitive advantage until these challenges are successfully faced and overcome:

Application evolution.?Banks need agile applications development to profit from IT agility. They need to redesign processes and create a new application architecture optimized for cloud, which is a big undertaking.

Banking cost savings.?Costs are usually higher during transformation because banks have to support the existing legacy infrastructure while simultaneously investing in change. Cost benefits don’t fully appear until legacy is decommissioned.

Governance.?Banks need new methods for security and compliance, once data, assets and applications are no longer hosted on their own premises. That means new systems to cover everything, from interoperability to data sovereignty, regulatory compliance and oversight of multiple cloud providers.

Complexity.?During transformation, banks systems must manage legacy, while interconnecting with cloud-based operations, mapping points of connectivity and potential weakness, and scrutinizing and reporting in real-time, without interruption.

Banks need a roadmap to the cloud and, above all, they need a proven method for keeping costs low and monetizing cloud benefits fast. We need to make the transition to cloud as painless as possible, removing risk along the way and looking for ways to deliver financial benefits long before the migration is complete. Forward-thinking banks can accelerate the change, using standardized products and components – as well as the expertise of strategic ecosystem partners – to monetize cloud earlier than ever, and reap the rewards.

Conclusions

Migration to the cloud will empower banks to focus on their primary business and reserve their capital and resources to better banking solutions rather than IT. This focus is an area where the challenger bank shine. And non traditional digital providers are moving into the financial services space, skipping over the barries to entry that cloud has sigificantly lowered. this includes the digital behemaths who are poised to reach an already engaged and ready customer base for new banking services.

Banks can use APIs to access the blossoming Fintech ecosystem simply and quickly, essentially tailoring the banking proposition for the market niche identified. Also, the cloud sevice provider htaht banck use to run thier service can offer far more value thant simply providing the hardware to run processing.

Running a succesful and agile banking service in the cloud is less about technology and more about process, strategy, development and keeping upwith all the cloud foundation that the technology is resting on.

If you want to know about it, please download the episode from my podcast: MODA - Modern Digital Architecture