Cloud Banking in the Financial Industry

Cloud banking

Migrating to the cloud can offer several advantages for banks and financial institutions, but not surprisingly, it also comes with many challenges. The banking industry needs to implement strategies and prepare for a 2030 version of banks that will look completely different from today.
Evolving consumer expectations and new lucrative business opportunities are making leaders recognize the benefits of cloud computing. In this article, we look into why a bank might consider moving to the cloud, the advantages and challenges, the difference between cloud-based core banking and on-premise software, and some examples of cloud banking companies.

Cloud computing is the concept of cloud providers offering servers, data storage, networking, applications, analytics, and other products on a single platform. Banks and other financial institutions can use cloud offerings to deliver products and services quickly and efficiently. And with 9 out of 10 companies using cloud services today, cloud adoption has been on the rise for many years. However, the banking industry is careful, as always. In summary, cloud-based banking offers several advantages in terms of cost efficiency, scalability, flexibility, accessibility, and security. However, it also comes with challenges related to security, compliance, integration, and performance. The choice between cloud-based core banking and on-premise software should be based on a bank's specific needs, resources, and regulatory requirements. Several banks and fintech companies have embraced cloud technology to modernize their services and infrastructure.

Cloud service providers (CSPs)

Cloud service providers are often large companies. Amazon, Google, and Microsoft are the three giants controlling some 65 percent of the market share:

Amazon Web Services: 32 percent market share
Microsoft Azure: 23 percent market share
Google Cloud: 10 percent market share

But there are others as well: Alibaba Cloud, IBM Cloud, Oracle Cloud, Akamai Connected Cloud, and Netlify, just to name a few.

Different types of cloud banking

Cloud-based core banking involves hosting banking systems and applications on cloud infrastructure, while on-premise software refers to hosting these systems within a bank's physical data centers.

Public cloud

A public cloud is the most common type of cloud computing. All hardware, software, and infrastructure are owned and managed by the cloud provider. Microsoft Azure is an example of a public cloud. Customers share the same hardware with other organizations, called “tenants”, and you pay only for the service you use. A public cloud offers near-unlimited scalability and a vast network of servers, ensuring against failure.

Private cloud

A private cloud consists of hardware and software used exclusively by the bank and deployed on a private network within the organization's firewall. It is physically located at the bank’s data center or a third-party provider. Government agencies and financial institutions often use private clouds.

Hybrid cloud

A hybrid cloud is a type of cloud computing that combines on-premises infrastructure, private clouds, and public clouds. Hybrid clouds can help companies meet regulatory requirements while leveraging existing on-premises infrastructure.

Cloud service models for cloud banking

IaaS

IaaS, Infrastructure as a Service, is servers, network equipment, and software offered to customers over the Internet. Customers can lower IT costs and the need for hardware.

PaaS

PaaS, Platform as a Service, refers to cloud computing services providing a platform for developing applications without the developers needing to set up the required infrastructure.

SaaS

SaaS, Software as a Service, refers to business applications and their data hosted and managed by the cloud provider. Applications are used on-demand from a web browser and include collaboration tools, e-mail services, invoicing, and incident management. Applications are typically on a subscription basis, and the provider handles upgrades, security, and other maintenance.

BPaaS

BPaaS, Business Process as a Service, is business process outsourcing delivered based on a cloud service model. BPaaS provides people, processes, and technology. For example, BPaaS could handle all credit card transactions of a business through cloud-hosted networks instead of businesses manually handling them.

Advantages of cloud-based banking

Banks are considering moving to the cloud for several reasons:

Meet customers’ evolving expectations, adding new customer experiences and offerings
Innovation of market-relevant products
New alternative business models
Grow revenue
Customer insights and monetizing of data assets
Improved security, efficiency, and resilience
Increased compliance with regulatory requirements
Cost efficiency
Disaster recovery, loss prevention, and fault tolerance
High redundancy and low-cost backup
Attract the talent and competence of today

Cloud is a game-changer for how financial services organizations will operate.

Resilience

Cloud providers typically offer robust disaster recovery solutions, ensuring data integrity and business continuity in case of unexpected events. Cloud provides the ability to replicate data and application services across more than a single data center or region using zone-redundant storage accounts.
With Azure Pipeline, if a disaster occurs, ARM scripts can re-create the entire environment. The scripts understand that the environment has changed and recreate it. The solution dynamically provisions and destroys the infrastructure on Azure as needed.

Innovation

Customers need and expect more digital services. Banks must adapt to new experiences in other apps their customers are using. Banks must develop new customer experiences, leveraging tools and new technologies like IoT, machine learning, and integrations to other systems. Organizations must adopt the cloud to promote innovation and quickly build new capabilities and services.

Affordability

Cloud offers a pay-as-you-go model, meaning that cloud-based solutions generally require lower initial costs and upfront capital expenditures (CAPEX) than on-premise systems, minimized infrastructure investments, and shorter set-up times. In contrast, on-premise solutions require substantial upfront investments in hardware and software. Banks can scale their infrastructure and computing resources up or down to accommodate changes in demand, paying only for what they use. At the same time, on-premise solutions require the purchase and installation of new hardware for scaling. Cloud computing can lead to significant cost savings over time and more granular spending control.

Compatibility

The transition to cloud for the banking industry will take years. Cloud platforms offer flexibility in terms of technology stacks and deployment options. Banks can choose from several services to tailor their infrastructure to specific needs. Instead of building advanced data analytics and machine learning capabilities in-house, organizations can use technologies offered by the cloud providers. It’s essential to avoid vendor lock-in so banks can quickly adapt to changes without re-build whole solutions. On the other hand, multi-cloud strategy puts even more pressure on competence as it adds even more complexity and challenges to the journey. Because of that, banks should carefully consider the choice of cloud provider, as switching between providers can be costly and challenging.

Convenience

Cloud providers handle infrastructure maintenance and updates, relieving banks of this responsibility. On-premise systems require ongoing maintenance and upgrades.
Many applications are already cloud-based SaaS products. ERP, CRM, and finance systems are already cloud-based. Banks can get access to these resources and start benefiting from them, taking small steps toward the cloud.
Cloud-based systems can be accessed from anywhere with an internet connection, enabling remote work and improving customer access. On-premise systems may have limitations in remote accessibility.

Fraud detection

Handling data for many customers enables cloud providers to develop and train fraud detection techniques. Cloud computing can help banks detect anti-money laundering and other fraud issues.

Analytics

Banks can combine data from different business units into one place, enabling analytics for valuable insights and better decision-making.

Environmentally-friendly

Cloud lowers the energy consumption and carbon footprint. With consumption models, idle time is minimized, which makes the utilization of computing power more efficient.

Challenges of cloud-based banking

Regulations

Cloud can help banks and financial services firms meet the ever-evolving regulatory reporting requirements. This benefit applies to multiple operating jurisdictions, which can be very valuable. However, banks must still navigate complex regulatory environments, ensuring compliance with data privacy laws and financial regulations when using cloud services.

Security

Cloud providers have very high security standards, and they invest heavily in security measures and compliance certifications. Providers typically take responsibility for the security of the lower-level infrastructure layers. With frequently updated software, the cloud is a security-first approach for a bank’s operations. When used correctly, cloud environments can be more secure than on-premises, often exceeding what individual banks can achieve with on-premise solutions. However, banks must implement robust security measures in the cloud.
While cloud providers offer robust security measures, the shared responsibility model means that banks must still secure their data and applications within the cloud.
‍Azure Container Registry can be used as a private registry to store container images. Authentication can be done with Azure Active Directory.

Data migration

The transformation from an on-premise data center to an enterprise-level cloud solution can be challenging. However, the transformation can be something other than a big-bang project. Steps can be taken incrementally. Migration of legacy systems to the cloud will, undoubtedly, still be complex and may require significant changes to existing processes and applications.
Cloud providers offer solutions that connect the cloud with an on-premise network. With Azure App Service Hybrid Connections, application resources in an internal network can be accessed as long as the resource can make outbound calls to Azure.
Also, companies can be flexible in choosing multiple cloud service providers. Azure Arc is a bridge that extends the Azure platform to help you build applications and services with the flexibility to run across data centers, at the edge, and in multi-cloud environments.

Unforeseen circumstances

Cloud-based systems may also introduce latency and performance issues if not configured correctly. This would be a problem, especially for applications requiring low-latency processing.

Competence

The global digital transformations put cloud competence in high demand. New skill sets will be needed: DevOps, UX, etc. With the legacy of COBOL applications running on mainframes, banks are used to having challenges finding the right competence. Cloud skills mainly include skills to build, design, and maintain cloud computing systems. This competence will probably be, at least a bit, more accessible to find than COBOL programmers. The whole set of employee roles will change, and the company needs to adapt its culture and mindset.

Microsoft Azure

Microsoft Azure offers several services that a bank could use:

Azure Kubernetes Service for developing and deploying cloud-native apps
Azure Event Hubs for Kafka as an event streaming platform
Azure Container Registry is a private registry to store all container images
Azure Active Directory for authentication
Azure Application Insights for observability
Azure Pipelines for deployment and disaster recovery using ARM or Bicep scripts
Azure DevOps for CI/CD

Financial institutions that want to modernize their financial transaction systems can benefit from well-architected frameworks built by Microsoft. The Azure Well-Architected Framework is a set of guiding tenets with five pillars of architectural excellence: reliability, security, cost optimization, operational excellence, and performance efficiency. The Microsoft Commercial Software Engineering (CSE) team is a global engineering organization that works directly with the largest companies and not-for-profits in the world to find solutions to carry projects forward to production-ready solutions. Last year, CSE built a solution for a banking company that wanted to modernize one of its transaction systems. The proposed solution is a high-quality, stable, and efficient cloud architecture solution with these three main blocks: back-end services, load testing, and monitoring:

‍

‍

Examples of cloud banking companies

A neobank is a type of direct bank that operates exclusively using online banking without traditional physical branch networks.
‍Chime and Monzo are neobanks that operate entirely in the cloud, offering digital banking services to their customers. Another example is Revolut, which provides various financial services, including currency exchange and cryptocurrency trading.
‍Ally Bank is a traditional bank that has transitioned much of its infrastructure to the cloud. Wells Fargo, one of the largest banks in the United States, has been gradually migrating some of its operations to the cloud.

Conclusion

The banking industry rapidly shifts to cloud-based solutions to meet evolving customer needs and capitalize on new opportunities. Cloud banking offers several benefits, including cost efficiency, scalability, flexibility, accessibility, and security. However, it also presents challenges such as regulatory compliance, data security, and data migration. Several banks have already adopted cloud technology, and some operate exclusively in the cloud. As the banking industry prepares for the future, cloud-based solutions are set to play a pivotal role in reshaping the landscape of financial services.

Key takeaways:

Cloud banking offers significant benefits to banks, including cost savings, scalability, flexibility, and security.
However, cloud banking also presents challenges such as regulatory compliance, data security, and data migration.
Several banks have already adopted cloud technology, and cloud-based solutions are poised to reshape the future of financial services.

References

‍