Getting to market quickly is key. The benefits of launching new services from the cloud are well understood (and demonstrated by such neo-banks as Monzo and Revolut). Subscription pricing, elastic scaling to scale out or scale in resources based on demand, and the preservation of precious capital expenditure by outsourcing the infrastructure. All are important mechanisms to drive down the cost risks for new services.
But what happens after launch? Services already in the market are not excluded from the benefits cloud has to offer. In addition, even services born in the cloud are not immune to market vagaries and fluid customer demand. Change is inevitable.
Cloud-native software running on a cloud platform can eliminate the old-world need for a costly, protracted project to upgrade software. Effectively, cloud native applications are structured as autonomous pieces of manageable, containerised code (in the form of microservices) rather than monolithic software only hosted in the cloud. This allows financial institutions to update or upgrade only those components whenever they need to make a change, rather than having to wait for a convenient time to take down the whole service. Leveraging the cloud on-demand capabilities, cloud-native applications are also ideal subjects for continuous integration and deployment, offering significant opportunities to reduce further the time to market.
The pace of innovation and the proliferation of digital devices are affecting the banking operating models and influencing the wider ecosystem. The most prominent of these innovations include big data analytics, automation, artificial intelligence (AI) and machine learning (ML), Blockchain, and the Internet of Things (IoT). Many of these technologies are interrelated, and dynamic. Solutions for interconnectedness are not static, and banks must introduce these into their model for change.
Using advanced API-first technology coupled with design-led thinking and continuous deployment will empower banks to rapidly innovate, connect to emerging ecosystems, and enable developers to “build in the morning and consume in the afternoon”.
Taking care of business
Security fears about relinquishing infrastructure control have long been cited by bank security officers as a reason for not adopting public cloud infrastructures. Security or data privacy breaches make for sensational headlines, enormous regulator fines, and erosion of precious brand capital.
Established banks have invested heavily in tenured control frameworks to successfully provide a safe, compliant, and trustworthy service – free from vulnerabilities and malicious code – to ensure that services can operate securely, and customers can use their banking services with confidence.
Cloud service providers have made mammoth investments in security in their own datacenters as well as around the ecosystem that supports the transmission and storage of customer data – not merely to replicate bank level security, but also to massively expand the complexity and sophistication of the security protocols. It is in this area that pooled resources can deliver a security model far greater than any one bank could achieve.
Regulators are most concerned with this data protection. One of the biggest obstacles to moving mission-critical banking services to the cloud has been a reluctance to undergo regulatory scrutiny. In the Temenos Community Forum (TCF) Annual survey, regulatory concerns have remained on the priority list about moving these services into the cloud. Although 90% of respondents cited this as the biggest barrier in 2019, down from 40% in 2009, regulation remains a key concern for banks, particularly with the lack of reference cases in many markets.
However, this view is slightly at odds from what is happening in the regulatory landscape which is subtly changing. Regulators internationally are starting to realise the positive impact cloud can have on boosting competition, creating high-quality predictability, and enhancing security of the banking ecosystem.
From a supervisory perspective, cloud is the pathway to a financial services landscape that regulators are actively promoting. It can be seen as being essential to Open Banking, which unlocks the market to competition at the same time as enabling banks to break down their value propositions and monetise them through APIs.
In developing countries that may not have the infrastructure and data centers that modern banking needs, cloud offers an instant solution – as long as regulators are comfortable with domestic data being held overseas. In the Philippines, for example, the Central Bank has issued guidance that gives banks the right to run core-banking services in the cloud and use offshore services.
Freedom to focus
Migration to the cloud will empower banks to focus on their core business and devote their capital and resources to better banking solutions – rather than IT. Banks can return their focus to delivering the mission-critical core-banking proposition and serving their customers. They can access the ancillary services and specialist functions via third parties and partners by extending the service with APIs.
This core focus is an area where the challenger banks shine. In Australia, neo-bank Judo Capital has created a fully cloud-based, API-centric technology ecosystem that enables them to focus entirely on their customers rather than managing IT systems. And non-traditional digital providers are moving in large numbers into the financial services space, skipping over the barriers to entry that cloud has significantly lowered. This includes the digital behemoths who are poised to reach an already engaged and ready customer base for new banking services. ApplePay is merely the first of many big developments we can expect to see in the coming years.
The true optimisation of cloud-native software and cloud platform capabilities stems from prudent and insightful vendor selection and partnering. Distributed database technology can magnify the cost benefits from cloud as well as introduce multi-cloud functions to achieve almost zero downtime. Banks can use APIs to access the blossoming FinTech ecosystem simply and quickly, essentially tailoring the banking proposition for the market niche identified.