Financial institutions (FIs) are fast coming to realize the need and importance of using a cloud-based infrastructure, with spending on cloud system services set to grow to $63 billion by the end of 2021, according to a recent study.
Allocating the funds to build out and support these platforms is only one small step in a much larger journey, however, one that still has some pitfalls FIs must sidestep.
The increase in FIs’ spending on cloud-enabled tools and services is crucial to support growth in consumers’ use of online and mobile channels for a higher percentage of their financial tasks and transactions. U.S. bank J.P. Morgan Chase designated 16 percent of its 2019 budget to developing new technologies, including cloud-based platforms to accommodate this need, for example.
Yet upgrading to a cloud-based infrastructure is still complicated for a large majority of FIs, especially those that have not made significant advances in improving their existing infrastructure over the years. Many legacy FIs rely on cloud technologies solely for the purpose of supporting external services, such as email and customer relationship management (CRM) systems, and have yet to upgrade their core banking systems, for example.
Part of the challenge that impedes migration to the cloud has to do with data privacy and security concerns surrounding storage and handling of customers’ sensitive information. One 2019 study found that 59 percent of industry respondents felt that making sure cloud platforms and their related applications and data were secure represented the most significant challenge to fully embracing multicloud computing solutions. Banks must also be sure that the security measures meant to protect their cloud servers do not add any frictions to the seamless user experience their customers have come to expect.
Maintaining this balance requires taking a measured approach, especially in the financial world, where participating entities must also ensure that they are complying with changing data and regulatory standards. The following Deep Dive examines how an infrastructure that uses multiple cloud networks or hybrid models combining both private and public cloud software may enable FIs to be compliant with security and speed as they take their next steps forward into the cloud banking era.
Pairing Security, Innovation Through Hybrid Cloud
Tying together the benefits of both public and private cloud solutions has appealed to the banking industry for several years as consumers in various global markets have started to rely more widely on digital platforms. One 2017 report even predicted that 36 percent of FIs would be using the cloud for half of their transactions by 2020. Progress has been a little slower than some industry professionals may like, however, with a large number of banks still running the bulk of their core banking services on legacy infrastructure.
Using hybrid cloud technologies or multiple cloud providers can allow FIs to make a more gradual shift away from the legacy core banking systems. Recent research has shown that the hybrid cloud model remains the most attractive option to these institutions. Relying on a hybrid cloud means FIs can still have dedicated data servers, allowing them to move from mainframes to the cloud with less friction. This also enables them to save sensitive information on internal systems while tapping third-party cloud services for handling the rest of their processes. A hybrid or multicloud model can also allow FIs to use public cloud infrastructure to handle the consumer-facing processes of their platforms, which can help them craft more seamless digital experiences.
Many banks today are still considering where they can best apply private and public cloud solutions to innovate their banking infrastructure, but the time frame for experimentation is rapidly running out. New developments, such as the pandemic, have accelerated the demand for digital services among both businesses and consumers and have created new challenges for banks that are still running on legacy systems.
What's Stalling Cloud Innovation
FIs that are looking to upgrade their capabilities by adopting cloud-based solutions must do so in a methodical way. Embracing cloud-based infrastructure can help accelerate the rollout of digital banking solutions, but FIs must also ensure that they are staying compliant with changing data privacy and security rules, meaning banks must familiarize themselves with how they can and cannot store sensitive information before they finalize any cloud strategies. This is true for FIs in many global markets, with three different regulatory bodies in Europe alone currently developing new security standards for different types of data and how they may be stored on the cloud.
Regulators in the U.S. are also continuing to debate how financial and other types of information must be stored and processed online. The 2019 CLOUD Act represents one of the newest legislative attempts to create cloud standards for FIs, for example. This means that banks with global operations must simultaneously comply with the data and privacy requirements of multiple regulators — rules that do not always coordinate well with one another.
Banks must continue to view cybersecurity as a primary part of any future cloud strategy while making sure security measures rely on cloud technologies that can adapt quickly to changing regulations and compliance needs. A flexible core banking infrastructure incorporating a hybrid or multicloud model will allow FIs to be nimble when it comes to rolling out and marketing new digital banking tools and solutions.