Before thinking about banking in the clouds, we should first take a look at how banks look behind the scenes today. The daily banking transactions, financial record keeping, and loan and credit processing capabilities are facilitated by a back-end system called the Core Banking System (CBS) (Gartner, 2019). While Core Banking Systems are often specialized in a certain kind of banking (e.g. retail banking, wholesale banking), they all have in common that they should enable some possibility of standardized connection and simple integration of third-party systems via open interfaces (Thalhammer, 2019).
So far, so good. But how did the “Core” of banking change in the past, and how is it changing right now? Around 25 years ago, the core banking functionalities where still core capabilities of a bank´s IT department. Around that time, external providers started to offer their comprehensive solutions. Although many banks still rely on their own Core Banking Systems today, these systems are aging and might need replacement soon (Kronberg Advisors, 2019). Therefore, it is not surprising to see more and more startups moving into the space with the aim to offer Core Banking Systems superior to the solutions offered by incumbents.
But how do these challenger Core Banking Systems compare to established offerings? They are faster, more flexible, and cheaper. Besides others, this is made possible by using new technologies that have not been around 25 years ago. First, the challengers focus on core functionalities, so banks gain flexibility and can add further third party functionalities if needed. Second, the challengers embed more openness within their architecture; this allows easier integration of external solutions and flexibility to react to regulatory changes. Third, challengers ́ solutions are often cloud-native leading to lower infrastructure requirements and implementation efforts. Fourth, the novel solutions are SaaS deployable allowing banks to be more flexible and to variabilize costs (Kronberg Advisors, 2019).
While banking in public clouds offers many benefits, it also comes with downsides. Banks might not be ready to fully rely on public clouds and would prefer to stay in control of the Core Banking System. Further, security concerns still seem to be an issue. Nevertheless, I believe that in the long term the benefits will outweigh the downsides; the technology will develop further, the financial sector will become accustomed to it, and more and more banking tasks will move to the public cloud.
Gartner, Inc 2019, Core Banking System, Gartner, Inc, viewed 18 Sep 2019, <https://www.gartner.com/it-glossary/core-banking-systems>.
Kronberg Advisors 2019, Core Banking Systems: Will Banks choose the Challengers over the Incumbents?, Kronberg Advisors, viewed 18 Sep 2019, <https://www.kronberg-advisors.com/blog/core-banking-systems-will-banks-choose-the-challengers-over-the-incumbents>
Thalhammer, K. 2019, Kernbanken Systeme, Payment & Banking, viewed 18 Sep 2019, <https://paymentandbanking.com/infografik-kernbanken-systeme/>.
Very interesting post Ivo!
Cloud banking is really the future in the banking industry and I totally agree that the benefits outweigh the drawbacks. You already listed some benefits to cloud banking and after having sparked my interest I did some research and found a couple more.
One important aspect is that Cloud Banking drives banks’ business innovation, as it enables them to build better customer experiences and to create more personalized offers. At the same time it leads to efficient integration of the diverse business units and faster decision making, as the creation of common datasets provide more elaborate insights through shared platform tools. Additionally, it improves the bank’s resilience to respond faster to problems, such as outages and disruption. This is enabled through the replication of data across various data centers. Last but not least it can even improve the bank’s IT security as cloud providers have extreme security standards and the environment can be more secure than on-premises.
It is quite visible that the numerous advantages of cloud banking are too big to ignore and I am quite sure that it is only a matter of time until banking in the clouds will be part of the every-day business at any bank.