Benefits of Cloud Services for the Banking and Financial Industry

Financial institutions, the cornerstones of society, must keep up with the fast-changing and challenging times. Modernization is essential to meet customer expectations with evolving regulatory landscape, cybersecurity threats, and other risks.

Digital banking and cloud computing have changed the way we bank. Cloud banking is helping shape and changes the future of banking and financial services. Digital transformation is vital for the successful cloud adoption of banking services.

Flexibility is crucial in this fast-moving digital world and has become essential since 2020. Disruptions from natural disasters, macroeconomic shocks, and cyber attacks have shown that the financial industry needs to be agile. The Covid-19 pandemic has now heightened the need for digital transformation.

The banking sector continues delivering benefits and solutions as they aim to increase efficiency while reducing IT costs by moving away from the aging infrastructure. The banking industry steadily continues to embrace cloud technologies to manage the volumes of data that are generated every day. Rapidly scaling day-to-day operations and releasing new financial products quickly is made possible by tapping into services and partners already integrated into the public cloud.

• The banking and financial sector spends approximately USD 67.42 billion on cloud services per year, suggests ResearchandMarkets.
• In 2020, IBM launched a public cloud service specifically for financial services, which was created in collaboration with its first customer, Bank of America. BNP Paribas and other service vendors joined it to launch the IBM Cloud for Financial Services.
• 80% of banks in the UK surveyed have moved less than 10% of their business infrastructure to the public cloud.
• 80% of the banks surveyed acknowledge that cloud migration will benefit them by increasing market speed, and 69% recognize cost optimization.

The Centralized Online Real-time environment, the 'CORE' banking system (CBS), makes up a network of banking services. It connects various bank branches, allowing customers to carry out transactions of several types from any bank branch and experience the bank as a single entity regardless of location.

How does it work?

The core banking system consists of back-end servers that handle routine banking operations like interest calculations, passbook maintenance, cash withdrawals etc. For customers wanting to withdraw cash from an ATM or a branch - a request is sent to the centralized data centre, where it is processed and authenticated. The data centre contains the bank database, an application server, a web server, and a firewall to protect the bank system from cyberattacks.    

Core banking systems -

On-premises - This banking system works on a locally hosted infrastructure and provides the banking institution with various customizable options.

Cloud-based - As the name suggests, the banking system is hosted on the cloud and provides more flexibility and customization than an on-premises system.

Benefits of Cloud Computing for Banks 

Improved customer experience - By using cloud services, banking services can be accessed anywhere and at any time, leading to enhanced customer experience.

Reduced costs -  The most visible benefit of cloud computing over the in-the-premises working model is the ease of adaptability per the institution's need. With cloud hosting, organizations can scale the IT infrastructure as per need. The added advantage is there is no time latency, as there is no waiting time for scaling the infrastructure.

As most cloud services offer a pay-as-you-go pricing model, banks can reduce or eliminate on-premises infrastructure costs by moving applications and data to the cloud.

Faster processing - Cloud platforms are scalable, designed for fast performance, and can easily and quickly handle vast data transfers efficiently and promptly. It reduces transaction processing times for the bank and reduces latency.

Scalability -   Cloud computing eases infrastructure scaling capabilities and delivers IT resources as needed, including computing power, storage, bandwidth etc. Banks can benefit from this and increase or reduce cloud infrastructure per their needs.

Security - Cloud providers offer a broad range of policies, technologies, and controls that strengthen the safety of the data, apps and overall infrastructure from potential threats. Cloud providers follow stringent compliance controls and offer multiple layers of protection against data breaches, hacking, and other attacks.

Reliability -  Cloud computing data centers offer backup, and disaster recovery facilities. The data is mirrored at multiple sites, making it a more reliable option than an onsite data center.

Elimination of mundane tasks - When the infrastructure is moved to the cloud, the IT department of the financial institution is free from routine maintenance and day-to-day security. Additional staff is not needed in case of expansion and the current workforce can focus their time and energy on the specific needs of the institutions.

Despite the explosive growth, various strategies and benefits of cloud computing, there is a flip side to these benefits that ultimately deter many banking institutions from adopting cloud computing. According to a 451 research advisory, only 18% of financial institutions have broadly deployed cloud services. Some of the challenges are -

Privacy and Security - Financial and customer data is extremely sensitive and attracts a greater risk of cyber-attacks and data leaks. Privacy of customer and financial data has to be placed at its core. As per guidance issued by the European Banking Authority (EBA), banks should address these issues before considering outsourcing these services to third-party cloud services entities.

Compliance - Data security tops the list of priorities for banking or financial institutions, followed by compliance regulations and reporting standards. The Financial Conduct Authority (FCA) and European Banking Authority (EBA) have established a regulatory landscape for institutions that intend to adopt cloud services. It has become clear that banks must take these regulations seriously before it starts storing sensitive data on the cloud.

Cloud computing is here to stay and the future of banking resides in using the cloud infrastructure. Using advanced analytics, machine learning, and AI requires heavy processing power that most financial institutions may not possess or would face heavy investment in infra cost to possess. By choosing the right partner for cloud computing in banking and financial services, banks and financial institutions can utilize the benefits of public cloud services.