Accelerate Digital Innovation in the Cloud
"To accelerate digital innovation, banks need to adapt to cloud computing."
This is what we discussed and challenged on March 31, in the good company of Achim Thienel, Director of Product Management Core Banking and SaaS at Finastra.
I remember, back in 2007, people like Chris Skinner talked about the cloud as the future of banking. However, when I asked my colleagues in the bank back then, they told me that mainframe computers are much more reliable and cheaper for the heavy calculations of transactions in the back-end. 7 years later, I heard the same conclusion from a colleague at Belgium’s biggest retailer where I worked at that period.
Clearly, the cloud isn't new. As the technology evolved over 15 years, so did the context to discuss cloud banking.
Reliability and resilience
Are mainframes still the most reliable option for heavy calculations? This is no longer the right question since the basics of the mainframe, batch-based processing, are obsolete. Achim explained that the customer no longer accepts batch-based banking in most cases.
He added: "When we talk about reliability, bear in mind that in 2021, 94% of all internet workload was processed in the cloud already. With our cloud applications for banks, we do low tests with 5000 concurrent users. We process 1800 TPS, we have network response times in the same setup between 10 to 12 milliseconds, and this is all under Azure Cloud."
Nowadays, time is playing against the mainframe's reliability, Achim added, with the main risk being the lack of knowledge. Young talent no longer invests in mainframe technology, and mainframe experts are quickly reaching the age of retirement.
A counter-argument from a banker in the room was that cloud expertise is scarce in a bank's talent pool, although this is temporary.
Overall, instead of being an argument pro mainframe, reliability is becoming an argument pro cloud computing.
The same is true for IT resilience. Yes, banks need to have full control over their IT, but this doesn't mean they need to own the infrastructure.
When we asked the audience, “risk and compliance” and “security” appeared to be the main hurdles for banks to switch to the cloud. Achim believes this is a misconception.
"The big hyperscalers invest massively in cloud security. Take Microsoft, which invests roughly a billion per year in Azure Security. That's massive, and no other data centre provider, local data centre provider and of course, no in house providers can give the same level of security", he explained.
The problem, someone said in the room, is not so much cloud security but rather the connection points, the links with the cloud provider.
Achim agreed with this and added that the biggest challenge in a migration project is not so much the choice of which pieces to migrate to the cloud, but how to connect them.
Once connected, it’s not over. Banks remain the end responsible, so they need to have a validated framework in place. Banks also need to have the required control mechanisms to show the supervisor that their core banking can be trusted. Companies like PwC and KPMG can be beneficial in mapping the required control mechanisms and building an assessment for the supervisor.
Accelerate Digital Innovation
Cost is not an argument to move to the cloud in most cases, despite claims in the past. In building the business case, banks often end up surprised with the total cost of a mainframe. Achim: "Very often, banks forget about the components like labour, third-party components, database cost and so on. Based on my experience and conversations, if you consider all the elements, the cloud is slightly cheaper, but not significant."
Does cloud computing really accelerate digital innovation?
"I'm not aware of one single challenger bank setting up on-prem whatsoever", explained Achim. "Building a bank in the cloud makes them very flexible and open. They can consume the innovation, which is available in the cloud and of course, this is a huge competition for traditional banks."
Coincidently I had a call earlier this week with an incumbent banking executive that told me it is not so much the additional functional features that convinced them to move to the cloud but the acceleration of technical changes for more innovation. Maybe he doesn’t know about Finastra offering.
With FusionFabric.cloud, Finastra has an innovative core banking platform in the cloud, on Microsoft Azure, with around 250 FinTech companies onboarded to assist Finastra clients in improving their services.
Achim: "You have core banking services on the one hand in the cloud, and you have these FinTech innovations on the other hand. We connect the bank with both, supported with our API management."
At the end of the session, someone asked a great question: how do we influence IT in favour of cloud technology as a business person in an IT heavy organisation?
"Today, the transition is not so much driven anymore by it like it was in the past", explained Achim. "It's more driven by the business indeed. So fundamentally, as a bank, you want to keep your customers, be competitive, and give excellent user experience and flexibility. The cloud can give you that because you're part of a whole cloud economy of innovation platforms."
I liked this session because of the very honest feedback on what cloud banking really means. It doesn’t solve all the problems, and the problems it solves may not completely disrupt the way we bank.
By linking all the pieces, and all the arguments, it became clear that cloud technology is there to accelerate change, to accelerate digitisation.
Banks will need to step out of their comfort zone to embrace cloud computing, but it may be the only way to survive in the long run.