Five Cloud Myths about Core Banking Systems (Article 1)
Article 1: Next-Generation Banking Platform – Open, and Scalable
In collaboration with Swisscom, a series of articles has been written to address common cloud myths in the banking context. Through three articles, we aim to explain and clarify these myths while providing simple and common cloud terminology to help you understand cloud technology.
In today’s article, we will clarify the current market trend and the different cloud models available. In the next two articles, we will explore and clarify the following myths together:
- Myth 1: The Cloud always saves money
- Myth 2: The Cloud makes it easy for cybercriminals
- Myth 3: Once you choose a cloud provider, there’s no turning back
- Myth 4: Moving software to the cloud automatically makes you more innovative
- Myth 5: Cloud migration is too complex
Market Trend: Cloud in Banking
More and more core banking system providers, as well as software and service providers in the financial sector, are developing solutions for the public cloud that are designed to be more modular and independent from the core. As a result, the selection of solutions is growing, but so is system complexity. Modularization brings not only flexibility but also integration efforts and the need for effective partner management.
A 2023 study by IFZ found that over 50% of banks demand modular, cloud-native architectures (Blattmann et al., 2023). McKinsey confirms this and adds that investments in core technologies like cloud, data management, and APIs will be essential to achieve scalability, agility, and rapid innovation, for instance, in implementing artificial intelligence in business models (Biswas et al., 2020).
A cloud is far more than just a traditional data center that any core banking provider could theoretically operate in-house. The difference is not only that IT resources – such as servers, databases, network infrastructure, and software – are hosted by external providers like Amazon Web Services (AWS), Microsoft Azure, Swisscom Enterprise Service Cloud, or Google Cloud, and made available over the internet. A “cloud” is defined by key characteristics: dynamic scalability, easy configurability using “Infrastructure as Code,” and a pay-per-use model that provides flexible, on-demand access to resources.
These additional services and functions are what transform a cluster of servers in a data center into a true cloud. Consequently, the roles and responsibilities shift between the external providers, the core banking provider, and the bank itself. The infrastructure no longer needs to be managed and expanded independently; it can be flexibly and scalably adapted alongside technological advances.
This allows core banking providers to focus more on modernizing their core and related systems. Technologies such as artificial intelligence, blockchain, or cybersecurity systems can thus be researched, tested, and implemented more efficiently – with the clear goal of bringing new and innovative financial products to market more quickly.
Increasing competitive pressure from neo-banks or non-banking industries, along with customer expectations for seamless digital services across multiple devices, forces banks to keep up. Banks and core banking providers are therefore compelled to embrace cloud solutions – to increase customer proximity and improve process efficiency. Without cloud compatibility, it’s no longer possible to offer these rapid development cycles for digital financial products and services at the right time and place. Any organization without cloud compatibility will lose market relevance.
The question now becomes: What is the path to the cloud, what options are available, and what myths need to be debunked?
A Vision of the Next-Gen Banking Platform in the Cloud
The requirements for a next-gen banking platform include both banking-specific aspects like verticalization (software-side separation of banking disciplines such as payments, investments, lending, account management, product management, and general ledger) and technical aspects like cloud readiness. The next generation banking platform unites flexible front-end solutions for hybrid digital banking services with a stable core banking system in the back end. The customizable and functionally specialized user interface can be connected to the core banking system as needed for new business models. Secure multi-tenant environments and attribute-based data separation increase both data security and scalability. Subject matter experts from various areas can thus customize and use the core banking system according to their specific needs.
To ensure the necessary flexibility, the banking platform must be “cloud ready.” This means it should be natively secure, cloud-operable, and cloud-agnostic toward specific cloud providers. A cloud-ready platform is capable of operating in various global cloud environments, such as AWS, Azure, or Google Cloud, while taking advantage of cloud benefits like automatic scaling, reduced infrastructure costs, and dynamic resource adjustments through cloud services.
However, the term “cloud ready” goes beyond merely being able to run on different cloud environments. Truly cloud-ready software must be capable of integrating managed services from different cloud providers – such as managed database services or file transfer services – while efficiently leveraging dynamic infrastructure scaling. This is enabled by using container technologies like Docker and Kubernetes, which support scalability, load balancing, and redundancy.
Moreover, there should be no software requirements that hinder cloud operations, such as access to the virtualization layer, which is often unavailable in a cloud setup. A cloud-ready platform must offer maximum compatibility with various cloud configurations while avoiding vendor lock-in. This is achieved through the use of open standards and open-source technologies, giving the platform the freedom to flexibly tap into the best offerings from different cloud providers without being tied to a specific vendor.
Cloud Operating Models
In the context of these developments, the cloud plays a central role in the future IT strategy of banks and core banking system providers. Various models are available depending on the need: private, public, multi, and hybrid clouds.
The private cloud is operated exclusively by a provider such as an ICT provider or a core banking system provider for the core banking system. In contrast, the public cloud is provided by vendors like AWS, Google, or Azure, with cloud resources shared by various organizations and individuals.
Another approach is the multi-cloud, where multiple cloud types, such as private and public clouds, are combined. The private cloud can either be operated by an external provider or in the company’s own data center – with the goal of harmonizing local, public, and private components. To ensure seamless use, close integration and communication between infrastructures are required, enabling business processes to be orchestrated and workloads to be distributed flexibly.
The hybrid cloud model goes a step further by outsourcing specific and independent workloads to different cloud infrastructures based on demand and security requirements. For example, customer-facing services could run in the public cloud, while the core banking system remains in the private cloud to ensure secure data management.
Studies show that many banks prefer a hybrid model, as they often hesitate to move their core banking systems entirely to the public cloud, while SaaS solutions for business processes and customer-facing services are considered particularly relevant (Biswas et al., 2020).
The differences between the cloud models highlight the complexity of decision-making in the use of cloud technology within the banking sector. The goal is to ensure system security and 24/7 operational availability without downtime, while also maintaining control over the core banking systems. Various myths have developed around these decision processes, which need to be debunked.
References
Biswas, S., Carson, B., Chung, V., Singh, S., & Thomas, R. (2020, September 19). AI-Bank of the Future: Can banks meet the AI challenge? McKinsey & Company. https://www.mckinsey.com/industries/financial-services/our-insights/ai-bank-of-the-future-can-banks-meet-the-ai-challenge
Blattmann, U., Buschor, F., & Ettlin, J. (n.d.). IFZ Sourcing Studie 2023. https://drive.switch.ch/index.php/s/0v3T0gptuMMNR9v
