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August 1, 2023

Cloud Banking: All Tech Aspects You Need to Know

August 1, 2023
Read 9 min

Cloud-based banking is a relatively new trend in software development. It originated through the merging of such technologies as Big Data, AI, machine learning, modern encryption practices, and even blockchain. Not to mention that the liberation of the banking sphere in general which is reflected in Open Banking principles added to it significantly.

But what is cloud-based digital banking? Using a simple metaphor we can compare it to a baking industry.

Let’s say there is a small bakery that is using secret old recipes passed down for generations. This bakery has a lot of clients and the small size of the kitchen as well as a limited number of employees prevent them from catering to the growing number of customers time-efficiently. We assume that the bakery is a small bank in Nebraska.

Then, one day some other company reaches out to this small bakery and suggests they rent big spaces and distantly employ people who can carefully follow the old recipe and bake the same product line and then send it to the clients for relatively small money. Would the owners of small bakeries agree? You bet!

Of course, there are risks: what if that company steals the recipe and starts catering to your customers on their own, or reveals the addresses of your customers to your competitors? You can inquire and the company management assures you that all is under control and what’s more important, you sign a contract where all your fears are addressed most accurately.

The given example is a rough comparison of banks and their relationships with Cloud Service Providers (CSPs). Although the majority of banks, like small bakeries, are still hesitant, and even if they migrate to the cloud, they take a granular-based approach and move only some of the workload. But the processes have already started, and with the development of new technologies and approaches, they will only continue to grow.

cloud for banking

Cloud-based banking: essentials

The term “cloud” was introduced in 2006 by Eric Schmidt, a former CEO of Google, which is one of the leading cloud services worldwide. We upload our photos, documents, calendars, presentations, and other digital assets to the Google Cloud without any idea of where they are physically stored. Considering that Google has several server locations worldwide, our files could be stored in Poland, Japan, India, the USA, or Brazil.

Of course, when we talk about banking and financial services, things become much more complicated. This explains why banks are slow to adopt cloud services. Until now, in North America, the rate of banks that migrated their total workload to the cloud is only 12%. Meanwhile, based on the Accenture report, more than 90% of banking top management executives are considering moving to the cloud for around 50% of business operations in the coming 2-3 years.

Benefits of cloud digital banking solutions

Access to new technologies

Modern CSPs are well-known for adopting various disruptive technologies, such as NLP, machine learning, AI, and Big Data. Banks can easily access these technologies through cloud connections and are charged relatively small amounts of money for them.

Cost efficiency

Migration to the cloud helps banks decrease operational costs. This means that they can now witness bigger business growth. By rough estimations, leveraging the cloud could save up to 10-20% of a company’s operational costs.

Reduced time to market

The adoption of turnkey cloud banking solutions significantly reduces delivery times compared to developing from scratch. This helps banks and other financial institutions to quickly respond to growing customer needs, changing market conditions, and dynamic infrastructure growth.

Enhanced security

One of the regulations for CSPs to enter the market is to undergo an unprecedented level of testing, including rigorous security tests. They must comply with the latest regulations in the banking and financial sectors, in addition to implementing the newest encryption techniques.

Staying competitive

The traditional banking industry is currently being disrupted by multiple fintech startups and neobanks. These companies are agile, cost-effective, offer extensive cloud services, and have the potential to enter the market very quickly. The cloud-based model for banks is a subtle response to their competitors’ aggressive policies.

Risks and security challenges in cloud-based digital banking

Based on the fact that banking and the financial sphere have zero tolerance for regulatory and reputational risks, the majority of banks have major concerns regarding the compliance of CSPs with data security and privacy rules. The ideal solution is to find a company that has previously performed core banking migration to the cloud and has solid expertise in cloud services and security.

Steps to safeguard privacy while migrating to the cloud

  1. Assess your institution’s governance model regarding cloud services.
  2. Introduce cloud to your playbooks, including disaster recovery, business continuity, and resolution playbooks.
  3. Review external operational risks in cloud security management and disruptive technology adoption, such as containerization, microservices, etc.
  4. Reach meaningful cooperation between CSPs and third-party IT companies who will be providing cloud migration services.

How to approach banking cloud security and risks challenges?

Developers working with the cloud often face many challenges on the way to embracing multi-cloud environments and seeking ways to embed security regulations into each stage of development.

  1. Unification of security practices. Security architecture requirements should be enveloped in a single end-to-end lifecycle.
  2. Security Checkups. Several special tools help developers identify misconfigurations that could cause cloud security risks. Also, when choosing a CSP, inquire whether they have any risk-preventive mechanisms embedded into their policy engines.
  3. Cloud governance. Make sure that the security tools provided by CSPs are integrated into their cloud governance policy. Hire professionals to implement these practices without hampering the innovative nature of cloud services and their elasticity.

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Technological aspects of cloud-based banking solutions

Role of application programming interfaces (APIs)

API is the key element of cloud service communications. It connects on-premises apps with the cloud infrastructure. Additionally, it connects multiple clouds and the software within them. In other words, it’s a gateway or interface that helps to interact with cloud services. Each CSP offers its own APIs, which are used by developers. Some CSPs only provide APIs that are compatible with their platform. At the same time, there are various cross-platform APIs that allow developers to build cross-platform connections.

Cloud-based banking deployment models

There are three main cloud deployment models: migrating the existing core banking infrastructure to public cloud, private cloud, or hybrid cloud. Based on the needs of the bank or any other financial institution, they could choose any of the cloud deployment models.

  • Public cloud is the most common option, but any infrastructure deployed there is owned by a CSP, which owns the cloud.
  • Private clouds are designed to ideally match the requirements of businesses, and the infrastructure deployed there is owned by the bank.
  • A hybrid cloud is an infrastructure made up of two or more clouds. They could be private or public clouds interlinked with each other through APIs.

To minimize the risks and have full ownership of the data, processes, and operations migrated to the cloud, it’s better for the bank to choose the private or hybrid models.

Cloud banking service models

The migration to the cloud offers banks and financial institutions lowered operational costs, flexible operational models, and the intensification of all processes. It’s vital to choose the right cloud service model which meets your business needs and stimulates the growth of your business. There could be software-, business process-, platform-, or infrastructure-as-a-Service. Each of these cloud service models has its strong sides.

  • Software-as-a-Service is the type of cloud-based banking service model where banks let CSPs host banking software. Users access the related data on their side. Some examples of such operational processes are CRM, ERP, accounting, HR management, content management, and invoicing.
  • Business Process-as-a-Service streamlines standard operations.
  • Platform-as-a-Service offers entire platforms for development, application interface, texting, and storage.
  • Infrastructure-as-a-Service allows banks to use CSPs’ storage capacities, network equipment, servers, and other resources as an outsourced service.

Successful implementation strategies

At Itexus, we have deep expertise in leveraging cloud services. Typically, the team working on cloud-based banking solutions consists of several positions. A business analyst is responsible for the app’s business logic and interaction with the customer. A project manager organizes the development processes. DevOps specialists are extremely important for cloud migrations and connections. Let’s discuss some of the projects successfully developed by our professionals.

Neobank mobile app

One of the projects is a banking mobile app for migrants. In addition to the front-end development and design, the app infrastructure was moved to the cloud and we had to make sure that our customer passes all the required security audits.

  • Our specialists equipped the solution with the best services provided by Azure Cloud: Azure Security Center, Azure Key Vault, Azure SQL Database, and Transport Layer Security 1.2.
  • Also, for increased performance, we connected the banking app to the cloud-based banking platform Mbanq.
  • Other CSPs such as Alloy for KYC, TransUnion for AML, Vouched as an AI ID verification service, and others (Argyle, Mitek, Twilio, SendGrid, and Uniteller) were connected.

To learn more about the project, please refer to the case study.

White-label mobile banking app

One of our clients is a Silicon Valley resident and they required a solution with the full spectrum of banking services modern neobanks could offer. The solution is deployed in the AWS cloud and additionally connected to the following CSPs:

  • Zendesk for customer communication and support;
  • Mbanq is a bank-as-a-Service cloud infrastructure that offers ordering virtual and physical cards, providing money transfers, showing transaction history, pushing SMS and email notifications, and other account management functionality;
  • Socure for ID verification services.

To learn more about the project, please refer to the case study.

Summary

Cloud-based banking is essential for sustainable and resilient operations performed by banks and other financial institutions to gain a competitive advantage. Ideally, to unleash greater agility and flexibility all banking workload should be migrated to the cloud while banking top management will receive greater resources for innovation.

At the same time, it’s important to choose the right service and deployment cloud models that will suit your business needs. At Itexus, we advocate for either private cloud or hybrid cloud options as these models are more protected against possible breaches, and banks and other financial institutions can fully control the processes.

To learn more about cloud-based banking and our expertise in this field, reach out to us and we will discuss your future strategic decisions regarding cloud navigation.

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