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Hybrid Cloud & its Impact on Banking

Hybrid Cloud & its Impact on Banking
December 08, 2020

With the advent of hybrid cloud computing, the banking industry have adjusted their ways of servicing customers to stay on top of the competition. The Banking Industry began leveraging the benefits of private and public cloud solutions to improve operational efficiency, bring in agile ways of working, scale up to meet large market demands, and achieve total cost of ownership to keep up the profit year on year.

Most of the banks prefer hybrid cloud computing to reduce the operational cost and improve the operating margin with the belief that innovation is possible using this approach.

In this blog, I picked up ‘consumer banking industry’ as my focus area to share information gathered over a period of time. I have explored six themes for this blog, namely: scalability, security, legality, standards, regulation, and competition.

There are three things widely considered in addition to the above parameters on deciding hybrid cloud such as connectivity, modernization and security.

Scalability – Self-servicing channels such as IVR play a vital role in consumer banking industry for serving the need of the consumer throughout the day/year and to meet various demands, from bank balance details to block my card requests. Access to online/web channels shoot up (and down) based on seasonal demand. Banking industry adopts hybrid cloud approach to keep self service needs such as forms and requests for delayed processing such as transaction history. Pre-closure requests shall be in public cloud and infrastructure can spin up/down based on demand/traffic.

Mere adding of CPU/memory does not guarantee scalability of a banking application, it just enhances the throughput of the application. The banking application needs to achieve performance in addition to scalability. No bank is ready to move a legacy portion of the code as-is to the public cloud. Rather, they look for avenues to improve performance of the application either by complete rewrite or migration to a newer technology stack. Plenty of business opportunities exist in modernization of the application to achieve robust scalable architecture by keeping an eye on the performance of the system.

Consumer banking deposits is an area where scalability is not a major concern considering the number of transactions per day. However, areas such as deposit interest rates, deposit renewal, closure requests, and tax management notifications are preferred area for banks to move to public cloud infrastructure, whereas deposit creation and withdrawal maintenance is preferred to be on premise. Due to an increase in security controls and encryption mechanisms provided by various SaaS providers/cloud service providers these processes have also migrated to the public cloud completely.

Most of the consumer banks are on track to modernize their applications and make them cloud ready either by adopting complete rewrite using modern technology stack or move only a portion of interface such as user interface and batch job processing to be cloud ready; keeping the legacy data stores still on premise. To meet this architecture proposition, there are many data connectors/adaptors available in the market by third-party service providers or cloud service providers themselves, thus helping keep the required application component in public cloud infrastructure.

Security- Application security is the key for hosting an application at private, on-premise or at public-cloud environment. All customer- centric, regulatory data, and competitor data analysis are designed to be part of on-premise cloud environment, which also includes account management and servicing. This ensures customer confidence with regards to their personal data. The law of the land and regulatory compliance requirements force banks to opt for on-premise data management.

Banks prefer public cloud for the areas such as customer/prospect marketing and branding communications by considering the low risk in terms of security.

On the sales side, for areas such as prospect and opportunity handling, prospect financial need analysis and review, and product/service deal execution, the natural choice for the banks is to keep them on premise considering the security/bank business prospects in mind. Whereas, prospect education and advisory services, product/service information display, and alerts and reports delivery are a part of public cloud considering security of the data.

Abundant services (PaaS, SaaS Product services) are available at public cloud. Consumption of any such services without the control of bank IT leads to major security breach. Careful decision needs to be followed by the bank while adopting public cloud services. Applications which are truly hybrid faces threats in terms of log analysis, key management, and data encryption by having multiple tenants – few on premise and few on public cloud.

Though, there are plenty of encryption techniques available to adopt hybrid cloud, the banking system faces significant challenges in performance. For example, search capabilities and business intelligence capabilities are some areas of concern in adopting hybrid cloud while following strict encryption methodologies/solutions.

Legality – Banks follow obligations imposed by the law of the land to ensure protection of citizen rights. Every bank needs to adhere to local legislation right from data security to bookkeeping of records (record maintenance for x number of years before it is purged/archived). Banks have good control on who can access data and what they can do with it for applications hosted on-premise. However, tracking data access on public cloud is not 100% possible.

While meeting ever greater regulatory requirements, banking sub-systems such as payments and transfers, financial reporting, as well as audit and taxes are the areas where banks prefer to operate in the private cloud infrastructure. Customer credit analysis are nowadays outsourced to third party service providers by keeping part of the data on premise and by providing secure connectivity to third party service providers with the rest on public cloud to ensure legal compliance.

Currently, banks show increased appetite to use business process outsourcing (BPO) offerings using hybrid cloud infrastructure by having core systems at their on-premise infrastructure and data for BPO at public cloud infrastructure. This setup ensures all legalities are followed and met, while allowing BPO call centers to operate from remote locations thereby cutting costs.

On mortgage and loans, systems such as loan booking, disbursal servicing, and collared management are the areas where public cloud offerings are utilized by the banks. Foreclosure management and associated systems are on premise considering the legal requirements that need to be followed by the bank.

Standards- Banks need to adhere to the code and standards of the host country. Areas such as customer awareness programs, credit counselling services, ‘customer matters’, and customer forums to address grievances are normally designed to use public cloud infrastructure. For data collection – from signature capture and verification, document capture, document generation and account opening, the natural choice is on-premise deployments.

Banks need to shed their legacy approach and build an iterative, design intuitive hybrid cloud infrastructure, which will help them ultimately deliver simpler services to their customers.

Customer record bookkeeping (e.g. for x number of years) and physical deletion formalities need to be verified by the bank’s audit team and it evolves as a major risk since public cloud service providers follow different deletion procedures. This forces bank’s systems to adopt to on-premise cloud infrastructure for those applications which must run through stringent audit procedures (e.g. credit card data provisioning systems). Talent management and training, social media data analysis, and smart customer/social analytics are the areas of work completely done on public cloud to leverage various benefits of third party service providers and SaaS benefits of public cloud service providers.

Consumer banks get more benefits by adopting hybrid cloud in support services such as human resources administration, and procurement services such as vendor and IT service management. Most banks prefer public cloud in such areas which benefits them in terms of cost savings, leveraging benefit of work/support from remote, and bringing new areas of innovation (innovative bots in training and IT services)

Consumer banking systems now rely more on open banking standards to build APIs that share data securely with third party applications; bringing more value to customers accessing bank data and leveraging the benefits offered by these third party service providers. Naturally, hosting such APIs goes to public cloud infrastructure.

Regulation – Success of hybrid cloud enablement purely depends on how bank identifies the risks and manages them. There are regulations to hold the data and access them within a country. This forces the banking industry to adopt hybrid cloud. Apparently, the cloud service provider is forced to host their servers locally and cost of maintaining them is passed on to the bank. This further forces the bank to adopt slice-and-dice approach when deciding to move only part of the application to public cloud infrastructure for meeting regulatory requirements. Hence, international banks increase their footprints across the globe by adopting local data centers or setting up data centers locally on their own.

Banks follow a closed approach by having systems and customer data, that need to follow regulatory requirements, on premises. Host-to-host, point of sale corporate payment access, and SWIFT need to follow the regulatory act of the country of operation and so the choice is private cloud for banks.

Consumer bank credit card subsystems such as account services, authorization and charge back, claims settlement and billing are usually hosted in-house to meet regulatory requirements of the bank.

Innovation such as artificial intelligence-driven fraud monitoring helps the bank in regulatory compliance and many consumer banks adopt hybrid-based data analysis to improve fraud detection and reporting.

Competition

To meet stiff competition, branding and marketing are designed in a way that some portion lies in private cloud (rebrand positioning, customer/prospect marketing) and some in public cloud (e.g. campaign delivery, surveys, advertising and branding communications). For benefit of the customer, many banks have chosen to implement open APIs in areas such as interest rates, loan offerings etc. that can be consumed by the third party application/service providers to give real benefit to the customers. Today it has become a lifeline for banks to leverage technology so that both bank and the third party application/service provider benefit from open APIs. Many banks prefer to host the APIs in the public cloud rather than on-premise data centers due to various technical reasons including security and scalability (scale up as and when needed).

Adopting new technological trends range from intelligent bots to artificial intelligence in digital marketing, where consumer banking system relies mostly on hybrid cloud architecture. Business process automation (RPA) in customer servicing (account payable, know your customer) and various report automation are the areas where hybrid cloud architecture is being adopted. However, to meet the compliance requirement, areas such as account pre-closure, fraud detection and credit card processing are still largely on-premise data centers in closed proximity with the bank’s IT network.

Finally, designing and building a hybrid cloud should be an iterative approach, where the bank enterprise needs to satisfy (rather than compromise) different IT teams and the user base. Hybrid cloud is the right choice for the banks and with confidence in the ever-growing technology, it will become a common practice in the banking system to use hybrid cloud infrastructure.

My final point: No Bank is ready to compromise customer (data) against cozy deployment of its application/data either on premise or at public cloud!

A picture is worth 2000 words, here you go:

2000 words