Published: March 2024
Contributors: Mesh Flinders, Ian Smalley
Cloud banking is a term that refers to the on-demand delivery of banking services by financial institutions via the internet. Like other cloud computing services, it relies on remote access to compute resources, such as physical servers, virtual servers, data centers, Software-as-a-Service (SaaS) and more.
In addition to offering greater ease and accessibility, cloud-based banking improves the customer experience in other ways, including the ability to pay for many things online. For example, when a customer of a financial institution that provides cloud banking services watches a pay-per-view film from the comfort of their home or summons a ride on a rideshare app, cloud-native digital banking services are used to complete the transaction.
In addition to powering many popular consumer services, the cloud ecosystem also helps the financial sector lower costs and meet other business needs. From powering applications that enhance remote work to delivering the high compute power needed to run artificial intelligence (AI), machine learning (ML), and Internet of Things (IoT) applications, banks everywhere are leveraging the power of cloud platforms.
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For consumers, cloud banking has made everyday activities like shopping and transportation much easier. Consider the task of buying groceries and picking up your kids from school. Before cloud banking was a reality, these tasks would require multiple stops in different locations. Now, someone can accomplish them using only a smartphone with a cloud banking app.
The power of cloud banking doesn’t stop with the consumer though. Increasingly, the banking sector is leveraging it to improve data security, create more innovative products, and deploy cutting-edge technologies like AI and ML to automate mundane tasks. In fact, cloud migrations at financial institutions have become so widespread, the sector is far outpacing others and currently accounts for as much as 16% of global cloud expenditures.
As financial institutions seek to leverage the cloud to deliver better products and services to their customers and achieve their own digital transformation goals, they are realizing several important benefits.
Reduced costs
Shifting workloads to the cloud has allowed banks to lower costs associated with data storage and data analysis. Considering banks are required by law to maintain detailed financial records for all customers, this is a significant area to discover value. Cloud banking lets financial institutions shift from an up-front, on-premises data storage model to more flexible, pay-as-you-go solutions that can be adjusted as their needs change.
Enhanced data security and compliance
Because they protect customers’ most important information and assets, banks are frequent targets of hacking and fraud attempts, but shifting financial services to the cloud has made them safer. Modern cloud banking solutions keep customer data safe through added layers of protection, such as encryption and fraud detection. Cloud banking solutions also help banks stay in regulatory compliance with the ever-changing regulations that govern their industry. Finally, many cloud offerings have built-in disaster recovery (DR) capabilities that help financial institutions recover swiftly after a security breach or massive outage.
Increased AI capabilities
Leveraging the cloud has opened banking systems to the power of AI across multiple workloads. One example is in the field of customer data and product development. When a bank stores customer data in the cloud, AI algorithms can constantly scan it for insights into customer behaviors that can then be used to design new products and features. Another example is in the customer relationship management (CRM) space where AI chatbots and virtual agents are already replacing call centers, better helping customers with a variety of tasks, including opening a new account, transferring money and applying for a credit card.
Faster delivery of new services
Because cloud banking is such a vibrant and technologically innovative space, there are new applications and services being designed every day. This means many cloud banking capabilities are off-the-shelf, dramatically shortening the amount of time it takes a bank to offer it to their customers. When a bank that’s already deploying cloud infrastructure spots a customer need that isn’t being met, chances are there’s already an off-the-shelf application available that would immediately improve the user experience.
In its early days, cloud banking was simply a way for banks to deliver financial services to their customers remotely rather than in-person at a physical location. As the industry has evolved however, banks are increasingly leveraging the cloud to find new efficiencies in infrastructure and banking operations, especially data storage and processing.
In the 2000s, smartphones and faster internet speeds ushered in an era of digital innovation in the banking industry. What had been a sector mired in the costs and constraints of physical infrastructure began to transform. Soon, banks were offering more and more services digitally. After initial concerns about data protection and security, customers began to trust the space more and become more open to conducting transactions online.
By the second decade of the new century, it was normal for customers to access their accounts online, at any time of day, often on the device of their choice. As security capabilities in public cloud offerings increased, banks began to access their servers and databases over the internet as well, rather than via on-premises data centers as they had in the past. This made banks customers for both private cloud and public cloud solutions and began the current era of cloud banking where cloud service providers (CSPs) compete in the areas of security, technology and adaptability to offer banks what they need.
When shaping a cloud strategy, financial institutions face a delicate balance between customer demand for the newest applications and services, adherence to demanding regulatory requirements, and cost. One of the most important choices they must make is between a public and private cloud.
When banks first started to move their services into the cloud, most chose a private cloud environment because it was considered more secure. A private cloud is a cloud computing environment that belongs entirely to a single organization. All cloud services on a private cloud being used by a financial institution are delivered on a private network, limiting the ability of bad actors to penetrate it and compromise customer data. The infrastructure for private cloud instances is typically located inside of a data center owned by the financial institution or by a third-party vendor they are contracting, adding an additional layer of security. Despite the attractiveness of the private cloud in terms of security and control, it lacks the scalability and flexibility offered by the public cloud, and with public clouds growing more and more secure, many banks are choosing them as an option now.
A public cloud is a cloud that’s hosted in the public domain that can be accessed over the internet. Many of the biggest companies in the world, including Amazon Web Services (AWS), IBM and Microsoft Azure host public cloud instances. A public cloud lets financial institutions store customer data in centers and scale the services they subscribe to up and down as needed. While delivering massive advantages in terms of cost, scalability and flexibility, the public cloud model has caused worry among some financial institutions around data privacy laws because many of the servers where data is stored are in different countries.
Hybrid cloud and multicloud solutions seek to combine the advantages of cloud computing from both the public and private ecosystems. Hybrid cloud environments are exactly what they sound like: a combination of private and public cloud offerings. Multiclouds are instances where cloud customers select various services (public and private) from numerous providers. Hybrid and multicloud banking deployments are growing in popularity because they allow financial institutions to shop for the lowest prices available from several providers when selecting a cloud service.
As financial institutions embrace the cloud and its many benefits, use cases are increasing every day. Small and large institutions alike are launching new digital transformation initiatives with cloud transformation at their centers. Here are a few ways cloud banking is changing the world of financial services.
For years, many banks relied on legacy IT infrastructure that had been in place for decades because of the cost of replacing it. But maintaining it was costly too, not to mention the opportunity cost from not leveraging the speed and agility of new technologies. Many banks today use cloud banking solutions as part of larger modernization initiatives where they move core capabilities like data storage and processing off expensive legacy IT infrastructure into new, more adaptive cloud operating models. This helps reduce costs and increases the level of their technological offerings for customers.
Cloud banking has changed the overall banking experience so much that some new banks don’t have physical locations at all. Challenger banks, for example—tech companies that rely heavily on financial technology (fintech) products and services—are using the cloud to create totally digital banking platforms. Some offer their services exclusively on an app you can download to your smartphone. Relying heavily on the cloud, challenger banks offer the same retail banking services as traditional financial institutions, including checking and savings accounts, loans and credit cards, without the overhead of branch locations and the employees required to run them.
Open banking (or “open bank data”) is a new practice, enabled by cloud technologies, where financial institutions open their customer’s data to third parties, often other financial service providers, to fuel innovation and deliver new services. Banks that practice open banking first must get their customers’ permission to share their information, typically through a consent form. Then their data, including account, transaction history and other information, can be shared via an application programming interface, or API. Uses of open banking vary widely but typically include marketing opportunities for loans and other financial services as well as the development of new digital products.
The shift from private to public cloud by many financial institutions has enabled public cloud providers to offer new, innovative products in a product-as-a-service model, allowing banks to experiment with different services and products for their customers. Off-the-shelf offerings also banks to focus less on fintech, which is rarely considered a core banking competency, while still benefitting from innovation in the space.
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