Cloud technology is a transformative power for digital banking and represents a fundamental shift in business models. It is really in the last five to ten years that financial institutions (FIs) have started to leverage outsourcing cloud software to application providers, making it easier to run, operate and scale in line with business need and paying only for the computing power consumed.

Finextra spoke to Temenos - Ross Mallace, business line director, SaaS; Petr Mandik, chief security officer; Cormac Flanagan, product director, technology; and Alex Duret, product director, transformation - about its report ‘The Future of Digital Banking in the Cloud’. The report discusses and how Temenos’ cloud-native, cloud-agnostic solutions can deliver a market bullseye for target customer groups while reducing the total cost of ownership, improving security and meeting compliance obligations. Temenos is an Advanced Technology Partner in the AWS Partner Network (APN).

Balancing customer demand with pressure

Mallace highlights that banks can balance customer demand for seamless, ubiquitous services with market pressures arising from increasing regulation and new competitors by seeking out partnerships with digital banking solution providers.

“The balance is achieved with the technology transfer model that meets customer (and ultimately, shareholder) pressures for an exciting and intuitive banking experience, and provides the robustness, and resilience required for compliance.”

He goes on to say that from a supervisory perspective, many regulators are actively promoting the cloud - the technology being essential to open banking - which opens up the market to competition, enabling banks to break down value propositions and monetise them through APIs. Mallace provides KYC as an example.

“Together with open banking, cloud will create more customer-centricity and better user experiences, as open APIs integrate banking services into different applications. It's a spur for the competition and innovation that regulators are keen to promote in the industry.”

Returns from the core

Banks are also under pressure to innovate to be compliant, remain relevant and increase profit margins. However, changing the core in a bank’s production system can be risky and costly due to a lack of automation, insufficient test coverage and weak processes to provision infrastructure on expensive hardware.

DevOps methodologies have been put in place but getting meaningful returns could prove to be a struggle. Duret explains that banks can maximise the opportunities that the cloud presents in terms of reduced costs of processing from scalable and vendor agnostic solutions with resilience-based cloud architecture solutions.

“API networks enable fast connectivity to partners to enhance solutions. Scalable solutions mean that resources are only consumed when needed and can flex and fall as required - and banks only pay for those resources they use or reserve. A cloud-native software architecture will also leverage the most relevant technologies, such as distributed databases and serverless computing for microservices, resulting in better performance at a lower cost. In addition, open APIs not only help banks implement real time processing along the value chain, but they also are a powerful tool to standardise and accelerate the connectivity with partner solutions and third parties. APIs help de-risk implementation projects and cut down integration budgets.”

Duret continues, “These cost optimisations can in turn be dwarfed by the gains to be expected from a modern core banking system, by further decoupling business imperatives from IT capabilities, and launching new products and services more rapidly. With enhanced DevOps capabilities, banks can increase their speed to market for changes and obtain faster payback for new initiatives. They also have access to out-of-the-box SaaS services and can let the vendor do the heavy lifting for operations, maintenance and upgrades, within a subscription model - which means they can preserve capex funds. All of these add up to significant reductions in the TCO and vastly improved efficiencies.”

Cloud-native software is scalable and can be easily adapted and updated. But as Flanagan explores, “it’s about digital transformation, not just digital creation. There are numerous ways that banks can begin utilising the benefits of the cloud, from including non-production configuration and testing, initiating new digital portfolios, or migrating existing customers to cloud-based services - all whilst delivering efficiently on the bank’s vision.”

Flanagan goes on to explain how Santander’s Openbank migration to Amazon Web Services (AWS) is a good example of how an established bank can harness the power of the cloud to deliver a unique customer proposition. “This is a great combination of the cloud power of AWS, best in breed banking software from Temenos, and the bank’s clear and well executed digital strategy.”

Securing the pace of innovation

While getting to market quickly is key, the pace of innovation and the proliferation of digital devices are impacting the banking operating models. Further to this, cloud-native solutions are helping FIs leverage emerging technologies such as big data analytics, artificial intelligence (AI), machine learning (ML), blockchain and the Internet of Things (IoT).

Flanagan adds: “Cloud is not just a delivery platform from which to run software. Cloud is the portal from where businesses with a long-term vision seeking to take their place in (or lead!) the digital economy will consume AI, ML, data, and perhaps even tools we haven’t yet thought of.

“The elastic scalability of the cloud environment provides a significant advantage - banks are able to manage data and storage systems without due concern of long term management, or worrying about upgrades or systems changes. Further, growth is unlimited with the processing power that the cloud providers can deliver. Data lakes in the cloud provide access for AI and ML models, and all that processing power means meaningful models can be created, and recreated, without constraint.”

Coupling API-first technology with continuous deployment empowers banks to innovate, connect to ecosystems and enables developers to “build in the morning and consume in the afternoon,” as the Temenos report details. In addition to this, hyperscale cloud service providers have made mammoth investments in the security of data centres and the ecosystem that supports the transmission and storage of customer data.

Mandik explains that whilst the costs of security are not eliminated with the implementation of the cloud, “how these costs are incurred is changed in the cloud. Resource pooling is a key security benefit of public cloud deployment - banks can access security frameworks at a scale that could not be achieved by a singular entity.

“Cost has not been removed but transferred into different type and at a lower level due to economies of scale. Banks would still need to invest on their side and carry their own (enhanced) due diligence to satisfy themselves and their regulators. The cost they used to invest themselves is now spent on resources from providers - effectively they need to ‘reimburse’ the providers or SaaS vendor via fees. Banks cannot buy out themselves from the responsibility. They are still data owners and must ensure it is adequately protected.”

What is needed for a bank to ensure market success? A clear vision. Mallace concludes that today, the tools needed to articulate the exact experience a bank wants to deliver to the customer are available.

“Understanding this, and knowledge of the tools is helpful. Canny vendor selection is critical - banks should seek the right cloud-native core banking software alongside the right platform partner - who possess the experience and expertise to implement the solutions in a highly regulated environment.”