Moving to the cloud in banking
  • article
09/01/2024

Moving to the Cloud: What Challenges Can Banks Come Across?

90% of organizations are already embracing cloud technology. While transitioning to a cloud environment opens doors to unique opportunities, it also brings forth many challenges. What problems might banks encounter?

Paulina Twarogal

Content Specialist

Marcin Dobosz

Director of Technology

Cloud technology is gradually paving its way into every industry, with 90% of organizations already embracing it, as reported in a survey by O’Reilly. The global investment in cloud-based services is expected to surpass 1.12 trillion euros by 2025. The question arises: What fuels this widespread adoption?

Well, operating in the cloud makes it easier to scale, stay compliant, and run an agile business. Recognizing the vast opportunities, companies across sectors are increasingly gravitating towards cloud-based systems, and the banking industry is no exception. 

Yet, transitioning to a cloud environment involves more complexities than meets the eye. It’s no surprise that when it comes to banks, they proceed cautiously, taking their time to navigate this intricate process. 

Now, you might wonder: What are the challenges banks might encounter in this transition, and how can they navigate them effectively? Read on to get the answers and see how Neontri can be a valuable ally in this transformative process.

Cloud computing in the banking industry

Moving to the cloud in banking

The truth is that cloud computing isn’t a recent concept; it dates back to the ’60s when companies used it for the management of virtual data resources. However, it wasn’t until the early 21st century that it gained popularity, marked by the launches of Amazon Web Services in 2006, Google’s App Engine in 2008, and Microsoft’s Azure in 2010. 

Currently, these three cloud service providers control 65% of the market share. There are others too, though. Alibaba Cloud, IBM Cloud or Salesforce also contribute to the diverse cloud landscape.

While various industries quickly embraced cloud-based services, the banking sector has been relatively slow to do so. Some banks are making progress on their cloud journey, however, the majority is just getting started. 

Either way, financial institutions must adopt new technologies to streamline operations, drive innovation, and stay competitive. A significant 80% of top bank executives express concerns that not adopting these changes may threaten their organization’s existence.

The cloud–what is it really?

Cloud computing is a revolutionary technology that has changed how banks store, process, and analyze data. Sounds impressive, doesn’t it? 

But here comes the fundamental question: What exactly is this cloud?

In simple terms, the cloud functions as a global network of remote servers that hold data, applications, and resources. Instead of relying on physical infrastructure, businesses can seamlessly access computing resources instantly over the internet. This eliminates the need for on-site data centers and extensive hardware investments.

Types of cloud computing

In the cloud for banking ecosystems, there are three primary environments that institutes can choose from: public, private, and hybrid.

Public cloud: It’s a cloud infrastructure managed by third-party cloud service providers and shared with multiple organizations over the internet. The cloud provider owns and manages all hardware and software, and access to this space is provided through subscriptions. 

Private cloud: A private cloud is created exclusively for one financial institution and is managed within a private network. It can be housed either in the bank’s own data center or hosted by a third party. Banks are usually recommended to use private clouds as they provide a higher level of control over data and security. 

Hybrid cloud: In this case, banks can use both public and private cloud systems, allowing data and applications to switch between them. Sensitive information is kept in a private cloud area, while less critical data is stored in a public one. 

Currently, 78% of organizations adopt a hybrid cloud strategy, recognizing that solely relying on either a private or public cloud doesn’t meet the unique needs of financial institutions. A hybrid cloud offers the flexibility and scalability of the public cloud, coupled with the security and control of the private cloud.

The regulatory landscape for cloud computing in finance

It’s crucial to acknowledge that cloud technology is subject to strict regulations in the financial sector. Various guidelines, regulations, and recommendations govern how financial institutions must handle data processing in the cloud. 

For example, the EU introduced the Digital Operational Resilience Act (DORA) and European Banking Authority’s Guidelines on Outsourcing Arrangements. The priority is to ensure an appropriately high level of security.

Balancing benefits and challenges of cloud computing in banking

What’s driving banks to the cloud and what’s stopping them from doing so?

Banks proceed with a cautious yet consistent shift toward the cloud. 72% of international banks believe that it will help them achieve their business goals. However, only 13% of leaders in the financial services sector have migrated their data to the cloud. The question is, why?

Consider the questions banks grapple with on their cloud journey: How much data can I store in the cloud? How can I ensure its safety? Will I lose control over my IT systems? These are just a few things banks are trying to figure out, and rightly so.

While there are numerous potential advantages to integrating cloud computing into the banking sector, it comes with its set of challenges. These challenges might be the reason why many financial institutions still lag behind other industries in this matter.

Lower infrastructure cost vs. the risk of budget overruns

moving to the cloud in banking

Benefit: Using cloud computing in banking removes the need for spending on infrastructure, security, and storage maintenance. Consequently, there’s no need for a special team to handle these tasks, freeing up resources for other pressing business priorities. According to the Economist Intelligence Unit report, cost reduction is the biggest driver of cloud adoption, with 42% of respondents citing this as a key factor.

Challenge: The costs of adopting and maintaining cloud services can often be unpredictable and underestimated. A team of Dutch university professors evaluated the expenses linked to cloud migration across ten “international corporate” banks. Their findings revealed that budget overruns were often attributed to application dependencies. 

Moreover, in key areas such as legislation, departmental support, re-architecting, and external contractors, at least half of the banks experienced cost overruns compared to their initial estimates. This highlights the challenge financial institutions face in accurately estimating and managing the costs associated with cloud adoption.

Improved agility vs. the lack of control 

Benefit: Using cloud technology transforms how banks operate. It makes them more agile and responsive to market changes by streamlining processes and providing instant access to software updates. A report by Capgemini revealed that 78% of banking executives think that adopting cloud computing can enhance their organizations’ agility and efficiency. 

Challenge: However, financial institutions worry about losing some degree of control when they move their systems to the cloud. It makes them feel like they’re giving up hands-on control of their IT systems, causing concerns about solving issues, setting up solutions, and protecting data.

Efficient processing vs. migration complexity

Benefit: Cloud-based hosting offers a key advantage—effortless resource scaling. As a business grows its infrastructure in the cloud, it naturally expands its applications and services while serving existing users. In this situation, the cloud system must be able to scale with these evolving needs. 

Auto-scaling further streamlines this process by automatically adjusting resource allocation to changing workloads, ensuring optimal performance without manual intervention.

Challenge: Banks generate substantial amounts of data. Transferring all of it to the cloud and ensuring its portability between different cloud providers can be complex and time-consuming. It’s estimated that nine in ten businesses have problems with migrating to the cloud. On average, it can take 15 months, but larger banks should expect much longer timelines.

Operational efficiency vs. integration with legacy systems

Benefit: Cloud technology automates regular tasks such as updates and backups, cutting down manual work and errors, and contributing to operational efficiency.

Challenge: Banks often have legacy systems that need to seamlessly integrate with cloud solutions. Ensuring compatibility between the outdated system and the new cloud environment can be difficult. Legacy systems often rely on outdated technologies, operating systems, and programming languages that might not align with cloud infrastructure. Achieving this integration without disruptions is a significant challenge.

High availability for improved customer service vs. service disruptions

Benefit: The cloud empowers banks to offer their customers convenient access to banking services through mobile or web applications, anytime and anywhere. The incorporation of high availability (HA) measures ensures that these services continue functioning, even when some components fail. After all, in today’s digital world, availability is king.

Challenge: The relentless pursuit of high availability, however, may introduce challenges of its own. Depending solely on a vendor for HA might lead to issues such as downtime, service interruptions, and contract disputes. This can potentially impact the seamless delivery of services to customers and undermine the improvements in customer service.

Serverless services vs. the risk of non-compliance

Benefit: Banks have the opportunity to embrace cloud-based serverless services that offer on-demand, easily scalable, and cost-efficient solutions. With serverless computing, developers free themselves from infrastructure concerns as the cloud service provider manages capacity, scaling, patching, and resources. 

Challenge: While powerful, these services may not suit critical banking applications due to their multi-tenant and public nature. Navigating stringent finance industry regulations becomes even tougher in the cloud, raising concerns among banking executives. Migrating to the cloud carries the risk of potential fines and reputational damage if it doesn’t align with regulatory approval.

And global regulators are taking a more proactive approach with initiatives like the General Data Protection Regulation (GDPR), open banking, Know Your Customer (KYC), anti-money laundering (AML), and enhanced customer authentication, intensifying the risk of non-compliance.

How to implement cloud computing in banking?

moving to the cloud

Cloud adoption is more than just a project; it represents a fundamental shift in a company’s DNA, bringing forth both numerous benefits and challenges on the path to digital evolution. 

At this point, you’d probably expect to find a list of best practices here. And we’d really like to give you one, but…It’s not that simple. There’s no one universal set of best practices that works for everyone. 

It all depends on the unique regulatory environment, security considerations, legacy systems integration, and specific business objectives of each financial institution. To make a successful transition to cloud computing, it’s crucial to get a tailored implementation strategy to these individual factors. 

So, the best practice here would be to reach out to a reliable IT consulting company for professional advice and actionable solutions.

How can Neontri make your cloud journey seamless?

Drawing on a decade of experience and over 400 successful projects across four continents, we understand the challenges financial institutions might encounter. What’s important for us is to assess your situation and develop a cloud strategy tailored to your unique needs.

Comprehensive cloud solutions: From strategy to ongoing management, we cover it all, leveraging top platforms. As certified Google Cloud partners, you can rely on our expertise to handle your cloud solutions effectively.

For example, we’ve supported one of the leading Central Eastern banks in Europe by developing an internal mobile app for their employees. The main challenge was to meet the multitude of intricate rules characteristic to the banking industry.

What we recommended was Google Cloud known for its scalability, reducing maintenance costs significantly. This resulted in a platform that smoothly integrates internal services into Android apps, giving consultants and managers centralized access to the newsfeed, system alerts, targets, and help desk.

Secure and flexible: Our cloud services establish a global, secure, and flexible platform for data storage and management, ensuring your peace of mind.

Migration support: Migrating your applications and infrastructure from on-premise to the cloud can be a complex and challenging process. Our experts will assist you from planning to deployment, ensuring a smooth transition and reduced infrastructure costs.

Multi-cloud support: Managing multiple cloud environments requires expertise. Specializing in multi-cloud solutions, we guarantee seamless integration and optimal performance.

Ready to embark on your cloud journey? Explore our services and how we can help you succeed.

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Agata Tomasik
Board Member
Head of Outsourcing
agata.tomasik@neontri.com

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