How the Cloud Is Shaking Up Core Banking

Opinions among bankers are split as to whether they would consider cloud-based core banking. A study from the American Bankers Association found that 29 percent of bankers said they would consider it, 50 percent said they were unsure, and 21 percent said they would not consider it. Because there’s no obvious answer, it’s worth contemplating whether your bank, in particular, would benefit from cloud-based core banking. So how does cloud-based core banking factor into modernization, what are some of the benefits and challenges involved, and why are more companies entering the cloud-based core banking space?

How does cloud-based core banking factor into modernization?

Modernizing your bank starts with modernizing your IT department. As IT becomes stronger and more modernized, IT personnel can give more attention to other areas of the bank. When IT personnel are freed up to modernize core banking and other vital processes, banks are enabled to stay ahead of competitive pressures and focus on serving customers. How does replacing core banking systems play into this modernization process?

Replacing a core system represents a significant turning point in a bank’s modernization. It allows for more agility and scale, helps control costs, and allows for secure online transactions. But because the process can take a long time, c-level executives are often hesitant to sign off on it. 

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“CEOs, CTOs and the heads of retail banking are often measured on 12- to 24-month cycles,” says Juerg Hunziker, CEO of Avaloq. “Transforming a bank takes two to three years. When you’re changing your direction almost on a yearly basis, it becomes a lot more difficult.”

This long process is why banks should consider implementing ITSM early on. While legacy systems might deal with change management, customer service issues, and customer-facing services separately, platforms like ServiceNow piece disparate banking tasks together and move them to one platform. These cloud platforms are built to automate all tasks associated with providing exceptional service and support, allowing employees to focus more time and energy on tasks that require humans. ServiceNow can be implemented in as few as 30 days, which helps cut down on the typical two-to-three-year timeline of shifting to fully cloud-based core banking.

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What are the benefits and challenges involved in cloud-based core banking?

Core (centralized online real-time exchange) banking is aptly named. This banking service “enables a group of networked bank branches to share data between bank branches quickly. This allows customers to access their bank accounts and perform basic transactions from any member branch office,” explains NuoDB. For customers, these interactions are at the heart of their banking experience. The cloud elevates these services, making them available from anywhere, all the time, and also making banks more agile.

While these services have been in place and improving for quite a while, regulatory compliance and security are issues banks continue to be concerned about today. Why? Because “threats and vulnerabilities involved in migrating to the cloud are ever-evolving,” says Timothy Morrow of Carnegie Mellon University. And regulatory compliance naturally takes a back seat to the monumental task of modernizing core banking systems, according to Tripwire. Regulatory compliance is deeply tied to security, so as security threats evolve so too do compliance requirements. 

Here are some benefits of the Cloud that address these issues for core banking:

• Infrastructure savings: Cloud computing eliminates the need for banks to maintain their own data centers, which can reduce the high cost of infrastructure.

• Regulation compliance: Regulators are updating compliance laws to address cloud computing. This is allowing banks to use cloud-based core banking platforms in tandem with regulatory requirements. 

• Automation and security: Because operations and workflows are automated, efficiency and security improve.

But these benefits don’t mean there aren’t challenges with adopting the cloud for core banking. Some challenges include the following:

• The risk of losing dependencies in the migration of legacy platforms

• Accounting for upstream and downstream dependencies

• Keeping data from third-party sources straight when it is transferred to the cloud

While these challenges can make it difficult to adopt the cloud, it is possible to overcome them. As security and regulatory requirements become more complex, the cloud can be a powerful tool for channeling time and resources in the most profitable places. 

Why are more cloud-based core banking companies entering the space?

“In 2014, Gartner listed 19 core banking vendors in its Magic Quadrant rankings. In 2018, it listed just eight,” according to bobsguide. “The market has experienced a series of mergers and acquisitions, including the creation of Finastra in 2017, and the takeover of First Data by Fiserv – a deal which combined the former’s 12,000 banking clients with the latter’s 4,000 enterprise payments customers.”

But while the cloud-based core banking space has been shrinking (and will likely continue to shrink), new vendors are starting to enter the market. Supply is entering to meet demand as banks are looking for cloud-based core banking systems that offer extended services, including things like business process outsourcing (BPO) or software-as-a-service (SaaS). This industry shake-up may mean that the pureplay core system business model is on its way out, making way for vendors who offer specialized, extended core services for commercial banks. 

One example is ServiceNow, which gives banks more options and allows them to choose the best solutions for core banking processes. Some offerings include improving customer experiences while also making products and services secure; responding to cyber threats while meeting regulatory requirements; and using AI and automation to keep up with new business models while also cutting costs. These offerings focus on bringing value to customers rather than just improving existing core services.

Bankers’ opinions on cloud-based core banking are mixed, but with the fierce competition facing banks, it might be time to make the switch. Cloud-based core banking improves your operations, and there are increasing numbers of vendors to choose from to make sure you get the right platform for your specific needs. Learn more about ServiceNow to see if modernizing your IT will be the push your bank needs to switch to a cloud-based core banking platform.