As cloud hosting matures and becomes mainstream, many banks are putting aside their early concerns about regulation and security as they realize that cloud hosting can save them significant costs.
Banks have discovered how quick and inexpensive it is to set up the necessary architecture for cloud hosting; when it used to take a month to obtain an IP address, now an entire architecture can be set up in a day. Moreover, development operations (DevOps) — the collaborative efforts of developers and other IT staff to deliver software and make infrastructure changes — is much faster and cheaper with a cloud service like Amazon Web Services (AWS).
Pricing with AWS for financial services is similar to Uber’s surge pricing, as processing is cheaper during periods of lighter bandwidth use. To save costs, processing-intensive activities can be scheduled to run at certain times in a region where less capacity/bandwidth is being used. Additionally, AWS offers some degree of free consulting to its customers and will even review larger clients’ architecture to identify the adjustments needed to ensure robust security. All of this adds up to a significant reduction in operations costs, capital investments and staffing requirements.
Challenges of the Cloud
Banks are still cautious about cloud hosting, as the service does not come without some drawbacks and obstacles. Banks might feel nervous about outsourcing their data storage since they are used to controlling their own environment and often believe other environments to be less secure than theirs.
Additionally, some vendors have not yet tested their products in an AWS environment or certified their products to run in that environment. However, AWS has matured enough to lock down everything needed to ensure a secure environment. Institutions simply need to have the correct security framework and the confidence that hosting a system virtually is as secure as using traditional, physical means. Finally, some may be concerned about eliminating jobs and running into compliance issues. With respect to the former, the reality is it does free up resources which can be deployed to tackle other issues. To combat the latter, financial institutions can obtain support from firms like Xtensifi to guide them through Service Organization Control audits of their AWS-enabled services.
Cloud hosting services have already been adopted by some industry leaders. Capital One has been an early adopter of AWS, followed by the World Bank. Soon after those institutions announced their foray into the cloud, Goldman Sachs and Bank of America began using public-cloud services to test software in 2016. Other top banks have followed their lead, to varying extents. Competing cloud services like Google Cloud are also likely to gain traction in the coming years.
But as with many changes in the financial services industry — particularly when it comes to technology — banks’ adoption of cloud hosting will come slowly. Many banks have long-term contracts with vendors and will have to wait for those to renew or expire before moving products or services to a cloud environment. Over the past 20+ years, banks have moved from mainframes to distributed services; now they are shifting back to centralized, thin-client systems. These cycles typically take about 15 to 20 years. Cloud hosting will come, but — as with the adoption of real-time payments discussed in my previous blog — the change will be evolutionary rather than revolutionary.