By Damon Clarke-Sutton, Director, UK Finance, Telehouse
Banks and financial institutions are among the most regulated organisations in the free world and are encouraged to take the question of risk extremely seriously.
This precautionary principle extends to IT architectures where the notion of “if it ain’t broke, don’t fix it” holds sway. Change equates to risk and risk is something banks need to manage carefully. The penalties are high for breaches of regulations such as Sarbanes-Oxley, MIFID II, and Basel III. The burdens of ensuring the highest levels of data security in line with regulatory requirements cause many banks to be reluctant to make any significant infrastructure or technical changes.
Yet in the contemporary climate of digital disruption, excessive conservatism threatens to be the undoing of any incumbent organisation. Irrespective of all the challenger brands entering the market, many of which were born in the cloud, changes in demand mean banks simply cannot afford to stand still. No organisation can.
The pressures for cloud-adoption
Banks’ own finance departments continue to put pressure on IT to expedite achievement of the cost-benefits from migration to cloud infrastructure. At the same time, banks must adapt their IT to meet another powerful business imperative – the need to collaborate effectively with fintech innovators and niche solution-providers from all over the world. Many of these organisations are native to the cloud and provide their solutions “as-a-service”.
Far-reaching changes in consumer and business behaviour also demand that financial institutions have a robust infrastructure that enables them to adapt quickly and with maximum effectiveness. Covid-19 demonstrated the critical importance of organisational agility, which can be achieved with more flexible IT architectures. Every bank must be capable of change and those not continuously transforming will soon find themselves left on the side-lines.
The ”After you” approach
Despite these obvious requirements and pressures, many banks prefer to sit back and wait and learn from competitors mistakes before embarking on significant digital transformation initiatives. Hesitation about fully embracing cloud is not down to a lack of will. In fact, many have already begun to modernise their outdated Legacy IT environments and switch to the cloud for scalability and reliability. On average, financial organisations now place 39 per cent of their IT infrastructure in the cloud according to Telehouse Research, projected to rise to 44 per cent within the next five years. Progress is patchy, however and many banks are only at the start of their transformation journey.
On-premises environments and poor cyber-security
Their biggest challenge is still security. While banks want to reap the benefits of cloud, no CTO or IT Director is willing to opt for a move that could open the organisation up to more threats and end a promising career. The penalties can indeed be high and regulatory compliance must be the top priority, making many reluctant to implement significant infrastructural or technical changes.
However, many finance professionals still have excessive faith in traditional on-premises infrastructure, failing to grasp how it can actually increase exposure to sophisticated cyber-attacks. Cloud security has advanced in leaps and bounds in recent years, with leading cloud providers investing heavily in a multitude of measures like zero trust verification, data encryption and access controls to ensure secure connections and full visibility of the data stored in each cloud environment.
Hybrid IT for banks – the benefits
One of the major misconceptions among non-specialists in the financial world is that cloud migration means shifting all the assets, applications and systems to the cloud. A cloud-only approach, however, is rarely suitable.
Rather than plunging head-first into the cloud, banks need to explore the practicalities and benefits of adopting more hybrid approaches, for example with cloud and colocation. This allows institutions to identify and take the right level of risk and establish what to outsource, when and how. The major advantage of hosting IT infrastructure in a colocation data centre is that financial institutions can control the migration process, stay on top of regulatory requirements and keep costs under control.
The benefits of running a hybrid IT architecture run much further. Through the deployment of a combination of cloud and colocation environments, banks can create a more resilient and secure foundation for growth, significant improvements in customer experience and the creation and development of new services. This is crucial as the retail and commercial banking markets continue to evolve in many directions and competition increases. Competitor organisations with leaner IT have higher levels of agility and can more easily pivot and adopt new solutions to meet changes in market demand or amplify their attractiveness to customers.
Cloud and colocation for big data analytics and AI
To increase market-share in such a challenging environment where customers demand more connected and personal experiences, incumbent banks need watertight IT infrastructure and faster cloud-adoption, even if it is not a total embrace of the cloud. With the current outdated legacy infrastructure, banks will continue to face the limitations of high costs, lack of flexibility and inability to respond rapidly to technological advances such as machine learning or artificial intelligence.
Shifting to modern hybrid environments, by contrast, will enable financial firms to realise all these benefits and progress faster with digital transformation strategies and innovation initiatives. A combination of colocation and cloud facilitates adoption of the latest technologies so banks can compete more effectively with digitally native players. Colocation can better support the computing requirements, data processing needs and real-time analysis that AI applications require, which in turn, can translate to firms adding new and attractive services more swiftly.
Colocation data centres can also provide access to leading cloud providers like Microsoft Azure and AWS, and enable financial firms to benefit from connected ecosystems of partners while extending network reach and reducing latency (the time it takes for a data packet to make the round trip between designated points). For AI and ML applications, low latency is often a make-or-break requirement.
5G mobile connectivity is often seen as an important piece of infrastructure for retail banking, enabling many new smartphone-based services for consumers. However, as is typically the case with any new wireless communications technology, the volume of data will rise significantly over time, putting more stress on backbone networks. To succeed, organisations must rapidly ingest and process data and this depends on having a connected, secure, scalable, flexible, resilient and low latency IT infrastructure.
Once a bank has the right balance between cloud and colocation, however, it can achieve innumerable fruitful collaborations with service providers (and regulators) to help future-proof processes, operations and business models. In the UK there are obvious advantages to choosing a data centre partner on the edge of the City, for example. Proximity means being able to conduct real-time big data analysis at low latency to improve the speed of transactions and online services, and ultimately, the entire customer experience.
What banks should aim for in cloud and colocation
While recognising no two organisations are alike, it is possible to say banking institutions and financial services providers should be aiming for at least a 50 per cent migration to the cloud to prevent them from being left behind. IT leaders within organisations should be working to ensure they have uninterrupted cloud access and highly reliable power provision so they can offer their boards peace-of-mind that key data, such as personal consumer information can be accessed securely at all times by employees.
The responsiveness that comes from fast access to data and analytics, allied to flexible infrastructure, will open financial institutions to a new level of opportunities in the era of truly digital banking and hyper-personalised microservices. Banks will have frontline access to more advanced analytics, enjoy greater resilience, and new business-critical connections that boost long-term growth. Overcoming cloud-anxiety to mature their infrastructure will improve business performance from top to bottom and create a greater appetite for innovation that will ultimately shape a brighter future for the sector.