The transition of core banking to the cloud is now

We all recognize that a wave of modernization swept through the banking industry around the year 2000. However, it’s important to note that what was cutting edge then may no longer be so. Many of the world’s largest banks continue to rely on IBM Z mainframes as their core banking systems. In fact, a report from IBM states that 44 banks out of 50 are using IBM Z mainframes.1 These mainframes are a workhorse in the banking industry, handling 30 billion transactions per day and 90 percent of credit card transactions. 

But now the world is moving toward digitalization. The future of all forms of physical money will also demand digitalization. The dwindling mainframe talent pool and high maintenance costs serve as decisive factors propelling banks to keep pace with the rest of the digital world.

So banks are finally migrating their core banking systems to the cloud.

Cloud benefits to banks

Cloud-based services not only provide a crucial lifeline to banks, but they also facilitate a significantly more rapid and efficient journey toward core modernization.

Cloud computing solutions offer many benefits for banks. For example, cloud vendors are relatively inexpensive and are available for a wide range of use. These savings arise from leveraging pre-existing security measures implemented by cloud providers, and extend to the eased compliance with various standards such as PCI-DSS and GDPR. A shift from the CapEX to OpEX further diminishes overhead and simplifies financial management.

Another benefit of cloud-based systems is the enablement of AI for IT Operations Management. AI helps keep systems up and running as well as makes the lives of the customers and the developers easy. 

Though a great deal of research is happening to empower the mainframe with AI-based Ops, top industry players have chosen to migrate from mainframe systems to align their strategies with those of the fintech market. For example, modernized insurance systems don’t just manage claims and policies; they have to use new data sources, machine learning techniques, and artificial intelligence to process the data in milliseconds.

There are numerous advantages to implementing a cloud-based core banking solution, including significant cost-efficiency, enhanced agility, and seamless scalability. The utilization of a cloud-based solution also enables banks to direct greater attention to improving customer service, developing new products, and fostering innovation.

Security of the cloud vs mainframe

You may wonder if core banking systems in the cloud are less secure than their mainframe counterparts.

The key to ensuring that core banking systems are as secure as possible is to choose and implement the right technology, controls, and processes, and make sure the cloud vendor is compliant with the regulations. As long as these measures are followed properly, the risks to a bank’s core banking system should not be significantly increased.

If you’re still uncertain about moving your core banking systems to the cloud, consider JPMorgan Chase’s recent move. In 2021, JPMorgan Chase replaced its retail core banking system in the U.S. with a cloud-native system called Vault.2 It signaled the shift toward API-first platforms that can allow live building, measurement, and instant scaling.

Furthermore, British multinational bank Standard Chartered plans to be 100 percent cloud-powered by 2025.3

How to select a best-of-breed solution

Leveraging cloud services for banking applications can be extremely beneficial. Nevertheless, it is also essential to evaluate the associated risks and benefits. You can strategize your cloud migration by leveraging multiple services from a single provider or even select services from multiple cloud providers. At times, banking may also demand a multicloud deployment, which can work as a backup when one provider fails to deliver.

One of the most important things to consider when migrating your core banking platform to the cloud is choosing an open-source solution. This way, you can be confident in the security of your application.

Going cloud-native

While technical maturity and ROI alone are critical to a successful core banking migration, other factors must also be taken into consideration. For example, in the financial sector, competition from fintech and big tech companies drives the shift away from legacy banking. This pressure forces banks to innovate and move from back-end support to an innovative role in their customers’ lives. As a result, they need to quickly deploy new products and code. Fortunately, cloud-native development makes this possible.

When migrating your core banking platform to the cloud, choosing a cloud-native solution is vital. This choice mitigates platform change risks and enables banks to utilize APIs for data transfer and integrate top-tier fintech solutions seamlessly.

Adopting a cloud-native approach for core banking helps banks focus on their primary business, mitigates legacy system maintenance risks, and addresses talent shortages, making cloud adoption an integral part of their IT strategy.

Protecting your bank from malicious third-party access

Banking security is paramount, as customer data is frequently entrusted to third parties. To safeguard this information, banks utilize advanced technology such as firewalls, encryption, privacy policies, and anomaly detection.

One pervasive threat is malware, which can access sensitive data and create clone cards for fraudulent use. Attackers can potentially lurk within a bank’s network for months before exploiting vulnerabilities.

As banks shift their core systems to the cloud, protection against malicious third-party access remains critical. Thankfully, numerous cloud computing solutions help fortify banks against cyber-attacks and data breaches. In addition to data protection, cloud vendors also provide built-in data management systems.

Steps banks can take

Besides updating their systems regularly, banks must also avoid side-loading applications, which increase the risks of zero-click attacks. In addition, they should create a disaster recovery plan. Without a plan, massive data loss and downtime can occur. Another way to protect against cyber attacks is to use vulnerability management tools. These tools automate threat detection and protect their systems against potential threats. Banks should also define access management policies for part-time employees. Finally, banks should adopt end-to-end encryption to protect their data.

Steps customers can take

Despite banks’ security measures, customers also play an integral role in protecting their information. Individuals should exercise caution when sharing sensitive data via email and be vigilant about monitoring their accounts for fraudulent activities.

Frequently updating technological protections helps secure sensitive information. Customers should also promptly report any suspicious activities to their banks, thereby playing their part in ensuring the security of their data.

Increasing innovation

As the maturity of cloud computing grows, banks are increasingly composing their core banking capabilities on the cloud. Progressive banks are leveraging software-as-a-service solutions to create cloud-based banking systems. At the same time, cloud providers have expanded their footprint to meet data residency requirements, creating banking-specific clouds and “outposts” within clients physical premises.

Banks are recognizing the need to modernize their core systems, but they often lack the resources and appetite for these projects. In addition, many banks opt for shorter-term projects with high return-on-investment. The cloud has helped speed up this process. Banks can now migrate core banking systems to the cloud by choosing which components they need and deploying them selectively or on demand.

In the early days of cloud banking, early adopters improved data analysis, redefined business continuity plans, and deployed reliable disaster recovery solutions. They also streamlined software development and testing processes. Today, however, banks are still lagging behind digital-native fintech. With the public cloud, challenger banks can scale their operations much more efficiently than traditional banks.

Conclusion

The evolution of banking is underway, catalyzed by the rise of cloud computing. Prompted by dwindling mainframe talent and escalating maintenance costs, banks are adopting cloud-based solutions for their core banking systems. This shift offers numerous benefits, including cost-efficiency, scalability, and the facilitation of AI integration. Crucially, it also enables a faster and more efficient journey towards core modernization. 

However, the transition requires strategic choices around platform selection, particularly with regards to security. By following the path of industry leaders like JPMorgan Chase and adopting a cloud-native approach, banks can mitigate platform change risks while improving customer service and fostering innovation. 

By moving core banking systems to the cloud, banks can improve time to market for new products and services, making them more competitive in the marketplace. The new cloud-enabled core will allow banks to drive innovation and shape the future of technology. With this, banks can compete with fintech that have taken the cloud banking space by storm.

Success Story

Discover how we helped an investment banking firm modernize and transform its existing monolithic legacy accounting engine software into a solution that can operate efficiently within a suitable platform and environment. Read more

What Relevantz Can Do for You

Relevantz can be the partner you need for holistic cross-service model banking solutions that support core banking and other mission-critical applications. With our business-first, outside-in modernization approach, Relevantz can help your application modernization initiatives, including the rehosting, replatforming, refactoring, rearchitecting, rebuilding, and replacing of your current enterprise systems. We can also separate the applications from legacy infrastructure, modularize intermingled business processes, liberate data from legacy systems, and innovate new digital systems.

And because our approach is iterative, your enterprise will be able to enjoy all the benefits such as bleeding edge technology, adapting to new technology even during the execution, and on par Industry standards and domain compliance leveragement, creating new demand unique selling point for your business while keeping your legacy systems humming behind the scenes.