Big Breakthroughs as Banking in the Cloud Replaces Legacy Systems

Not that long ago putting customer information in a public cloud was unthinkable. Now, financial institutions large and small are taking the plunge, enabling them to respond to customer expectations 'like a fintech.'

In the middle of the pandemic when the government instituted Paycheck Protection Program loans, Live Oak Bank asked its then-legacy core provider how quickly it could make the changes needed to ramp up PPP lending on a large scale. The answer: It would take six months to change the code.

Regrouping, Live Oak Bank turned to Finxact, a cloud-based bank technology company it had already begun working with. The result: The new PPP capability was up and running in weeks.

Since then, Live Oak, an $8 billion SBA loan specialist based in Wilmington, N.C., has completely transferred its core systems to Finxact’s “core-as-a-service,” leaving the legacy provider behind.

“The days of running on traditional mainframes are ending. To deliver customers the best experience… in an agile way, is only possible with cloud-native technologies on open platforms.”

— James (Chip) Mahan, Live Oak Bank

Live Oak is far from alone in making this move. No less than JPMorgan Chase announced that it will replace its current retail core banking system in the United States with a cloud-native core system called Vault, developed by Thought Machine, a vendor based in the U.K.

Read More: Advantages of Cloud Computing In Banking Can’t Be Ignored

“JPMorgan Chase represents one of the most ambitious, powerful financial institutions in the world,” said Paul Taylor, CEO and founder of Thought Machine. “Our joint work signals to the finance industry that cloud-native core banking technology is the future for financial services.”

Given what’s been happening in bank technology, that statement goes beyond vendor chest thumping.

Recent Cloud Banking Announcements

JPMorgan Chase U.S. retail core banking — with Thought Machine
First Horizon VirtualBank — with Finxact
Live Oak Bank retail and commercial deposit accounts — with Finxact
Wells Fargo Commercial & Corporate Banking — with nCino
Arvest Bank, including payments and digital (just beginning) — with Thought Machine and Accenture

CEOs Start to Take Cloud Seriously

Live Oak Bank CEO James (Chip) Mahan III weighed in on the bank’s decision to switch core systems to the cloud: “Every bank CEO and CIO should be sitting up and taking notice,” he said. “The days of running on traditional mainframes are ending. To deliver customers the best experience, and to have the ability to create banking solutions that give customers what they need in an agile way, is only possible with cloud-native technologies on open platforms.”

“Living on an API-first platform gives us the ability to build on the fly, offer products quickly, measure results instantly, and scale in a matter of minutes instead of days or weeks,” said Mark Moroz, Live Oak’s Head of Product.

Besides Live Oak Bank, Finxact announced that Tennessee-based First Horizon Bank converted its VirtualBank division from legacy core to a cloud-as-a-service. “First Horizon built customer momentum into their transformation by identifying and migrating an existing line of business that was running on a legacy core. The industry should take note of their approach,” said Frank Sanchez, CEO and founder of Finxact.

Read More: Run Your Bank in the Cloud: Crazy or Fintech Smart?

It’s About Innovation More Than Efficiency

Not only large banks are getting into the cloud. Finastra, another cloud core provider, announced that it signed 25 financial institutions to its core banking platform during its 2021 fiscal year. These include Peoples Credit Union, Webster City, Iowa; Fowler State Bank, Fowler, Ind.; and First National Bank of Manchester, Manchester, Ken.

“Financial institutions have long viewed legacy core technology as a hinderance to innovation,” said Stephen Greer, senior analyst at Celent, commenting on Finastra’s announcement. “They are realizing that an open, cloud-based core has the ability to actually facilitate innovation and eliminate the roadblocks and inefficiencies caused by lack of integration with other technology solutions used within the institution.”

Finally, a Cure:

Cloud computing is a way for financial institutions to eliminate, or at least minimize, the effects of operational and data silos.

This capability prompted Arkansas-based Arvest Bank to announce it is working with Thought Machine and Accenture, to support a multi-year transformation of its core engine to the cloud. “As modern consumers’ lifestyles and digital banking expectations change, we want to ensure we deliver a banking experience that makes their lives easier today and well into the future,” said Kevin Sabin, Arvest’s CEO.

Specific improvements sought in his bank’s core-migration plan include innovations in payments, digital applications, and operational capabilities.

One more example of the trend is Wells Fargo’s selection of the cloud-based nCino Bank Operating System to accelerate digital transformation within its commercial banking and corporate and investment banking businesses.

“Now, more than ever, financial institutions of all sizes require a digital-first, client-centric approach,” observes Pierre Naudẻ, CEO, nCino.

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What About Those Cloud Security Concerns?

For years, financial institutions have been wary of entrusting sensitive customer information to a public cloud. Renato Derraik, chief information and digital officer, at Live Oak Bank, tells The Financial Brand three trends that pertain to the realities of cloud security now:

1. Familiarity. Many financial institutions already are using the cloud for specific applications, and have done so for years, so they have become familiar with the technology.

2. Complexity. It’s becoming increasingly complex and expensive to manage infrastructure in-house —
to upgrade servers, to enhance data controls, to restrict access to only the appropriate parties,and to apply patches to operating systems.

3. Vendor advances.  Current cloud providers have achieved major improvements and sophistication in their ability to manage security.

An analysis by Deloitte on cloud banking explores the security issue. “An important part of understanding the cloud is considering how an enterprise’s current infrastructure and capabilities may be limiting its ability to detect and address new risks and vulnerabilities,” says Deloitte.

“Security is different in the cloud,” the analysis continues, “because of the tools that are native to each cloud provider’s environment and the fact that cloud providers typically take responsibility for the security of the lower-level infrastructure layers. The shared responsibility between cloud providers and the clients they host changes how organizations should anticipate and prepare for security risks.”

Flipping the Switch in Stages

Admittedly, the thought of migrating a legacy core the cloud can be daunting. However, “it doesn’t have to be a binary switch,” says Huntley Garriott, president, Live Oak Bank. “You can start with a small project, maybe with your lending group or a digital bank. Then cut things in over time, so you’re reducing risks and building a knowledge base.” Another tactic might be “to leverage the cloud core with de novo clients,” says Derraik. “That way you gradually migrate the volume on to the new core.”

Read More: 8 Fintech Trends Changing Banking Forever

One imperative for financial institutions, says Derraik, is to have in-house expertise around cloud systems, their architecture, and security. “People at the bank who are using core have to have the expertise to effectively manage the access and control,” he states.

This advice was echoed in Deloitte’s analysis: “Cloud providers have extreme security standards — and have a track record. Environments can be as secure or more secure than on-premises — but only when implemented correctly and with skilled and trained security.”

Minnequa Works Credit Union, Pueblo, Colo., is another financial institution that switched to cloud-based core processing. Greg Leber, CIO, provided suggestions to financial institutions considering converting in an article on CreditUnions.com. Key points included:

  • Map the existing core and all its moving parts.
  • Put compliance documentation in order before changing the architecture.
  • Designate a single department contact to coordinate the move.
  • Conduct thorough pre-deployment testing of all functions, including accounting, collections, lending, and operations.
  • Compare apples to apples: Take an end-of-month cycle and review every piece of data and report that comes with it.
  • Let go of old processes, such as Excel spreadsheets.

Looking ahead, “Some fintechs are doing [new technology architectures] really well and are taking banking customers,” says Live Oak’s Garriott. “If the banking industry wants to keep up with that level of innovation, we have to adopt and migrate to the next-generation platforms systems.”

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