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

Two community institutions quietly became the first U.S. banks to operate fully in the public cloud, enabling them to match the speed-to-market and flexibility of fintechs. Their bold move, plus the IBM/BofA cloud collaboration, point to a major pivot in industry thinking.

A little-noticed announcement could mark the beginning of the end of one of banking’s most enduring truisms: that traditional institutions are hampered by legacy systems.

Two community banks are now running their institutions in the public cloud. They’ve been doing this successfully for about five months. Both institutions worked with Finastra, their bank technology vendor, to adapt its Fusion Phoenix core system to run on Microsoft’s Azure cloud platform.

The implications reach far beyond the bank IT world. Retail bankers, marketers, digital banking heads, lenders and leaders of other banking disciplines will all benefit from removal of the shackles of legacy technology. Things won’t change overnight, of course, but the industry’s thinking has altered in regard to the cloud.

The distinction between public and private clouds is significant. Simply put, a private cloud is a web-delivered service not shared with any other organization. By contrast, a public cloud shares computing services among different customers, even though each customer’s data and applications remain hidden from other cloud customers, as described by Cloudflare.

For years most banks and credit unions have drawn a line in the sand over using the public cloud for the processing or storage of customer data. More and more applications became cloud-based, creating a whole raft of “as-a-service” acronyms — such as software-as-a-service, or SaaS. At the same time, many larger institutions, including Bank of America, developed private cloud arrangements. Yet the resistance to using the public cloud remained.

But now that line has been crossed.

While Bank of America and IBM made news in November 2019 with the announcement of their collaboration to implement what IBM describes as the first financial services-ready public cloud, its rollout is gradual, beginning with complex risk management calculations, according to Business Insider. The sheer scale of that program “validates the use of the public cloud by banks for customer-data applications,” observes John Weinkowitz, General Manager of Retail and Head of Product Strategy for Finastra. “That move will be a catalyst.”

While that program, and others, ramp up, Finastra states that it is the first vendor to migrate core banking systems to the public cloud. Its two client institutions already live on the cloud are Commerce National Bank & Trust, based in Winter Park, Fla., and Commencement Bank of Tacoma, Wash.

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Benefits of Using the Public Cloud

Financial institutions have long recognized the potential of working with one of the major cloud providers — Amazon Web Services, Microsoft Azure and Google Cloud — particularly for data analytics and artificial intelligence applications. These three public cloud providers offer tremendous capacity, which is needed to handle the vast amounts of data now being analyzed and stored in the digital banking and ecommerce era.

Two factors that have prompted more traditional banking providers to consider embracing public cloud technology, according to Weinkowitz. These are: 1. Ongoing margin compression, which puts an emphasis on cost reduction, and 2. The need to innovate faster. Using the public cloud can reduce IT costs both in terms of hardware and IT/Operations administration and staffing costs, he states.

Weinkowitz told The Financial Brand that in addition to cost efficiency there are four other benefits for banks and credit unions that use the public cloud:

  • The ability to scale easily and without limit — both up and down — in real-time. Financial institutions are leveraging cloud providers’ huge investment in their tech stacks, which is far greater than what any institution could match on its own.
  • Closer proximity of data center to the institution, improving efficiency and performance. Microsoft Azure, for example, has 52 regions worldwide, with each region having a set of interconnected data centers.
  • Decreased latency (a measure of processing delay).
  • Greater redundancy due to multiple interconnected data centers and servers.

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Why Commerce Bank Moved to the Public Cloud

The Financial Brand spoke with one of the two banks about its move into the cloud. Although redundancy was very important to Commerce National Bank, a small one-location institution, it wasn’t the main reason why they opted to be one of the first banks to fully adopt the public cloud. The primary rationale, according to Pat Sideman, VP and Deposit Operations Officer, was simply that “this is the way of the future. The old ways are becoming antiquated.” Using the Phoenix platform in the Azure cloud puts the $119 million bank on par with fintechs in terms of speed and agility in offering services that are both responsive and capable, she states.

Re using the public cloud: “This is the way of the future. The old ways are becoming antiquated.”
— Pat Sideman, Commerce National Bank & Trust

“The Millennials who are going to be our customers for the next 40 years expect certain services from a bank. If you’re not able to offer those services, they will go somewhere else to find them,” Sideman states. That is one reason why Commerce National has been offering a mobile banking app since 2017, unusual for a bank that size, Sideman believes.

The bank was formed in 2003 and has been “tech-forward” right from the start, Sideman tells The Financial Brand. It has regularly worked with Finastra to test various products. So being a live test-case for the public cloud was not a big deal for them.

“Our CEO, Ray Colado, did not need convincing,” Sideman states. “He knew that for us to stay competitive with the big regional banks, we could not lose potential customers because the bank is not able to offer a service they want. Everything indicates the cloud is the way things are going.”

Using the public cloud allows Commerce National to have a much faster time-to-market for new products, and the flexibility to meet needs five years out that the bank can’t anticipate now. The arrangement also gives the bank the ability to more effectively and efficiently link up with third-party service providers, Sideman states.

In the ramp-up to going live in the cloud in November 2019, the bank ran the old and new systems in parallel, using a “staging database” that is part of the Phoenix system, according to Sideman. There were only minor issues to address, she says. Since “flipping over” solely to the cloud, there have been no issues, Sideman states. Response times, an initial concern, have been faster than before.

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