When JPMorgan Chase announced it was replacing its U.S. retail technology platform with a cloud-native core banking system in the fall of 2021, it seemed to be a way-outside-the-box move. Now, many industry observers see cloud banking cores as an essential requirement of a modern, competitive banking industry.
“The cloud is the 21st century foundation for 21st century banking,” says a recent paper by Accenture. “Banks that are accelerating their cloud migrations are seizing the opportunity to transform not only their technology architectures, but also how they operate and their relationships with their customers.”
Accenture is not alone. McKinsey issued two papers on the subject. “Very few [financial institutions] have truly moved to a more flexible back end,” says one paper. “That prioritization may now need to change.” This paper provides an in-depth study of cloud core conversions.
Cloud Is Banking's Future:
The most important step is to build awareness across the organization about the practical value of cloud.
Another McKinsey paper lists three key shifts required for banks and credit unions to embrace cloud migration:
1. Acknowledge the “Cloud is in our future.” “The most important step a financial institution can take in capturing cloud’s value is building awareness across the organization about the practical value of cloud as distinct from the exciting marketing material from vendors.”
2. It’s not about IT, but making the business more valuable. This requires two things: First, change the operating model to where technology and business work together in cross-functional teams. Second, start the migration at the domain level — a complete product or function such as checking, for example — rather than by opportunistically moving disparate applications.
3. Don’t keep the same processes in place. Take full advantage of the automation enabled by cloud.
A Rapidly Changing Banking Industry
Why is a cloud core attractive? Apart from the cost of having to deal with aging legacy core systems that run on obsolete computer languages such as Cobol, McKinsey lists six technology-related changes rapidly reshaping the industry’s future, which cloud computing makes possible or more efficient:
- Moving from closed systems to ecosystems. Market participants make their products and services available through other providers’ channels and offer third-party offerings through their own channels.
- Shifting to embedded service. Some banks have embedded credit products at point of search rather than offering credit options after the point of sale.
- Bye-bye batch, hello real-time. Real-time data acquisition and automatic updates are upgrading the experiences of customers and relationship managers.
- Not just reporting, advanced analytics. Product selection and service delivery are becoming more intelligent and personalized.
- Embracing a zero-trust security model. This requires encryption of data both in transit and at rest, multifactor authentication, access monitoring and tokenization.
- Truly personalized offerings. Customers are placing more importance on a bank’s ability to personalize by making small changes in credit product features, for example, as well as offering completely new products.
Vendors Pounce with New Services
That cloud core conversions are going mainstream can be seen in the proliferation of traditional and upstart bank technology companies getting into the act.
In April Fiserv acquired Finxact, a cloud-native banking system that provides 100% accessibility to all data and functions through modern APIs, as described by the company.
FIS has a cloud-native, API-first core banking offering that it calls Modern Banking Platform. The real-time system was first introduced for certain functions in 2019.
Core Providers Embrace Cloud:
Pushed by smaller competitors and clients, all the major bank tech companies now have cloud-native core options.
Jack Henry earlier this year announced a next-generation, cloud-native technology strategy aimed to help community and regional financial institutions innovate faster. The company is unbundling its core systems and, over time, rewriting all the core components as discrete, cloud-native services written as open APIs to work with other companies’ systems and fintech applications.
Earlier into the cloud-native arena were several modern core banking providers such as Florida-based Nymbus, which in mid 2022 added ConnectOne Bank, a New Jersey-based bank with $8 billion in assets. as a client. These tech companies, while lacking the large user bases of the big core providers, have exerted pressure on the market through their innovation.
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All-At-Once Conversion Not Required
David McIninch, senior vice president and head of Next Generation Solutions at Fiserv acknowledges the growing importance of cloud cores.
“Virtually every client we have, and certainly every bank we have talked to, is very interested in figuring out how to leverage the benefits of cloud, not just in the core but everywhere in the tech stack,” he states. “The future of virtually all software development will be at a minimum environment-agnostic, so it’ll be either cloud native or cloud enabled.”
“This notion of building licensed software that runs in the bank’s own data center will continue to dwindle because of the economics and resiliency of cloud computing.”
— David McIninch, Fiserv
McIninch tempers his observations somewhat by noting that, in many cases, a financial institution need not simply substitute its entire existing core system and move everything, right away, to the cloud.
“It’s less about converting the whole bank into a cloud-based or cloud-native core system. It’s really about taking advantage of the benefits that these new cores are bringing to the table to enable specific use cases.”
A Midsized Bank Commits to the Cloud
Arvest Bank, the $27 billion-asset Arkansas-based bank, announced in mid 2022 a five-year partnership with Google Cloud, as well as with Thought Machine, to enable and accelerate a multi-year digital transformation strategy. The bank’s specific goals for cloud adoption include:
- Advance digital banking and the contact center experience by using artificial intelligence tools and other tech solutions.
- Increase agility to meet the changing needs of retail and commercial customers from lending decisions to regulatory requirements.
- Offer training and certification opportunities for Arvest employees on Google Cloud’s tools and services.
- Decrease Arvest’s data center carbon footprint through cloud migration.
“The rapid shifts around consumer financial needs and behaviors, along with the expectation for consistent customer engagement across channels, impose unprecedented demands for technology and speed of execution,” Arvest president and CEO Kevin Sabin said. “Moving to the cloud is another key component to our transformation.”
Cloud Banking Is Not Just About IT
Financial institutions considering cloud conversion, of whatever type, need to heed the refrain from many industry analysts: It can’t be just a technology endeavor, but a complete operations and culture change throughout the organization.
The banks that are the most successful in realizing the cloud’s benefits of increased organizational speed and agility and lower costs get all lines of business involved, align organizational talent behind the cloud, and help ensure that business and IT are on the same page, Accenture states.
Cloud initiatives start with defining the business value that technology transformation can enable in terms of new capabilities, cost efficiencies, or risk mitigation, the consulting firm adds.
Fiserv’s McIninch agrees. All the benefits of using the cloud — including continuous improvement and deployment, and implementing tracking and metrics to understand in the moment exactly what is happening anywhere within your ecosystem — “has as much to do with the operations and the culture of the business as it does with the technology. So I think that those things need to come together.”
Arvest Bank’s newly-hired chief technology officer, Ninish Ukkan, has the last word: “API and cloud-based banking is the future of financial services.”