A deal between two large fintech providers has put the concept of cloud-based core banking until now, out of the question for most banks back on the table for bank technologists.
U.S. bankers remain abundantly cautious about cloud computing, as evidenced by a survey released Tuesday. But experts say it's only a matter of time before banks start accepting this method of software delivery.
Public cloud computing is the practice of using a network of remote servers hosted on the Internet to run applications and manage data. On the one hand, bankers appreciate the potential cost savings of the "pay-by-the-drink" pricing model such services provide. They also like the idea of being able to scale computing resources up or down as needed, instead of having to buy new servers for each additional project. Many banks have implemented cloud services for things like application testing and human resources.
But the idea of putting all their transaction and customer data, their core-account processing, on an external cloud has so far been off-limits. Such mission-critical data has to be safeguarded in-house or hosted by a trusted core provider like Fiserv, FIS, Jack Henry or D+H, the thinking goes. A rare exception is Independence Bancshares in Greenville, S.C., which is using Temenos' cloud-based T24 software, which runs on Microsoft Azure and Amazon Web Services.
"I think the attitude is evolving; we're not quite there yet," said James O'Neill, senior analyst at the research firm Celent. "There's emerging interest."
Such interest may be why Verizon and Infosys plan to jointly sell Infosys's cloud-based core processing software, Finacle, on Verizon's cloud computing service in a partnership announced last week. Finacle is a real-time, modular system that won a major U.S. client Discover Financial Services in December. The payment network and credit card lender deployed the Finacle deposit module for its direct bank last summer and this year is implementing the lending component.
"That was a big opportunity for Infosys to show the U.S. market they can be compliant with U.S. banking regulations," O'Neill said.
The use of Verizon's cloud computing resources gives Infosys flexibility.
"For Infosys, the fixed cost of creating a brand-new data center when they still only have Discover Bank as their launch customer in the U.S. market was probably economically prohibitive," O'Neill said. "It would be a, if you build it, they will come.' What they cleverly decided to do was find a proven provider of data center services, then throw the layer of cloud enablement to the mix. It's another plank in Infosys' marketing strategy in the U.S."
The U.S. banks that use Finacle on Verizon's cloud will get "pay as you drink" pricing, according to Infosys.
Pros and Cons
In some ways, a cloud-based core is not that different from the hosted software banks have been using from core providers like FIS and Fiserv for decades. In both cases, the servers are off the bank's premises and out of its control.
However, in the case of a service bureau, a banker can visit the data center and see the dedicated servers the bank's software is running on. In a cloud computing model, work is distributed over many virtualized servers that may be all over the world. Server capacity can be easily added or subtracted to reflect ebbs and flows in the volume of work.
"If you're a true cloud-based [software-as-a-service] provider, you may be running 100 servers for online banking. Then when everyone gets home from work and pays their bills in the evening, you might burst up to 1,000 servers," O'Neill said. "Then when everyone goes to bed you're back to 50 servers. All that happens automatically and it's all based on virtualized infrastructure."
One concern that has held U.S. banks back from trying this is security. In a Forrester Research report published Tuesday, 73% of bank technologists surveyed said security was one of the five obstacles preventing them from adopting cloud apps.
Bankers sometimes say they're afraid of what regulators would think if they adopted a cloud-based core. Regulators, for their part, haven't come out with a clear stance, although the Federal Financial Institutions Examination Council has warned banks of the risks of cloud computing.
"The problem is that the FFIEC has given guidance that leaves it a bit vague as to the suitability of cloud for banks," O'Neill said. "It's basically saying there's nothing fundamentally wrong with cloud computing; however, the bank needs to treat it like any other outsourcing relationship in terms of due diligence and governance. So lacking direct, tangible guidelines, the banks are saying, 'I don't want to take the risk of getting out there over my skis.'"
Ravi Rajagopal, global head of system integrators at Verizon Enterprise Solutions, said he is convinced that U.S. bank regulators will come around to supporting cloud services.
"Regulations are coming," he said. "In this market, most people would say the train has left the station. The federal government is leaning in that direction, the financial services industry will start moving toward that. It's already looming, but you'll see some changes. We as a technology company are preparing for that."
FIS Global, the largest U.S. core provider, launched a cloud-based real-time banking utility based on its FIS Profile platform, in Central and Eastern Europe in 2013; it has not announced plans to bring it to the U.S.
Rival vendor Fiserv is building a cloud core processing offering called Agiliti that it plans to launch later this year. It's based on the Signature core banking platform, which is already used in the U.K. by Tesco Bank. A data center hosting partner, Blue Chip, will provide the cloud delivery.
It's offering Agiliti in the U.K. first (the company did not share its U.S. plans). "We have a unique set of circumstances" in the U.K., said Travers Clarke-Walker, chief marketing officer for Fiserv's international group.
"The previous government was keen after the banking crisis to create more competition in consumer banking, therefore looking to make the [bank] application process more straightforward," he said. It also lowered capital requirements for newly chartered institutions.
Agiliti will charge banks a per-account subscription fee, which should be favorable to de novos.
"What that gives is absolute surety in your operational costs," Clarke-Walker said. "For the clients we have in the pipeline, that is unique. It gives you assurance of what the cost per customer is."