Opening the door to hybrid cloud in financial services

By Bill Fenick | 21 September 2015

In the past, the financial services industry has lagged behind other industries in terms of cloud adoption due to concerns around security and regulation. But this is rapidly changing – a report from Gartner predicts that by 2016 over 60 per cent of banks across the world will process most transactions in the cloud.  

Indeed, the financial services industry has been inching its way towards the cloud. Just looking at recent headlines, such as one report that found financial firms using 1,004 cloud apps, it’s clear that the sector is starting to see the real benefits that the cloud can bring. And if one of the largest independent securities regulators in the US – the Financial Industry Regulation Authority (FINRA) – can move its own platform to the cloud with AWS, so can others.

Financial services firms are realising the extent to which cloud services can improve their performance, an optimisation which can in turn win the confidence of existing customers and the business of new customers. These organisations are seeing that the agility and scalability of the cloud, plus the shift from CAPEX to OPEX, are opportunities too significant to pass up.

Interestingly, the cloud can actually help in the formation of new systems for financial services and other highly-regulated industries – systems which are more secure and meet the growing number of compliance requirements. Meeting the demands of new global regulations such as the U.S. Dodd-Frank Act, which mandates increased transparency in the over-the-counter derivatives market, is a difficult challenge. And legacy technology is no longer doing the job.

New regulations like this mean new requirements for financial institutions in terms of tracking data and recording transactions in real-time. This puts pressure on legacy IT systems which can in turn lead to serious issues around downtime and latency. Finance firms are hit by enormous losses if they encounter the smallest delay – even milliseconds of downtime can have a huge impact – so they are not prepared to take the risk associated with an outdated IT system.                                               

The move to the cloud is a clear indication that finance firms are waking up to the weaknesses of legacy IT systems. But despite this changing outlook, security in the public cloud does continue to be a cause of concern in financial services. For this reason, firms are moving towards a hybrid approach to the cloud, combining both in-house and outsourced technology with legacy and cloud-based applications.

The hybrid model has also become a popular option for the industry due to uncertainties around the private cloud, which was at one stage perceived as the “safe” option by many financial institutions. However, relying solely on this model requires continual investment, both in monetary and people terms, which makes it difficult to innovate and realise the full potential of the cloud. The private cloud model is quickly becoming outdated because of this and in itself is becoming a legacy system.

The subsequent emergence of hybrid cloud as the preferred model is also important for financial services as it provides the opportunity to migrate some information to the public cloud while leaving sensitive data in-house. This in turn helps quash concerns around security and regulations governing the location and storage of sensitive data.

New technologies are also helping financial institutions to anonymise data and abstract certain information from key customer financial data, supporting the move to a hybrid model. It’s a win-win situation for firms, and one that is set to continue shaping the future of IT deployment in financial services.

As one of the few new banks to be established in recent years, Metro Bank is one key example of a financial institution adopting a hybrid model, which it claims has enabled it to go “paper free”. It makes use of public cloud services from Microsoft, including Yammer and Microsoft 365, to help with employee productivity and innovation, while sensitive data including customer transactional and financial history is stored in the bank’s two private data centres.

An innovative approach to the cloud such as the one used by Metro Bank is still a long way off for some financial institutions. Many firms are still looking for the best way to make the hybrid dream a reality, with Gartner claiming enterprises are still two to five years from mainstream adoption. Yet on the other hand, a recent IBM report claimed that a hybrid model in banking and financial services is the “new normal”.

Financial firms are on their way towards a hybrid IT environment but there is still some way to go in terms of mainstream adoption. What’s clear is that strong connectivity between the cloud and on-premise data centres is the essential component in making hybrid IT in financial services a reality. 

By Bill Fenick, strategy and marketing director, financial services segment, Interxion.

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