July 19th, 2017
At a recent banking roundtable hosted in London, participants were presented with two questions:
- Do you agree that in just three years from now, every new core banking system that goes live will do so in the cloud?
- And do you agree that any new bank starting now would be mad to go any other way than the cloud?
The answer to both questions — from participants ranging from executives at established banks to founders of banking start-ups — was “yes.”
Banking Is Moving to the Cloud
To appreciate how startling this answer is, remember that, at least in the United States, most core banking systems — the systems that run the daily operations of a bank — are legacy on-premise software systems. Most are closed proprietary systems. They lack open APIs. And replacing them typically takes three to six years.
So moving to the cloud and its agile deployment practices by 2020 is nothing short of a technological revolution. But it’s a revolution that a growing number of bankers are coming to expect — and even welcome.
Bankers are increasingly frustrated with the lack of innovation in core banking solutions. They see that a new generation of FinTech start-ups can develop and market new services in a fraction of the time that core banking vendors can roll out a minor release. And consumers are flocking to those FinTech offerings and shifting their loyalty to slick, convenient FinTech apps they can access on smartphones and tablets. Banks might hold consumers’ money, but they no longer hold their attention.
Of course, every revolution has its challenges. Many bank IT departments are still new to cloud services and are still weighing the advantage of various approaches such as private cloud, public cloud, or hybrid cloud. Finance being such a heavily regulated industry, any approach will need to adhere to strict security and privacy rules and regulations. Cloud solutions that minimize the need for custom coding, proprietary modules, and labyrinthine development projects will obviously have an advantage.
The time for evaluating new cloud-based approaches is now, including integration platform as a service (iPaaS), such Boomi’s native-cloud service. Roundtable participants reported that all new project assessments include a requirement for optionally supporting cloud deployments. And Finextra notes: “Small and new banks go to the cloud for 99% plus of their activities from the outset.”
The EU PSD2 Directive
In Europe, banks have an added incentive for adopting cloud strategies and platforms. In 2015, the EU updated its Payments Services Directive (2007/64/EC) with a new regulation known as PSD2. The new regulation strengthens protections for consumers making digital payments. But from an “open banking” and “cloud banking” point of view, the critical rules in PSD2 are those that require banks to offer APIs that FinTechs and other financial organizations can access once they have consumers’ permission.
By mandating open APIs in payment systems, the EU intends to spur innovation and competition in financial markets. The law “aims to open up the EU payment market to companies offering consumer- or business-oriented payment services based on access to information about the payment account.”
Essentially, PSD2 orders financial institutions to release their proprietary hold over consumers’ accounts. Consumers might continue to deposit their funds with their long-trusted financial institution, but they will soon be able to rely on, trust, and pay service fees to FinTech start-ups that leverage data integration to gain visibility into and control over those funds.
EU countries must incorporate PSD2 into their national laws by January 13, 2018.
It’s going to be difficult for banks to comply with PSD2 while sticking with old, propriety core systems. The regulation all but orders banks to evaluate new, cloud-based services.
And the law puts banks and other financial organizations on notice. Once nearly inaccessible account information will soon be instantly accessed by any organization trusted by the account holder. To win the lion’s share of a consumer’s business, any organization — whether a fabled financial institution or a green-behind-the-ears start-up — is going to have to demonstrate that it can deliver the most value to the consumer in an increasingly crowded field of competitors.
Data Integration Is Critical to Open Banking
In the hyper-competitive financial services market, there’s something that banks and start-ups cannot afford to mismanage: data integration.
Financial organizations are going to be busy enough developing and implementing new marketing strategies, launching new products and services, and re-defining and re-invigorating their brands. They cannot afford to have their IT teams get bogged down in laborious custom-coding initiatives.
Incumbent banks cannot outrun start-ups while tangled up in spaghetti code. They need fast, low-code or even no-code platform for data integration, so that their data integration can move in lock-step with their strategic insights and market maneuvers.
The bottom line? When core banking systems move to the cloud, banking data integration needs to move to the cloud, too.
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