Cloud banking: 60 years on

Outside of generative AI, cloud is all the rage again.

Cloud is all the rage again

I suspect this is driven by investors looking for Software-as-a-Service (SaaS) solutions with predictable revenue streams based on subscription pricing.

When I say cloud is all the rage ‘again’, it’s because I’ve seen at least two other hype cycles centred around cloud computing in the last three decades. However, at least we are no longer talking about whether banking will move to the cloud.

As we all know, cloud is not new. In fact, it has a long history. You could argue that it started in the 1960s with the concept of selling computing power as a utility enabled by time-sharing mainframe computers. As these mainframes grew in processing power and storage, their parallel processing abilities improved and they became better at sharing computing resources effectively.

Only the largest banks could afford to buy mainframes and manage them in their own data centres, with Barclays claiming to have created the first banking data centre in the early 60s. Smaller banks and credit unions/building societies didn’t miss out though as third-party “service bureaus” bought mainframes to provide them with a share of their computing resources. Later, these service bureaus would also offer firms the option of buying their own computers which were managed externally by the bureaus, so banks didn’t have to create their own data centres. They effectively were the first-generation cloud providers.

Fast forward to the dot-com era and instead of requiring private telephone networks to connect head offices and branches, banks could use the internet. This also enabled third parties to expand their services to provide shared computing resources more easily.

If you define cloud as computing services accessed through the internet, then I suppose this was the start of cloud computing. During this period, it was really internet services like online banking that were run in these early clouds.

One of the big constraints of this generation of software was that each application was typically a “monolith”. They may not have been developed in legacy languages like Cobol, but still they were typically installed/deployed as a single package of software. So, even though software developed in Java was broken down into modules, they were typically deployed in a single package.

Fast forward another 10 years to the 2010s, we then had even faster processors, cheaper memory and more storage. We also had innovations in software like “containers” which made deployment easier and “micro-services” which made it possible to have cloud-native solutions.

At the same time, Big Tech firms (Google, AWS, Microsoft and so on) began scaling cloud computing provision: the bigger you are, the cheaper you can provide cloud computing. Aside from the cost advantages from scaling, Big Tech firms have innovated both on hardware and software much faster than banks could with their data centres. Furthermore, aspects like disaster recovery, security and resilience all require a higher level of capability when you are providing the service for many companies.

During this time, the cloud providers provided everything as a service, and I’m sure you’re aware of the stack: infrastructure, platform and SaaS.

Initially, there were regulatory challenges for banking in the cloud, but over time regulators and Big Tech made banking in the cloud a viable option. So here we are, and everything is easy now when it comes to cloud, right? Banks can simply buy or build software and leave the management of their solutions to cloud providers, right?

Well, no. For a start, banks still have responsibility under regulations like DORA (the Digital Operational Resilience Act) to ensure they have resilience against increasing cyberattacks. Then there is the opportunity for banks to move their monolithic legacy solutions to be cloud native. For core banking, this is a minimum five-year investment, and that’s if you get it right the first time! However, the advantages are huge. Being truly cloud native (I’ll discuss this more in a future article) can offer much higher scalability, faster development timeframes, greater resilience and much lower operational and infrastructure costs. Which bank in their right mind wouldn’t want all those benefits?

This week, I’m just saying that the journey to the cloud for banks may have started over half a century ago, but the pace of innovation is such that they cannot afford to wait to take advantage much longer. As always, there are many challenges along the way, not least the confusion created by vendors – more on this next time as well.

About the author

Dharmesh Mistry has been in banking for more than 30 years both in senior positions at Tier 1 banks and as a serial entrepreneur. He has been at the forefront of banking technology and innovation, from the very first internet and mobile banking apps to artificial intelligence (AI) and virtual reality (VR).

He has been on both sides of the fence and he’s not afraid to share his opinions.

He founded proptech start-up AskHomey (sold to a private investor in spring 2023) and is an investor and mentor in proptech and fintech. He also co-hosts the Demystify Podcast.

Follow Dharmesh on X @dharmeshmistry and LinkedIn.

Read all his “I’m just saying” musings here.