Industry

A Modern Infrastructure for the Digital Bank

Driven by Agility, Efficiency, and, Thanks to 2020, Resiliency
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Even prior to the events of 2020, the banking industry had been heading down the path to digital transformation, driven by a hyperfocus on customer experience and innovation.  Many banks emerged as leaders in transformation, modernizing not only the technologies necessary to achieve these goals, but also restructuring the organizations themselves, as well as their partner ecosystems.  API development, using agile methodologies, microservices and containers, and cloud as a deployment model all gained traction leading up to 2020.  Being a risk-based business, many bank executives still had concerns about challenges in security, internal skills and governance, but by and large the industry was advancing to a modern technology framework.

But during the COVID-19 pandemic, weaknesses were exposed in the bank’s technology environments.  Critical business platforms, like digital banking and lending, for example, experienced demands that overwhelmed them.  New and needed responses to the crisis, like the Paycheck Protection Program (PPP) in the U.S. were often hindered by legacy platforms that were not easily modified or developed quickly enough in time to respond to the immediate market needs.  While the immediate and tactical challenges were addressed in the summer, often painfully so, the annual autumn strategic planning and budgeting process added a new word to the lexicon of technology strategy: Resiliency.

Doubling Down on Infrastructure Transformation

One of the heroes of 2020 was the availability of software platforms that could be delivered on cloud.  Looking again at lending as an example, many software providers were able to deliver solutions to implement functionality like PPP in days, as opposed to the months it could have taken on legacy platforms.  In addition, because these solutions were deployed on cloud, they inherently benefited from scalability (and more importantly, elasticity of scale), consumption-based pricing, improved security, and business continuity and disaster recovery capabilities characteristic of major cloud platforms. 

What made 2020 different from previous years is that, although technologies like cloud were available prior to the pandemic, the crisis put cloud and associated technologies and methodologies in in the broader context of being a critical component of the institution’s technology architecture.  At the same time, some workloads are still seen as too critical (or competitively important) to integrate into a cloud environment.  Therefore, hybrid infrastructures of on-premise and cloud workloads and multi-cloud environments are now seen as the modern, de facto infrastructures that will not only drive innovation and agility for the bank, but improve resiliency and scalability as well.  In IDC’s Worldwide Industry CloudPath Survey (May 2020), 57% of banks responding to the survey told us that they already run in hybrid environments, with another 31% moving to hybrid models in 12 months, and a further 9% moving to hybrid in 24 months. 

Clearly, the banking industry has recognized the need to operate outside its own datacenter walls, where it makes sense, to leverage the strengths of its technology partners and deployment models like cloud.  Based on IDC’s latest Worldwide Banking IT Spending Guide estimate (March 2021), overall technology spending in the banking industry will grow 6.2% annually through 2024.  But growth in public cloud spending specifically, (both cloud infrastructure and software) is at twice that pace, 16% growth annually through the same period.

The Modern Infrastructure Brings Its Own Challenges

The move to a hybrid infrastructure is a transformation that will become the goal of most institutions over the next 3 years, or least be recognized as a high-level strategic asset that needs to be operated as a single entity to accomplish the bank’s business goals.  But implementing a hybrid infrastructure or bringing together a collection of platforms and deployments under a single organizational umbrella isn’t enough. We detail this further in the eBook, “Creating the Future Infrastructure for the Banking Industry“. The new hybrid environment brings with it new or more acute challenges that didn’t exist in a single datacenter model.

  • 3rd party risks.  As workloads are deployed across internal and external platforms, 3rd party management becomes critical to minimize business risk today, and to prepare for any potential new guidance as regulators catch up to the increasing use of cloud services.   
  • Service levels.  Customer experience must be closely monitored to not only ensure that service levels are being met, but that any disruptions to service can be traced and isolated to the network or system causing the disruption.  As the infrastructure increases in complexity based on a hybrid model, this task of identifying problems becomes more difficult.
  • Managing disruptions.  Once a disruption is identified, knowing whether the disruption is critical, temporary, or needs human attention, will be critical.  Technologies like machine learning and artificial intelligence will be key to keeping a hybrid infrastructure manageable.
  • Security.  In a hybrid environment, where workloads can span internal and external platforms, and edge computing is taking a larger role in the customer’s experience, security becomes a bigger challenge.  Security shows up as a #1 or #2 concern for IT executives when asked about moving to cloud, yet always shows up as a top 10 benefit once the institution has migrated some workload to cloud.  It is telling that bank spending on security is also outpacing overall IT spend in the industry, growing at almost 14% through 2024.

Infrastructure Transformation Isn’t Done Until It’s Manageable.

It’s an exciting time for transformation in the banking industry.  Modern technologies are being adopted faster than in any time in recent history.  But the concern is that the infrastructure will be built and operated before these last challenges are addressed.  My guidance for institutions embarking on this journey, or that have already started and are underway, is to remember to “dot every ‘i’ and cross every ‘t’.”  Additionally, I offer more guidance on how hybrid infrastructure will support the future of banking in the upcoming webinar, The Challenges and Opportunities of a Hybrid Banking Infrastructure, live on July 13th at 11 AM/ET. Click the button below to register.

Jerry Silva

Program Vice President, IDC Financial Insights