An increasing number of challenger banks, neobanks and digital offshoots are being born in the cloud and the technology is now being used by traditional banks and new players alike for all IT needs. Banks that are born in the cloud are at an advantage because legacy players that are in the process of migrating to the cloud are struggling with application modernisation, data centralisation and security.

Finextra spoke to Alexandra Frean, head of corporate affairs at Starling Bank, Paul Clark, chief technology officer at Tandem Bank and Amir Nooriala, chief strategy officer at Oaknorth about whether their bank was born in the cloud and whether the cloud has allowed the bank to pivot quickly, fail fast and expand at the speed of need.

Frean reveals that Starling Bank is “all cloud-based, apart from two small pieces of equipment required by Swift and Mastercard and both of these organisations are migrating to cloud.” She adds that the cloud has supported Starling during its rapid expansion and growth and continues to be vital.

Clark highlights that the cloud, “combined with very high levels of automation and repeatability, means we can focus on solving customer problems rather than worrying about provisioning infrastructure. Along with elastic scaling, we can quickly and cheaply try out new ideas, and if they fail, throw them away. If they succeed, we allow them to scale up to customer demand.”

He continues to say that: “This is the opposite of how infrastructure used to be done where it would take months to provision services and you’d have to capacity plan for expected peaks. That mindset made experimentation expensive, so it was harder to justify. Today we don’t have that problem.”

Nooriala describes Oaknorth’s journey and reveals that after obtaining their licence in March 2015, a lack of regulatory policy in place meant that they were unable to launch on the cloud. “Over the next six months, with the help of Amazon Web Services, we worked with the Financial Conduct Authority on policy items around data protection, access to data, security and business continuity, and in May 2016, became the UK’s first bank to be fully cloud-hosted. By this we mean, not just ancillary services like CRM or email, but everything down to the core in what was described as a ‘landmark move.’

He goes on to list the reasons why Oaknorth was born on the cloud:

• Flexibility: When banks buy data centre infrastructure, they are forced to decide upfront and are then stuck with their choice. With the cloud however, banks can spin up and spin down on demand. As a new bank, we wanted the freedom to experiment and continuously evolve our offering in line with customer needs and expectations, so the ability to do trial and error, test and experiment is a huge benefit. Added to this, we are able to take advantage of the latest updates in technology at the click of a button without waiting to depreciate existing investments.

• Business continuity: Being in the cloud means we can rebuild our entire core banking platform in a new location in five hours. This is the kind of figure that large incumbent banks dream of, but because we’re fully cloud-hosted, we’re able to make it a reality.

• Speed to market: Being on the cloud means we’re able to make changes to our systems much more quickly than most banks, often in days rather than weeks.

• Adaptability: The cloud can handle rapidly increasing workloads, it doesn’t matter if Oaknorth onboards 10 or 10,000 customers, the AWS cloud eliminates the need to try and approximate our infrastructure capacity needs. We can access as much or as little resource as we need and scale up and down as required within a few minutes.

• Security: It is now possible to be more secure in the cloud than on-premises. AWS invests a huge amount in security and has achieved a number of internationally recognised certifications and accreditations, demonstrating compliance with third party assurance frameworks, such as ISO 27001, ISO 27017 (cloud security), ISO 27018 (privacy), in addition to AWS PCI and SOC 1, 2 and 3 certifications.

• Focus: Being fully cloud-hosted enables us to invest our time, money and energy into those areas that are of greatest benefit to the business - both through the time and money saved, as well as the fine-grained cost transparency of our use of the underlying services.

• Resilience: A great example of this was earlier this year when we experienced the ‘Martin Lewis effect.’ The fact that we’ve built all our technology from scratch and are fully cloud-hosted proved to be invaluable. From the moment Martin mentioned our name on ITV’s The Martin Lewis Money Show, we saw our web traffic begin to spike, hitting a peak of over 50x its usual levels within the first 30 minutes. Having a newly-built banking infrastructure which has the resilience of a cloud-hosted IT platform allowed us to scale horizontally (i.e. handle more volume) at will, and effectively spin up the extra server capacity required to handle the avalanche of web traffic we experienced. The result? In the first hour, we saw millions of pounds pledged. By the end of the following day, it was in the tens of millions. Our website remained live and operational throughout.

Now that the cloud is being adopted by legacy players, is there still an advantage to being born in the cloud? Frean says yes: “Legacy players are some way from being in the cloud - they have only just dipped their toe in the water. It’s not so much to do with the cloud per se. Banks that realise they are technology companies will fare better than those that do not.”

The Tandem CTO disagrees with the notion that the cloud was always intended for startups and not banks. “It’s still someone else’s data centre, you’re simply paying for what you use when you use it. You can provision it all yourself either through a console, or how we do it, which is via scripts.”

The Oaknorth CSO has a similar attitude and states that “people need to stop seeing cloud as something alien. There is still dedicated infrastructure for your business. It’s just that the world’s experts manage it for you and allow you to instantly add, remove or upgrade it as you need or as technology evolves.”

Clark continues: “Will we outgrow it? We’ll always need a data centre and we’re unlikely to need our own dedicated one so we’ll likely always use someone else’s. Cloud is ideal for that. Whether we always use the PaaS services from a cloud provider is a trickier question.

“Right now, we’re comfortable paying for someone else to manage patching, security, active/active etc. for us. As we scale, these costs may come into view and we may decide to deploy our own open-source versions rather than keep consuming the PaaS options. This is something we keep an eye on through the regular cost reviews we undertake.”

To Frean’s point, Nooriala says that “the cloud is being adopted by legacy players for ancillary services such as CRM and email, but their core banking is not cloud-hosted. It will be very difficult for them to fully migrate to the cloud due to their legacy IT systems. However, this is not how we compete with incumbent banks - yes, it gives us several benefits as outlined above but our competitive advantage comes from our speed, flexibility, transparency and entrepreneurial approach.

“You can migrate to the cloud just like you can make an iOS app work on an android phone but for it to run optimally, it needs to be native. We are fully cloud-hosted and our architecture has been designed for the cloud. i.e. we are cloud native. We take advantage of all the services and the efficiency that brings.

“Cloud or no cloud, it can’t turn a bad product or business case into a good one. Banks that are born in the cloud / fully-hosted in the cloud can invest their IT budget in innovation, whereas their incumbent counterparts need to use the majority of this to maintain existing systems,” Nooriala says.