Core Banking Software: What Does Cloud Native Really Mean?

The financial services industry is undergoing a significant transformation, driven by the increasing adoption of cloud technology. 91% of financial services executives surveyed for Capgemini’s World Cloud Report – Financial Services 2023 stated that they had partially or completely adopted cloud technologies.

Cloud-native core banking applications are at the forefront of this shift. They promise to revolutionise how financial institutions operate, offering benefits such as enhanced flexibility, faster innovation cycles, and improved customer experiences.

But what exactly does cloud-native mean in this context, and why does it matter to financial institutions?

This article will explore the key characteristics of cloud-native applications, how they differ from traditional core banking applications, and their benefits for financial institutions.

What Is Cloud Native?

Cloud native refers to a method of building and running applications that leverage the flexibility, scalability, and resilience of cloud computing environments.

This means cloud-native applications are specifically designed for cloud environments from the ground up, unlike traditional applications that were designed for on-premise infrastructure.

What Are Cloud-native Core Banking Applications?


Cloud-native core banking applications are modern banking software systems built to operate entirely within cloud environments. These applications manage critical banking operations such as account management, transactions, customer data, and compliance, leveraging the cloud to deliver enhanced performance and agility.

Key characteristics of cloud-native core banking applications

Cloud-native core banking applications have the following components:

1. Microservices

Cloud-native applications are composed of small, independent services called microservices. Think of microservices as digital Lego blocks that can be easily assembled, disassembled, and reassembled to create a larger, more complex structure.

Each microservice handles a specific business function — such as account management, transaction processing, or customer relationship management — and can be developed, deployed, and scaled independently.

This modular approach allows for updates to one service without disrupting the entire system and faster deployment of new features, improving flexibility, agility, and scalability for financial institutions.

2. API

Application Programming Interfaces (APIs) are the glue that connects microservices in a cloud-native architecture. APIs facilitate communication between different services and systems, enabling seamless integration and interoperability.

This API-first approach facilitates easier integration with fintech partners, regulatory reporting systems, and customer-facing applications, enabling banks to create more comprehensive and innovative financial services.

3. Containers

Containers are lightweight units that package an application along with its dependencies, ensuring that it runs consistently in different computing environments. Think of a container as a portable box that holds everything an application needs to run. This portability simplifies deployment across various environments, from development to testing to production.

Container orchestration tools, like Kubernetes, manage these containers, ensuring optimal resource allocation, high availability, and seamless scaling. This approach enables banks to efficiently manage workloads and respond quickly to changing demands.

4. Service meshes

As the number of microservices grows, service meshes become crucial for managing communication between them. They handle service discovery, load balancing, and security, improving the overall reliability and performance of the core banking system.

5. Immutable infrastructure

This practice ensures that components of cloud-native applications are never modified after deployment; rather, they are replaced with new versions.

For financial institutions, immutable infrastructure ensures consistency, reliability, and security.

6. DevOps and Continuous Integration/Continuous Delivery (CI/CD)

Cloud-native development thrives on DevOps practices, which foster collaboration between software development and IT operations teams throughout the entire software lifecycle.

This collaboration is facilitated by Continuous Integration (CI) and Continuous Delivery (CD) pipelines, which automate the building, testing, and deployment of applications.

CI/CD allows for faster time-to-market for new features and regular improvements, enabling banks to rapidly respond to market changes, regulatory requirements, and customer needs while maintaining system stability.

7. Serverless computing

Serverless computing allows developers to build and run applications without managing underlying infrastructure since cloud providers are responsible for scaling and managing the servers needed to run code.

This pay-per-use model eliminates maintenance overhead, allowing financial institutions to save costs and scale resources up or down based on real-time demand.

Difference between cloud-native and traditional core banking applications

Traditional on-premise core banking systems are typically monolithic, meaning they're built as a single, interconnected piece of software. These systems often run on dedicated hardware within an institution’s data centres.

Cloud-native core banking systems, on the other hand, are made up of loosely coupled components, and optimized for cloud environments.

Below are other key differences between traditional and cloud-native applications:

Scalability

• Traditional: Scaling involves often requires significant investment in additional hardware and can take considerable time to implement. Moreover, it requires significant downtime, affecting service availability and customer experience.
• Cloud-Native: Leveraging the elastic nature of cloud infrastructure, they can dynamically scale up or down based on demand, without requiring significant upfront investments. This scalability ensures optimal performance during peak periods, such as during a surge in transactions or end-of-month processing, enabling banks to provide uninterrupted services to customers.

Flexibility

• Traditional: Its rigid, monolithic architecture makes it difficult to introduce changes or new functionalities. Customizations and integrations with third-party systems require extensive effort and can lead to prolonged development cycles, limiting the bank's ability to adapt quickly to changing market conditions.
• Cloud-Native: Its microservices architecture allows for easy addition or modification of services, meaning institutions can quickly add new features or integrate with external systems. This modularity offers unparalleled flexibility, enabling banks to adapt to new market demands or regulatory changes with minimal disruption.

Resilience and availability

• Traditional: Ensuring high availability and disaster recovery in traditional setups often involves complex, redundant infrastructure and elaborate backup procedures. These measures can be expensive and are not always foolproof, leading to potential downtime that impacts customer trust and satisfaction.
• Cloud-Native: Built-in redundancy and disaster recovery capabilities ensure that services remain available even during hardware failures or other disruptions, maintaining operational continuity and customer trust.

Deployment and updates

• Traditional: Deploying updates in traditional systems can be cumbersome and risky. The tightly integrated nature of monolithic applications means that even minor changes require extensive testing and scheduled downtime, slowing the deployment of new features and bug fixes.
• Cloud-Native: CI/CD pipelines allow for frequent and reliable deployments, enabling banks to quickly roll out new features and updates.

Cost structure

• Traditional: Requires substantial capital expenditure for hardware and software, as well as ongoing maintenance and operational costs
• Cloud-Native: Uses a pay-as-you-go pricing model, leading to lower upfront and ongoing costs.

Integration capabilities

• Traditional: Integrating with modern technologies and third-party services often requires custom interfaces or middleware for integration with other systems due to their monolithic architecture and reliance on legacy protocols.
• Cloud-Native: APIs facilitate seamless integration with internal and external systems, allowing banks to easily incorporate new technologies, partner with fintechs, and offer enhanced services to customers.

Innovation and agility

• Traditional: Development cycles are longer due to the interconnected nature of traditional systems, slowing down the introduction of new features.
• Cloud-Native: Microservices architecture and DevOps practices enable rapid development and deployment of new features, often in weeks or days. This agility enables banks to quickly respond to customer needs, regulatory changes, and competitive pressures, ensuring they remain at the forefront of the industry.

Cloud-native vs. cloud-enabled core banking software

“Cloud-native” is sometimes used interchangeably with “cloud-enabled” in the context of core banking software. However, both terms represent fundamentally different approaches to cloud adoption.

Cloud-enabled applications, also known as "lift and shift" solutions, are traditional core banking systems that have been moved to the cloud with minimal modifications. While this approach allows banks to benefit from some cloud advantages like reduced hardware costs and improved accessibility, it doesn't fully leverage the cloud's potential. These systems retain their monolithic architecture and inherit many of the limitations of on-premises solutions, such as limited scalability and difficulty in implementing rapid updates.

In contrast, cloud-native applications are designed and built specifically for cloud environments from the ground up. They fully embrace cloud principles and technologies, including microservices architecture, containerization, and DevOps practices. This approach allows for true elasticity, enabling banks to scale resources dynamically, deploy updates continuously, and integrate new features seamlessly.

While cloud-enabled applications can be a stepping stone in a bank's digital transformation journey, they represent a compromise between legacy systems and true cloud-native solutions. Financial institutions aiming for maximum agility, scalability, and innovation should consider cloud-native core banking platforms as their long-term strategic goal.

According to Accenture, “When fully implemented, cloud alters the character of the organization: its innate flexibility, the speed at which it operates, and its openness to change and innovation.”

Benefits of cloud-native core banking software for financial institutions

Cloud-native core banking software offers numerous advantages for financial institutions, enabling them to stay competitive in an increasingly digital marketplace. Here are the key benefits:

1. Faster time-to-market and innovation

Cloud-native architecture enables financial institutions to rapidly develop and deploy new products and services. The microservices structure allows teams to work on different components simultaneously, significantly reducing development cycles.

With continuous integration and continuous delivery (CI/CD) pipelines, updates and new features can be rolled out quickly and frequently. This agility allows banks to respond swiftly to market demands, regulatory changes, and emerging opportunities, fostering a culture of innovation and helping them stay ahead of the competition.

2. Improved operational efficiency

With cloud-native core banking software, financial institutions can streamline their operations by automating routine tasks and reducing manual intervention. This leads to more efficient processes and fewer errors, boosting productivity and reliable service delivery.

3. Enhanced customer experience

Cloud-native core banking software empowers financial institutions to deliver responsive, personalized, and seamless banking experiences.

APIs facilitate seamless integration with third-party services, enabling banks to offer a wider range of products and services that cater to evolving customer needs.

Additionally, the scalability of cloud-native systems ensures consistent performance even during peak usage times, leading to higher customer satisfaction and loyalty.

4. Reduced operating costs

Cloud-based core system providers offer a pay-as-you-go model, eliminating the need for large upfront investments in hardware and ongoing maintenance costs.

Automated processes reduce manual intervention, cutting down on labour costs. Moreover, the ability to quickly deploy and test new features can lead to substantial savings in development and time-to-market costs.

5. Increased scalability and flexibility

The cloud-native approach provides unparalleled scalability, allowing financial institutions to handle fluctuating workloads effortlessly. Whether it's a sudden spike in transaction volume or the need to support new branches and services, cloud-native systems can scale up or down automatically. This flexibility enables banks to adapt to changing business requirements without compromising performance or incurring significant costs.

The modular nature of microservices also provides flexibility in system design, allowing banks to add, modify, or replace services as needed without disrupting the entire system.

6. Improved security and compliance

Contrary to initial concerns about cloud security, cloud-native core banking systems often offer enhanced security features.

Cloud providers invest heavily in advanced security technologies and practices, including encryption, identity and access management, and continuous monitoring. Regular, automated updates also ensure that the latest security patches are always in place.

Furthermore, many cloud-native solutions come with built-in compliance tools and features, helping banks meet regulatory requirements more easily and adapt quickly to new regulations.

Bank on the Cloud with Woodcore

Cloud-native core banking software is a powerful tool for financial institutions looking to modernize their operations, improve their service offerings, and maintain a competitive edge in the rapidly evolving financial services landscape.

The good news is that you don’t have to build your own from scratch. Woodcore offers a robust, flexible, and agile cloud-native core banking platform that empowers you to deliver a superior customer experience, operate more efficiently, and innovate faster, all while optimizing costs and maintaining robust security.

Book a demo today to learn more.