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Why Is Cloud-Based Digital Banking Not the Future of Banking?

Oct, 26, 2021
Alex Malyshev

Over the past few years, the banking sector, like other industries, has started adopting cloud-based computing for daily banking operations.

But despite the current shift towards cloud-based banking, some financial institutions are still hedging to migrate their operations to the cloud exclusively — and for good reason.

But what is a cloud bank, and why should financial institutions not rush to implement it?

In this article, we explore the challenges and benefits of cloud-based digital banking. But first, let’s define relevant terms.

What is cloud-based banking?

Before going any further, let’s define a cloud bank.

A cloud bank is any banking infrastructure that exists on the cloud. 

So what is cloud-based banking?

Cloud-based banking refers to deploying (and managing) banking infrastructure in order to control cloud-based core banking operations and financial services without dedicated physical servers.

How does it work?

Cloud service providers (CSPs) like Microsoft, Google, and Azure handle the complex cloud infrastructure and allow banks to use it for specified fees. 

Depending on the company’s size and budget, a CSP can offer private, public, or hybrid clouds. 

Cloud-based service providers

Source: Capgemini

Some of the standard cloud service models include:

  • Business Process-as-a-Service (BPaaS) — provides services that cover everyday operations like billing and human resources.
  • Infrastructure-as-a-Service (IaaS) — delivers a fully-fledged core banking infrastructure that handles business operations and software integrations.
  • Software-as-a-Service (SaaS) — delivers cloud-based banking software for accounting, invoicing, customer relationship management, etc.
  • Platform-as-a-Service (PaaS) — offers a cloud-based core banking platform for app and database development.

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Advantages of cloud-based banking 

Now that we’ve established a relationship between cloud computing and banking, let’s explore the advantages of migrating your bank to the cloud.


When you host your banking infrastructure on the cloud, you won’t have to pay server costs; the cloud service vendor handles maintenance. Instead, your financial institution only needs to pay a subscription fee. 

Besides, modern CSPs use a pay-per-use model, which is a cost-efficient option for banks of all sizes. 


When your banking services run on the cloud, compatibility won’t be an issue because cloud infrastructure works on all platforms. 

Conversely, banking organizations that rely on legacy software might experience compatibility issues when modernizing their infrastructure.


Most banks are shifting to cloud-based banking solutions because they are convenient to use. At the same time, CSPs now provide data management services to manage complex processes within the bank.


As it stands, Amazon, Microsoft, Google, Alibaba, and Huawei dominate over 80% of cloud banking market shares, which signifies that these giants are backing cloud-based banking.

With that in mind, financial organizations can choose any CSP that meets their requirements and budget.

cloud based banking services share

Fraud detection

Financial institutions cannot tolerate any data breaches; your organization needs airtight data management systems to protect sensitive information from criminals.

With cloud-based banking solutions, you can protect your digital retail bank from malicious third-party access. Cloud-based solutions can also help digital banking institutions detect irregularities like identity fraud and money-laundering operations.


Since cloud vendors offer banking solutions with built-in data management systems, banks can enjoy automated data reporting and analysis. 


Managing banking operations requires significant computing power, which affects the environment negatively. But with cloud computing, you can maintain an eco-friendly infrastructure for your internal and external services.

Challenges of cloud-based banking 

Despite the eye-catching promises of cloud-based core banking solutions, the challenges to this model are enormous. 

Let’s explore the risks of cloud-based banking:


Banks and other financial institutions must abide by various local and global regulatory guidelines regarding data sharing and usage. At the same time, cloud vendors offer a different set of compliance rules, which conflict with established financial regulations.

As a result, banks must hire professionals to cross-reference these conflicting regulations in order to avoid fines. 

Here is a quote from a London bank CEO as reported by Cloudera’s managing director, Dr. Richard Harmon:

“Banking in the cloud consists of the largest, and most significantly regulated industry in the world, running on an entirely unregulated infrastructure.”

This quote encapsulates the sentiment of conflicting regulatory standards in handling cloud-based core banking solutions.


Despite the promises of airtight security and privacy, the cloud is not a haven for sensitive user and company data. 

Companies like Google are infamous for selling user data, which goes against GDPR compliance standards. Although the company claims to protect banking data, no guarantees exist that they keep to their word.

Data migration

Moving the entire architecture is a momentous task that most companies struggle to handle. In fact, Bloor Research carried out a study that showed that 38% of all data migration efforts end in utter disaster.

If your organization is migrating from obsolete legacy software, finding qualified cloud computing experts becomes a menacing headache.

Besides, migrating cloud-based banking services can take several months, depending on the bank’s size and underlying infrastructure. And in the hands of incompetent migration technicians, the process can disrupt banking operations significantly. 

Outsourcing risks

If a bank doesn’t have a properly-trained IT department to implement the cloud-based banking core, they would have to outsource the migrations, which presents additional security risks.

Outsourcing means that the bank hands over the reins of the entire banking architecture to a third party. By doing so, the bank or financial institutions endanger their users’ data.

Human error

Although most modern cloud banks rely on automated algorithms, humans still write the code and assemble the core infrastructure. 

Sky News reports that “sloppy coding” introduces over 1 million weaknesses in the software infrastructure that hackers can exploit.

Besides, a buggy code fragment can crumble the entire cloud infrastructure when creating a neo bank platform

So, you can never legislate for human incompetence and how it will affect your bank’s operations.

Unforeseen circumstances

Apart from human error, unforeseen circumstances can crush your cloud-based banking solutions.

Server downtimes and cyberattacks can render the application unusable. And since you don’t have any control over the vendor’s infrastructure, your organization will remain in limbo until they fix the issue.

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Cloud-based core banking vs. on-premise software

Financial entities are still at odds about migrating to cloud banks or adopting on-premise software. However, the truth remains that both options have several accompanying challenges and risks.

cloud-based banking hybrid

Source: Deloitte

On the one hand, cloud-based banking services are scalable because they are public, giving your organization less control over the system. On the other hand, your organization can adopt a private banking infrastructure to maintain control.

Essentially, the best option lies in the middle — a hybrid, on-premise cloud-based banking solution that internal teams can deploy and adjust.

And why is this the better option?

  1. Your IT department can handle internal operating models to suit your bank’s needs.
  2. Your financial organization can migrate to the cloud at a favorable pace.
  3. You can scale financial operations at your convenience.
  4. On-premise cloud infrastructure allows you to adjust the system to compliance standards and regulations.
  5. With on-premise solutions, you can add extra encryption and security protocols to protect sensitive user and company data.
  6. You can customize data analysis and handling based on specific use cases.
  7. Business teams and risk managers can make informed decisions to curb unnecessary billing expenses on cloud-based services.


The future of banking is in cloud-based systems, and the involvement of tech giants like Google, Microsoft, and Amazon consolidates this fact. But before adopting cloud-based banking solutions, explore the challenges, benefits, and billing costs. 

Alternatively, invest in on-site digital banking solutions tailored to your banking requirements. That way, you end up with a banking infrastructure that meets all industry regulations and compliance standards. Besides, you gain absolute control over banking data analysis, risk assessment, and daily operations. 

If you need help implementing digital banking solutions for your financial institution, reach out to us right away. Our experts will help you develop and migrate to an on-premise banking solution within a short timeframe.

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What is cloud-based banking?

Cloud-based banking refers to deploying (and managing) banking infrastructure in order to control cloud-based core banking operations and financial services without dedicated physical servers.

What is better - cloud-based core banking vs. on-premise software?

Here are the reasons why on-premise banking solution can make a better option:

  1. IT department can handle internal operating models to suit the bank’s needs.
  2. You can migrate to the cloud at a favorable pace.
  3. You can scale financial operations at your convenience.
  4. On-premise cloud infrastructure allows to adjust the system to comply with all standards and regulations.
  5. On-premise solutions, allow adding extra security protocols to protect sensitive data.
  6. Business teams and risk managers can curb unnecessary cloud-based services expenses.

What are the risks of cloud-based digital banking?

  1. Conflicting regulations
  2. Security risks
  3. Data migration
  4. Outsourcing risks
  5. Possible coding issues.
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