Ian Donald Head, Prime & Securities Services Technology, Standard Chartered
Custodian banking finds itself in the midst of rapid technological change. The industry needs the most advanced security and powerful computation, but it also wants those things to consume less energy and emit less greenhouse gasses, while still allowing it to innovate in a nimble and cost-effective way. Cloud computing looks like the only way forward.
Money, power, data
Traditionally, custodian banks have maintained their own data centres, in which they house their clients’ data - as they would store physical objects of value in bank vaults. Custodians install third-party software into those data centres and if the bank needs more servers, for instance to create a test environment for a new application, they buy and install them, often with a lead-time running into months.
Now, however, things are changing. Cloud computing allows custodian banks to migrate their systems to data centres run by companies that specialise in information technology. In 2018, 33 percent of bank respondents told Accenture that they had a high share of their workloads in the cloud; just two years later the figure had risen to 47 percent. What is driving this shift?
Rather than operating their own data centres, many custodian banks increasingly prefer a cloud-based arrangement in which the vendor provides software-as-a-service and is responsible for managing the platform. That way, the vendor applies their expertise and knowledge of the system to the best effect. This makes more sense than the bank retaining an army of technology experts who understand the vendor’s platform and administrate it.
The vendor’s intimate knowledge of their own systems has advantages for data security. Banks like Standard Chartered are attacked every day by criminals attempting to breach networks and steal information. Cloud providers guarantee a baseline level of security around a bank’s infrastructure, upon which greater security can be applied at the application level.
The cloud also has advantages in terms of environmental, social and governance (ESG) sustainability. Cloud providers are aware that ESG has risen to the forefront of many banks’ corporate strategies, and that their data centres must conform to the highest sustainability standards in terms of energy use, efficient cooling and sourcing renewable energy. From the banks’ point of view, if they need servers for a limited period, such as when testing a new application, it makes more sense financially and environmentally to use them for a few weeks on the cloud rather than installing permanent hardware sufficient for all possible current and future eventualities.
Barriers to cross
However, reaching the cloud end-point carries its own challenges for custodian banks. First and foremost, custodians are responsible for their clients’ data. They cannot offload that responsibility to a cloud provider. Custodian banks’ customers perform due diligence on their security arrangements not just from an operational perspective but on the network side too. As a result, the bank and the cloud vendor must forge a close relationship that establishes clear boundaries for where the responsibilities of each side lie.
Secondly, many national governments and regulators have their own strong convictions about appropriate security precautions, and these can extend to insisting that national data is held onshore. Countries like South Korea have long required this, but the idea has spread more widely in Asia and beyond, abetted by recent geopolitical frictions around the nature of globalisation itself. Such frictions cut multiple ways: a data centre located in the US, for instance, may encounter more scrutiny than one in the UK or Singapore.
This can mean that not all client data can be centralised, and that a custodian bank finds itself owning and managing different instances of the same application in different locations, which means securing that data separately in each one. This adds further complexity when it comes to analysing and reporting the data: such fragmentation requires workarounds to ensure that the information can be offered up to clients in a nimble, responsive manner.
Finally, it makes little sense simply to lift legacy systems from a data centre and deposit them into a cloud setting. To achieve the full benefits of the migration, the engineering and architecture of the systems need to change. For example, a large conventional “big box” application can be separated in the cloud into microservices, allowing them to be developed and modified separately without needing extensive testing across a whole gamut of other functions. Such re-engineering, however, has cost and time implications.
The future is cloudy
The cloud is not the only avenue through which the future is arriving quickly for custodian banks. Artificial intelligence and machine learning are already assisting with predictive analytics and data quality, for instance around settlement failures. They can be further enhanced by pulling in other streams such as macroeconomic data, but this requires scale in terms of data storage and computation power. The cloud can quickly provide this scale in a way that traditional solutions cannot.
Another key innovation for custodian banks are cryptocurrencies and blockchain-based tokenisation, which again have logical linkages to cloud computing. There is, for example, an increasing focus on how such technologies can be used to eliminate settlement risk. But while such technologies have arrived before the use-cases have fully matured, in the case of the cloud the advantages are already clear.
Ultimately, success for a custodian bank comes down to ensuring that data is in the right place at the right time and is of the requisite quality. Cloud computing is fast becoming the bedrock of custodian banking: its computational power and flexibility with stronger security and a lighter ecological footprint aligns with banks’ central strategies, while it offers the sandbox spaces needed to test and incorporate the other new technologies that will shape the sector in the years to come.
