On-premise VS cloud – vol. 1

Mariann Harrison

On-premise VS cloud – vol. 1

Author: Máté Hidvégi, Head of Development at ApPello

In just a few years’ time, the banking sector is set to undergo huge transformation. On the one hand, there is constant pressure on the part of customers, who are spoilt by the high-tech giants with their user interfaces that sweep the board and convenient and hyper-fast administration. On the other hand, new technologies and disruptive business models are having a compelling impact so that banks need to start developing serious strategies if they want to remain competitive.

Due to strict regulations and cyber security aspects, the majority of banks are still operating their own server centres and in-house IT systems, with software running on an on-premise basis. That is, whatever application they acquire from an outside developer they purchase the package and then, after thorough customization, they run it on their own IT infrastructure.

In contrast, in the cloud solution banks take advantage of the servers of external service providers, data and applications are run on high-end external hardware and software, but even in this setup bank still have to ensure compliance with the relevant legal regulations, fire safety and data security.

It would appear that there is need for a more proactive and courageous strategy in order for a bank to take up cloud solutions, even though this would give access to many innovative extra services and state-of-the-art technology that is more costly to create in a bank’s own IT division.

So, what to do?

This article is designed to help those decision-makers who are just now considering whether they dare employ pioneering solutions in the strictly regulated banking environment or whether, for the time being, it would be more sensible to stick to a tried and tested strategy. Or perhaps a combination of these two approaches would lead to the most efficient operation…

Let’s start out on the assumption that in principle, every bank has its own server room and a hefty level of IT infrastructure because the sensitivity of data in a credit institution demands a high-level cyber security protocol. The conclusion that in this way, on-premise is a cheaper and safer solution is self-evident, because the conditions are already given. However, the situation is more nuanced than this.

A cloud service provider applying modern technology is capable of serving up to 150 banks at the same time, in the meantime guaranteeing constant monitoring of the system, operational continuity and overload monitoring, all of which requires the involvement of many dedicated IT experts on the part of the bank.
Furthermore, flexibility of use and scalability are other factors in favour of the cost effectiveness of cloud service providers. For those banks where transaction volumes are higher or perhaps they are planning to enter new markets, the issue of scalability is vitally important. For them, the cloud provides a much more flexible and predictable cost construction.

The next question is: CAPEX or OPEX ?

From an accounting point of view, decision-makers have to weigh up whether the CAPEX or OPEX cost structure lies closer to the bank’s financial strategy. Whereas on-premise requires a larger one-off investment, in contrast the cloud solution pay-as-you-go pricing model increases operational expenditure and adapts far more flexibly to the amount of use. At the same time, an unexpected uptick or considerable increase in volume can make the operation significantly more expensive, in other words, success can come with additional costs. We are not going to come to a clear-cut standpoint, instead the right decision depends much more on how well the user is able to judge the volume of the planned project.

At the same time, an important factor in favour of the on-premise solution is that a software package run ‘in-house’ can be far more customizable than an off-the-shelf product running in the cloud. The more customized elements there are, the more complicated the testing is, which is why on the user’s side there is a preference for an own operated solution. The picture is further nuanced by the fact that very many apps are developed to be ‘cloud-ready’ so the user can decide how deeply he/she wishes to customize the application.
Software versions of the ApPello Digital Platform are basically off-the-shelf products, despite which they can be highly customized, flexibly developed and can even be complemented with 3rd party components. Although current experience indicates that the banks primarily prefer the on-premise application, irrespective of this all products are accessible in the cloud as well and they can be used in line with the individual demands of the client.

So the winner is…

This brings us back to the question raised at the beginning: whether a client selects an on-premise or cloud application is largely down to individual demands and operational characteristics.

Cloud services are:

  • more scalable
  • provide a greater degree of flexibility when volumes fluctuate
  • are cost effective
  • provide state-of-the-art technology alongside significant expertise

The on-premise construction:

  • can be better controlled
  • more easily made compliant to strict security provisions
  • operates more cost effectively with larger volumes
  • it provides better support for customization

Why not use both solutions in parallel or alternating?

Finally, we put forward the concept of a hybrid strategy: why not use both solutions in parallel or alternating?

In other words, weigh up which one to use by project. Hybrid or combined solutions can represent a good transition, providing new opportunities for open-minded and entrepreneurial decision-makers.

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