vk.com/id446425943		79
March 2018	Citi GPS: Global Perspectives & Solutions

Cloud Ecosystem – The Vision for Hardware, Applications and Data

Often we hear the phrase that “the cloud is just someone else’s computer” as if to imply that this evolution in tech is no big deal. While it’s true that the use of public cloud uses “someone else’s computer;” this is not true of private clouds, yet banks are still building them out. So it’s not as simple as the idea of a computer.

In fact, we think of the cloud as a service, not a computer. It’s this ‘service’ and set of capabilities, in addition to the entire ecosystem that comes with the cloud, which is transformational. When we refer to ecosystem, we are referring to the cloud (infrastructure), applications (software) and data. Benefits across all three of these facets are what can be truly transformational to the banking industry.

Modernized hardware allows for increased speed and efficiency of resource allocation and cost savings – The ability to virtualize all IT hardware (servers, compute and network) is now available, which means less need for physical equipment than with a legacy IT stack. This leads to cost saves (less physical presence), but also allows for on-demand provisioning of virtual machines.

For example, in a legacy environment, if a business line needed more resources, it would take upwards of 3-4 months to request servers, have the physical equipment delivered and racked into a data center. With cloud, a process measured in months can now be done in minutes. As more resources are demanded, a virtual machine can be spun up in minutes.

Modernized applications built with micro-services provide flexible and agile products – As back-end infrastructure is moving onto the cloud, applications are also being re-engineered to fully utilize cloud native features. Monolithic applications are now giving way to modular applications built from scalable micro-services.

The application design is becoming more manageable and resilient across the franchise with designs using Lego®-like micro-services connected through standardized APIs. With more flexible designs, we expect the cost of application maintenance to come down.

In addition, the ability to change quickly, innovate easily and compete is a strategic necessity. The ability to update applications with speed will likely become strategically important in areas like retail banking, payments, etc.

–We expect banks to ‘pick their spots’ and be methodical about which applications make sense to be re-engineered for the cloud. Workloads that appear to be better suited on a cloud environment (and likely among those to move first) include those that use high compute power (risk modelling, Monte Carlo) and those with spikey demand (trading, payments, mobile apps). Separately, banks can modernize and/or add new capabilities with SaaS applications although can take c.18 months to implement into legacy systems vs. one-third the time if micro-services were used.

© 2018 Citigroup

vk.com/id446425943
80	Citi GPS: Global Perspectives & Solutions	March 2018

Enhancing data by decluttering and standardizing data usage – Data is at the core of banks’ ability to provide reliable and secure banking services. We see banks investing in data quality clean-up to better leverage and unlock the information. There is the need for data quality, accessibility, and standardization—which best comes from upgrading and realigning banks’ core infrastructure.

The data clean-up initiatives are crucial in order for machine learning algorithms to extract meaningful insight. Setting an end-to-end data strategy can provide a more seamless client-centric experience, as well as enable more powerful analytics and AI tools.

With better data, there should be better integrated applications that allow customers to manage all accounts (debit, credit mortgage, trading, etc.) opened with the banks from one gateway point. Better quality data will enhance efficiencies of chatbots and robotic process automation (RPA) tools while moving closer to real-time B2B and P2P payments.

There are three levels of cloud computing: IaaS, PaaS and SaaS. IaaS is the most basic cloud service for raw hardware resources such as storage, computing, security or network capacity. PaaS includes infrastructure elements such as database, middleware, messaging, security, development tools and a presentation layer that are used to develop custom applications. SaaS is a cloudbased resource that is delivered as a complete software application to the enduser.

Figure 76. The Computing Stack for Public Cloud Offerings (Note 1)

IaaS	PaaS	SaaS
Application	Application	Application
Data	Data	Data
Runtime	Runtime	Runtime
Middleware	Middleware	Middleware
Operating System	Operating System	Operating System
Virtualization	Virtualization	Virtualization
Servers	Servers	Servers
Storage	Storage	Storage
Networking	Networking	Networking

= Managed by the software provider = Managed by the customer

Source: Citi Research; # Keep in mind that the ‘blue; bars are outsourced to public cloud providers. A private cloud (akin to IaaS or PaaS) would have both ’blue bars’ and ‘white bars’ both managed in-house, although ‘blue bars’ would be abstracted away.

Figure 77. Common Workload Paths to Cloud from On-Premises

Low

	“lift and	IaaS
	shift”

premises		/ Re-factor			PaaS	Efficiency&
On-		Re-host			Legacy
		Re-write
					Cloud	Effort
					native
		Re-buy &			SaaS
		re-deploy
						High

Source: Citi Research

© 2018 Citigroup

vk.com/id446425943		81
March 2018	Citi GPS: Global Perspectives & Solutions

Benefits to Modernizing Infrastructure – Cloud Can Lead to Cost

Saves, Flexibility and Better Resource Allocation

A simple way to think of hardware infrastructure is the data centers’ facilities full of server ‘computer’ stacks, network and cables for communication and all the supporting software that makes hardware run. Simply put, cloud makes all of this virtual. The IT infrastructure is accessible via the Internet.

In the past, applications or programs would run on software downloaded to a physical computer or server; now the same kind of applications can be accessed through the Internet. Consequently, cloud increases efficiency, and allows flexibility and automatic software updates.

Cloud helps to cut the high cost of hardware. It also helps eliminate some of the maintenance costs. Less maintenance and less physical equipment improve the opportunity cost of maintaining the infrastructure as well as the real dollar cost of maintaining the physical equipment and server farms.

Cloud allows a user to scale up the cloud capacity by drawing on remote servers. And conversely, provides the ability to scale down. This provides a level of flexibility in calling for resources, which is a real advantage in that it can accommodate fluctuating business demands on tech with speed.

Cloud technology enables banks to get applications to market quickly without worrying about underlying infrastructure costs or maintenance. For example, Capital One moved its mobile servicing platform to the public cloud (AWS). They were able to tune/test and find/fix small pre-existing performance flaws in their applications. Using AWS removed the constraints that would have prevented them from developing their ideal application.

There Are Many Different Ways to Move Applications to the Cloud…

One term we hear very often is “re-platforming,” but we have found it to be used as an umbrella term to cover different strategies of moving legacy applications to the cloud. In this scenario, they would ideally be redesigned as micro-services in order to be considered cloud-native (able to leverage the on-demand elasticity of the cloud).

Choosing how to update applications is typically a trade-off between time/effort and application efficiency. While we have noticed that banks tend to modernize their infrastructure and apps in tandem, re-writing apps to the cloud is not prerequisite to streamlining systems.

Ideally, applications would be re-written to be cloud-native, though it’s a lot of work… – Apps that are being re-written typically taking longer to move to cloud because the amount of effort and work increases. To upgrade or re-write or re-engineer a legacy application to leverage cloud capabilities like on-demand elasticity, banks first need to map out their application architecture, then restructure the app; extracting the logic from the legacy app as a base for the new application, and coding it as more modular, scalable micro-services.

–But rewriting provides great benefits – Applications re-written in micro-services are simpler to modify and result in much faster innovation, scalability, and flexibility, further improving hardware efficiency. The enables faster time to market with deployment and updates.

–Micro-services are much more adept at leveraging the strengths of the cloud, like its on-demand scalability; this is why we refer to IT “nirvana” as a cloud environment with applications built with micro-services. Rewriting applications also provides banks a chance to simplify their systems.

© 2018 Citigroup

vk.com/id446425943
82	Citi GPS: Global Perspectives & Solutions	March 2018

Re-factoring is a partial re-write, and therefore results in only part of the benefits – Re-factoring involves breaking down an app into smaller pieces and can involve re-engineering some parts to be cloud-native. These applications typically only benefit from the marginally better scalability and flexibility, improving hardware efficiency but not to the extent that re-written apps would. We have heard this referred to as “lift-tinker-and-shift.”

The easiest option is to re-host – Re-hosting, otherwise known as the “lift and shift,” simply migrates an old application to a new environment (cloud) and little is done to re-factor or rewrite the application. The app logic is not changed and only the minimum modifications are made to ensure that it can run.

–…but yields fewer benefits – A “lift-and-shift” results in “your-mess-for-less” – the bank would benefit from a more efficient cloud infrastructure, but would miss out on any flexibility and efficiency benefits of embracing a cloud-native architecture, and these re-hosted applications are essentially unchanged and would inherit the issues related to legacy architecture.

Or banks can re-buy 3rd party solutions, but they tend to be less customizable – In some cases, banks may choose to re-buy a third-party solution or referred to as SaaS (software-as-a-service). Though often thought of as “plug-and-play,” they can take up to 1-2 years to integrate with the rest of the bank. Based on the size, scale and complexity of their needs, it’s not always feasible for banks to use third party products without material customization. Furthermore, banks are tied to the vendor’s release schedule or vulnerable vendor lock-in; whereas a bank’s own application can be updated by its own developers.

Some Application Workloads Are Easier to Move to Cloud than Others

Banks often refer to moving workloads to the cloud. These workloads encompass the components needed to run an application, including the application itself, relevant data, and then compute, network, and storage resources needed to execute the application. However, some workloads are more difficult to move than others, and we expect banks will be selective with which workloads move to the cloud based on an evaluation of the benefits and risks.

Certain workloads can be more easily moved to the cloud. For example, lower-value workloads that benefit from the cloud’s on-demand elasticity, like newer front-end engagement apps (e.g., mobile) or testing & development are typically the first to move to the cloud. In comparison, banks may be risk-averse about moving high value core banking systems which are harder to move because of long lifecycles and mission criticality.

The types of workloads on the cloud can be another barometer for cloud-progress. For example, Capital One has noted that it was the first U.S. bank to use the public cloud and it plans to migrate many core business and customer applications to AWS over the next five years. However, this would be only one data point. A bank with a lower percentage of workloads on the cloud may be spending more time and effort re-writing the application to fully leverage cloud characteristics.

© 2018 Citigroup