CU Management Magazine

Head in the Cloud

By Celia Shatzman

No matter the era, there is always something that experts and amateurs alike will determine to be the key to the future success of credit unions. These days, that’s the cloud core. As technology continues to evolve, the cloud has been at the forefront of predicted advancements and achievements in the industry. After all, being able to reliably serve members has always been a cornerstone of credit unions’ success, and that is a key selling point of the cloud core.

“Cloud-based cores are going to increase a credit union’s ability to truly transact from anywhere, anytime via any channel for their membership,” says Amber Harsin, CUDE, CEO of CUProdigy (cuprodigy.com), a credit union service organization and core provider based in Salt Lake City.

“The ability to access cloud environments from anywhere and build in multiple points of redundancy in operations is a powerful business continuity tool for every credit union. Software deployments are hands-off for the credit unions, hardware maintenance is obsolete, and the IT team gets to do the cool stuff of vetting technologies that serve each credit union’s unique memberships.” Everybody wins.

Major financial institutions, including Chase (chase.com) and First Horizon Bank (firsthorizon.com), have already moved large parts of their core systems to the public cloud, signifying a big break-through and a turning point in the industry. Moving to the cloud not only can improve technological capabilities for a credit union, but also help deliver a seamless digital experience and advanced tools and technologies to members.

“Credit unions have been using private and public cloud technology for some time now,” says Shanon McLachlan, VP of Jack Henry & Associates Inc. (jackhenry.com), Monett, Missouri, and president of Symitar (symitar.com), a division of Jack Henry with headquarters in San Diego. “By leveraging cloud technology, credit unions can enhance their strategic and technical agility to innovate and differentiate quickly against emerging challengers and disruptors. As the lines increasingly blur between traditional, big tech and fintech providers, agility and speed-to-market are imperative to credit unions’ viability and future- readiness. Applications that are architected and written for the public cloud can benefit most from that environment.”

Below, experts share how the cloud core will have a role in the future success of credit unions.

IMPROVING THE CREDIT UNION EXPERIENCE

Switching to a cloud core isn’t just beneficial to the credit union itself—it can bring major perks for members. “The speed of release of new features and services are the promised member benefits, while scalability and openness are the primary promised benefits to the credit union,” says Brad Smith, partner at Cornerstone Advisors (crnrstone.com), Scottsdale, Arizona.

For instance, switching to a cloud-based core makes the risk of downtime practically nonexistent. Preston Packer, VP/CMO of FLEX Credit Union Technology (flexcutech.com), Sandy, Utah, explains that ATMs, debit card networks, internet banking and mobile apps must always be on and available. “That is the expectation for all of us as consumers, not just as members of a credit union,” he says. “How many times have all of us gone to a website and have it not work? That impacts our relationship with that retailer or that website. We are now dealing with the on-demand generation.”

Using a cloud core can improve the overall technology infrastructure for credit unions by reducing hardware spending and maintenance. At the same time, it’s crucial for credit unions to vet the security and reliability of their cloud providers.

“Physical security at a data center is constant—redundant power, cooling, fire suppression are all things that can be difficult for a credit union when it comes to the simple physical security of infrastructure environment,” Harsin says. “Data security in a cloud-based core means multiple layers of encryption both in transit and at rest, automatic backups, backups to the backups, near-real-time data replication running 24/7/365. [These features] provide a level of comfort to credit unions that if an event occurs, their systems can continue running.”

Removing the management and monitoring of physical backup devices frees up physical space as well as IT bandwidth, giving IT team members the opportunity to invest their time and efforts in other areas—such as focusing on new member-facing technology.

“Leveraging a cloud core improves the lives of credit union employees, which then improves the lives of members,” says Sarah Allison, CFO of $205 million Sterling Federal Credit Union (sterlingcreditunion.org), Sterling, Colorado. “Everyone’s experience is streamlined, and it frees up employees to focus on better serving members.”

A cloud platform also helps foster innovation and growth for credit unions because it increases market agility, allows the faster building of technology ecosystems, and provides the ability to better leverage data and artificial intelligence/machine learning services to deliver personalized services and products. And utilizing the cloud means that data is always accessible.

“From a business perspective, credit unions may benefit from scalability, enhanced security, operational efficiency and lower total cost of ownership through reduced physical hardware and software license expense,” McLachlan notes.

PRIVATE VERSUS PUBLIC CLOUD

Smith breaks down the difference between the various cloud models: “Traditionally, core systems have been deployed in a private cloud environment, managed by either the credit union in an in-house model, or the core vendor or their designated partner, such as a CUSO, as a hosted model. A private cloud environment typically places responsibility for functions—such as system operations, infrastructure upgrades and disaster recovery—in the hands of the client or the core vendor or their designated partner(s).

“In a public cloud environment, such as AWS (Amazon Web Services, aws.amazon.com) or Azure (azure.microsoft.com), the cloud provider provides the infrastructure, leaving system operations the responsibility of the credit union,” Smith continues.

“This may then give credit unions greater control over deployment of releases, job scheduling, file imports/exports and system configuration/customization that they would enjoy in a hosted environment while placing the onus of hardware management, load balancing and infrastructure upgrades in the hands of the cloud provider. There may also be financial benefits to a model that allows the institution to pay only for the processing it consumes, as well as licensing and amortizing the software, versus paying the core vendor a per-account fee.

“There are also hybrid models in which the credit union connects its server environment to a public cloud provider while running the core in-house. This alternative may allow credit unions to split workloads between in-house servers and the public cloud to gain greater efficiency—using proprietary servers for host-sensitive workloads and processes and [running] those requiring greater server resources on the public cloud.”

From a cost perspective, it would be very expensive for a credit union to build out its own private data center and move its infrastructure to the cloud. Harsin notes that public clouds like AWS and Azure are going to be far more affordable, but there is some trade-off in terms of knowing where your data is at all times. Private clouds offered by many CUSOs can provide the economies of scale that make a cloud-based infrastructure cost-effective for credit unions.

Credit unions should consider such variables as peaks and valleys in traffic when determing which model is most efficient and best meets their needs. “I think it all depends on the type of applicationthe type of data and the environment,” says CUES member Javier Lozano, VP/information services of $943 million Northern Savings Credit Union (northsave.com), Prince Rupert, British Columbia.

“We’re still in the early stages of embracing the cloud as a whole, so we will start with the hybrid environment,” Lozano explains. “Some services will remain in more of a public environment because they make sense, such as things where you don’t have a lot of private data. … But when it comes to data that is sensitive, that requires a higher degree of privacy. I think a private cloud, at least for now, is a better solution for the type of organization that we are. We have both kinds of capabilities available to us because of the need for compliance and the need to protect privacy. I think that’s going to evolve and change in the future.”

THE DRAG OF LEGACY SYSTEMS

If your credit union’s existing core is showing its age, now is a good time to consider a cloud-based solution.

“The drag of legacy core systems refers to the older architecture and closed nature … that produced strong, secure and reliable systems but now struggle to keep up with the needed pace of change,” Smith says. “These older systems have much longer development cycles and are more difficult to communicate with by the myriad third-party vendors and fintechs that need access to credit union member information.”

Upgrading certainly poses challenges, since it can be hard to integrate with and mine data from legacy systems. “When your core database architecture and languages are over 30 years old (which is very common), it becomes time-consuming to make old and new system languages speak to each other, which immediately increases expense,” Harsin says. “These old systems were not designed to easily get data from them. They were meant to chug through postings and can do a great job at that, but pulling out MCC (merchant category) codes to see where your members use their debit card and how often? Well, that may be a custom report and X dollars of data analyst or developer time that you have to pay. It does not need to be that way. Modern architectures are designed to be open for the purpose of extracting as much data as one may want.”

Older core banking systems were usually designed for reliability rather than the agility offered by open architecture. A modern cloud core allows financial institutions to be much more nimble.

“With legacy systems, you can only take advantage of what they offer,” says Darrin Blankenbeckler, CEO of Sterling FCU. “We leverage an open API system through MDT (Member Driven Technologies, mdtmi.com, Farmington Hills, Michigan), so we have access to and can seamlessly integrate with many products from other vendors.”

His colleague, Allison, notes that technology is rapidly evolving. “With legacy systems, you don’t have the flexibility to take advantage of new technological advances, which can lead to struggles with member retention and can be costly,” she adds.

COMPETITION & DIGITAL TRANSFORMATION

“Leveraging a cloud core allows us to offer services in a cost-effective way to our members, which enables us to compete with big banks,” Blankenbeckler says. Big banks have been embracing cloud cores faster than credit unions, which has allowed them to pivot faster and add new services more quickly.

“The financial services industry is fast becoming a technology-driven industry,” McLachlan says. “A move to cloud-based solutions allows credit unions to leverage the most modern technologies available. Cloud cores enable community financial institutions and non-chartered fintechs to target specific niche markets with streamlined product offerings. This reduces the barrier to entry into new markets and helps level the playing field for credit unions battling for market share against big banks and other disruptors.”

If adapting to a cloud core offers more equal footing, credit unions should take advantage. “We have to acknowledge that we’re playing on a tilted field,” Packer says. “The minute that we… recognize that, we can do something about it. Credit unions can pivot, like a big bank can. It’s David and Goliath. Credit unions need to embrace that underdog spirit and find partners that make them more efficient. We have to embrace our differences and then we have to strengthen our strengths.”

Traditionally, credit unions have lagged on their technological offerings, notes Sabeh Samaha, president/CEO, Samaha & Associates Inc. (ssamaha.com), a financial technology consulting firm based in Miami Beach, Florida, but that is starting to change. “Technology fear is no longer the case,” he says. “The big banks are throwing billions of dollars into technology. We have to really pay attention and then work closely with our partners to make sure they bring competitive functionality and competitive services.”

Digital transformation initiatives are helping to trigger core migrations throughout the credit union industry. “More features, improved user experience, and better systems and channel integration from digital initiatives highlight flaws in dated core systems,” Smith says.

“Likewise, many legacy core products are unofficially being sunset, which is triggering more credit unions to abandon their core vendor’s digital offerings ahead of their likely core replacement.”

Examining a credit union’s technology unlocks opportunity across the board. “It is hard to think of an organization today that is not thinking about data and how to connect better with our members and our community,” Lozano says. “The core banking system is that first place where we’re going to start. From there, we’re going to move to the online banking application, the CRM (customer relationship management) system, maybe the lendingsystem, but we need to have a place where we collect most of the information. And that’s basically what the core banking is, that record of history and transactions and everything that we need and making it accessible. This is something that we can connect and integrate easily with other applications and systems. We’re going to mature over time and understand how to use that information better and better.”

EVOLVING THE REMOTE WORKFORCE

Thanks to the pandemic, people have been turning to remote work in droves over the last two years. Moving to a cloud core has been instrumental in providing the technical capabilities needed to allow credit union employees to work from home; after all, one of the biggest perks of cloud-based cores is they can be accessed from anywhere in the world. No matter the location or the time zone, all you need is a secure VPN (virtual private network) tunnel.

“This is a significant benefit, as many credit unions plan to support remote and hybrid work environments in the long term,” McLachlan says. “In addition to traditional user ID and password access, many credit unions have added additional layers of security for remote access, including both MFA (multi-factor authentication) and VPN. Both … prevent bad actors with compromised credentials from accessing the credit union’s systems.

“There are a number of affordable COTS (commercial off-the-shelf) products available for both MFA and VPN,” McLachlan adds. “A strategy of layered defense has proven to be the best defense against bad actors gaining access to consumer information through the credit union’s core and complementary systems.”

Like many other credit unions, Lozano says the team at Northern Savings CU was worried that it would be very difficult to transition to a remote workforce, but the shift was smoother than expected.

“We’ve been able, actually, to not just get a lot more things done in the last couple of years, but to really strengthen a lot of relationships,” he says. “We are really far away from any major city, so you have to think about communities that are already separated from each other because of geographical boundaries. Having access to those communities is really difficult.

“What the technology did was to create more channels and opportunities to be in contact with each other. We know that for some people, it has been difficult to make this transition. But we feel that overall, the ability to provide that kind of flexibility to the workforce and support people the way they needed to be supported … has been very beneficial for the organization. Having a system that now can be accessed from anywhere safely and securely and provide that level of accessibility to the workforce has been invaluable.”

Ultimately, switching to a cloud-based core will keep information at the fingertips of a credit union and its employees, which is what it’s all about these days. “We live in a global village,” Packer says. “When and where I connect to data should not impact my ability to move with data. If access to data is limiting or slowing a remote workforce, you need a new technology partner, period. It doesn’t matter where you are, where you live, work or play in relation to that data.”

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