How neobanks can save on hyperscale cloud costs

How neobanks can save on hyperscale cloud costs

Neobanks have changed the face of banking in the last five years – offering an alternative for digitally-minded consumers to the more traditional branch-based banks.

Their popularity has led to Grand View Research predicting that the neobanking market will grow to be worth $722.60 billion by 2028. In a recent article on neobanks, Finextra states that “the reason for this astronomical rise of the neobanks is the vast opportunity of the underserved left by traditional banks that were up for grabs during the pandemic. Most of these were freelancers, gig workers, and independent creators”.

100% digital, neobank apps and online platforms offer time-poor consumers and the self-employed more flexible, accessible banking. They fill the gap that has been widening in recent years between what traditional banks offer and what consumers now expect from their bank. During the pandemic, for example, consumers couldn’t go into high street bank branches because they were closed. It shone a spotlight on the need for banking services that don’t rely on a physical location, which had been growing in importance even before the pandemic.

As purely digital entities, what technology has been key to delivering on neobanks’ promise of more flexible banking?

The cloud has been a big enabler of neobanks’ success, giving developers an agile environment in which to develop, test and deploy new services quickly and an effortless experience for users. In particular, hyperscale cloud providers, which offer low cost, scalable services that are a very attractive proposition to new companies.

As with anything that seems too good to be true, however, what starts out as low cost can quickly start to ramp up.

The secret cost of hyperscale cloud

Because of the success that neobanks have achieved with the cloud since their inception, they are understandably cautious about moving away from the cloud for their digital banking infrastructure as they start to grow their customer base.

However, many are now realizing that the long-term costs of working with cloud hyperscalers are not sustainable if they want to continue to grow.

In a report titled “Lessons learned from the most common mistakes made by cloud infrastructure adopters”, Gartner analyst Miguel Angel Borrega revealed that instead of saving on costs, companies can in fact overspend by 20-50% indefinitely if they make mistakes during cloud adoption.

This is in direct contradiction with the claims of many hyperscalers that they can dramatically reduce total cost of ownership (TCO) of digital banking infrastructure.

Unfortunately, it’s not always that simple. For example, did you know that services such as monitoring day-to-day operations and networking security - key components of on-premises digital banking infrastructure - aren’t typically included with cloud services? If you look in detail at what is offered by the likes of Amazon Web Services (AWS) and Microsoft Azure, these services are sold as separate components. Equally, they look at data in terms of objects and assign a metered cost to every object. It means that if you run a data-intensive process, there is a price-per-gigabyte charge. Once you start to add services or data-intensive processes to your agreement with a big hyperscaler, the additional costs start to add up fast.

In a similar vein, neobanks could end up paying more for CPU resources because of the way that big hyperscalers price compute and storage separately. And, while flexibility may be a key USP for hyperscalers, more often than not, costs won’t be adjusted if neobanks don’t use all of their allocated resources that they’ve already paid for.

Every year, Flexera produces a ‘State of the Cloud Report’ and for the sixth year in a row, it shows that while cloud costs continue to grow, the amount of waste remains high. Optimizing the existing use of cloud is the number one initiative for companies surveyed, highlighting that FinOps teams need to look at ways to improve cost saving initiatives when it comes to the cloud.

How neobanks can save on hyperscale cloud costs

How does working with a bespoke hosting provider help reduce costs?

One of the solutions is to work with a partner that provides infrastructure hosting for banks on dedicated servers with cloud flexibility. There are a number of reasons that working with a fintech hosting provider can help lower costs.

A hosting provider can create an environment for a neobank that is configured to its specifications but with the cloud’s cornerstone flexibility, to expand or reduce digital banking infrastructure as needed.

By working with a bespoke hosting partner to create the environment you want, you get exactly what you pay for. For example, unlike hyperscalers, bare-metal hosting providers always package compute and storage together.

A fintech hosting provider is also a good option to create a decentralized, hybrid infrastructure. The strict regulations that govern the world of finance make hosting all services on public cloud either impossible - in the case of regions such as the Middle East where GDPR data cannot sit on public cloud - or inadvisable.

While it’s not illegal to host all digital banking infrastructure on the public cloud in the UK, for example, the Bank of England strongly advises that to help resiliency, financial services firms should work with more than one third-party provider. “Financial stability could be affected by disruption at a small number of third-party service providers relied upon by firms and FMIs”, the Bank of England’s Financial Policy Committee stated.

As we discussed in relation to blockchain node hosting in a previous blog, hyperscale cloud providers can suffer from downtime, so throwing your lot in with just one can expose central points of failure. Putting in place a hybrid infrastructure that is supported by a range of third-party providers will spread points of failure across multiple ecosystems, so if one provider goes down it won’t bring the whole system down with it.

Digital banking infrastructure for the future

A Money20/20 whitepaper recently said that “technology trends and market timing present a rare opportunity to reassess core infrastructure” and potentially also save on digital banking infrastructure costs for neobanks.

If predictions about the growth of the neobank market are right, their customer bases are only going to continue to expand. Neobanks need to be in a position with their digital banking infrastructure that they can flex and scale it to meet growing demand without a price tag that eats into their profit.

Visit our industry page to find out more about dedicated fintech server hosting solutions.


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