Few industries have been as fast and far-reaching as financial services in their response to the opportunities of the digital economy. Neobanks, the rise in online banking services, peer-to-peer lending, mobile payment systems, equity crowdfunding, digital trading, cryptocurrencies, and blockchain are just a few of the relatively recent major innovations the sector has embraced. These transformational services underscore the continuing need for robust and reliable connectivity. Advances in AI, analytics, cloud processing, and regulatory changes are pushing traditional networking methods to their limit. The cracks are beginning to show.

Legacy connectivity models, once the cornerstone of the financial sector, now present challenges regarding speed, cost, flexibility, and security. Movements like open banking are a case in point. Europe’s PSD2 regulation laid the foundations for the aggregation of financial services, the sharing of information (with consent) via APIs, and participation from non-financial players. Similar measures are now being debated in the US.

The choice and flexibility that comes with open banking make good sense from the consumer’s perspective. For providers, it requires a fundamental shift away from traditionally isolated approaches to data towards an innovative connectivity model. As these digital businesses evolve, they are increasingly looking towards solutions like Closed User Groups (CUGs) that enable smooth, secure, and efficient data exchange with multiple partners. As well as the secure, speedy processing of data from many different sources, a key additional value component in the new data connectivity model is the ability of third-party providers to analyze data, with the subsequent insights made available in various systems and apps.

What’s wrong with the current system?

While the banking sector has been agile in adopting many digital tools, its reliance on now-dated networking technologies, like Multiprotocol Layer Switching (MPLS), hinders its ability to adapt to the changing demands of its customer base. The success of MPLS centered around its ability to deliver speedy, secure connectivity when network traffic flow was steady and predictable. For the digital economy, dominated by cloud computing and the data-intensive technologies it supports, inherently variable traffic patterns are a given. In other words, one of MPLS’s big advantages has now become a critical hindrance. MPLS can be optimized according to data traffic flow, but these configurations take time and are costly. Financial services companies need to move away from MPLS for use cases where network traffic needs to be handled with agility.

Private networking solutions are coming of age

The shifting regulatory landscape, as well as the ongoing evolution of AI, ML, and analytics, are opening up exciting new opportunities for the financial sector. They are all predicated on superior connectivity: the ability to flexibly scale, process, and exchange data securely. One option that is proving both viable and increasingly interesting is the Closed User Group (CUG).

Sometimes referred to as mini-internets, CUGs are private, bespoke networks within larger networks specifically designed around their constituent members’ needs: financial institutions and their partners and service providers. All members of the CUG enjoy dedicated connectivity in a secure environment by establishing direct pathways within larger network frameworks such as an Internet Exchange (IX).

Why CUGs are gaining ground

CUGs offer the privacy you would expect from MPLS and enable enhanced scale, security, and greater control, all while costing significantly less. Their ability to scale as needed and rapidly incorporate new partners makes CUGs ideal for cloud-based environments and data-intensive processes like AI, automation, and analytics.

CUGs offer enhanced control and security because they are effectively private networks in which the members set the rules on access and can more effectively monitor data patterns, protecting these environments from the usual external threats that affect wider networks.

The dual benefits of flexibility and security make CUGs an attractive option for financial services companies looking to evolve their network infrastructure and future-proof their digital investments while simultaneously complying with the stringent regulations governing security and privacy in the sector.

What’s the future for CUGs in banking?

The increasing adoption of CUGs in financial services not only addresses the immediate need for scale, agility, speed, and security, it represents a strategic shift that will define and disrupt banking operations in the coming era. By embracing CUGs, financial companies are effectively laying the foundations for the next stage of modernization. It is a strategic move to ensure they can meet the future demands of the global digital economy.