Dr. Masahisa Kawashima, Technical Director, the IOWN Global Forum
Banks are continuing to embrace digital transformation and place more emphasis on online service. Over the past decade, the number of digital banks worldwide has increased nearly fivefold, from 48 in 2014 to 235 in 2023. This shows an industry-wide willingness to match the high expectations of a digitally-driven generation of consumers.
However, this journey has been underpinned by a wide range of complex hurdles for banks and other financial services institutions (FSIs) to overcome. This includes maintaining compliance with new regulations, overhauling legacy technologies to modernise operations, and the need to process an exponential increase in real-time data. At the same time, market scrutiny around security and sustainability only continues to increase.
Amid all of these pressures, all-photonic networks (APNs), which incorporate optical-based technology across the entire network to terminals, offer a long-term solution for financial services.
An industry characterised by complexity
In the financial services sector, regulations are becoming more complicated to keep pace with innovation including AI and generative AI. Meeting the requirements of a mixture of laws such as the Digital Operational Resilience Act (DORA) in Europe, the California Consumer Privacy Act (CCPA) in North America, and various global anti-money laundering standards, is a complex and costly exercise. For FSIs to thrive, robust data protection and operational stability are fundamental. But, as we move into an increasingly digital age, existing networks are quickly becoming insufficient.
Performance and latency are also key concerns for the industry. Cross-border payments processing, high-frequency trading, and fraud detection are all dependent on very high-performance and high-availability databases. Real-time data replication requires a pair of data centres that can be interconnected directly with optical fibres. However, the recent shortage of data centre supply in major financial districts makes it difficult for an FSI to find such a data centre pair.
As with all industries, consumers are demanding that FSIs address ESG concerns and continue to improve overall sector sustainability. Data centres, which suck up a significant amount of power and water, are becoming an increasing concern. A balance must be struck between supporting the data needs of modern innovation whilst doing so as sustainably as possible. The data-intensive financial services industry is no exception. However, without a drastic solution, data centre concentration in urban financial districts would keep increasing the urban carbon emission.
Travelling long distances with photonics
Until recently, optical transceivers for enterprise use could not be used for long-distance data transmission. However, the recent evolution of optical transceiver technologies has brought long-distance optical transceivers that can be installed into enterprise routers. This would solve the above data centre shortage and concentration issues. If a network carrier provides a circuit-switched network that provides a path for optical signals between the enterprise’s transceivers, FSIs can connect distant data centres and achieve real-time data replication.
A sustainable solution
As of early 2024, more than 11,000 data centres have been registered worldwide. Large hyperscale data centres, which are becoming more common, often have power requirements of 100 MW or more, equivalent to 350,000 to 400,000 electric cars annual electricity usage. Photonic networks can help to address the environmental challenge by facilitating the de-centralisation of data centres.
Due to their lower power consumption, APNs that are high-quality all-optical networks, using photonic technologies in all areas from the network to the terminal, can decrease energy costs and associated operational expenditure. These networks can also be used to transmit data over greater distances without impacting performance. This allows FSIs to relocate data centres to rural areas that may have better access to renewable energy sources.
Staying compliant
Financial firms can leverage photonic networks to ensure compliance with regulations like DORA by facilitating real-time data monitoring and accelerating data replication processes. This leads to improved back-up strategies and disaster recovery.
Additionally, these networks provide support for interconnected data centres that feature low-latency failover options. During periods of unexpected power outages, operations can transition smoothly and without disruption. This adaptability allows FSIs to fulfil effectively regulatory requirements concerning recovery time and point objectives.
The future of financial services
The financial services sector stands to be transformed by photonics technologies. With the ongoing evolution of the digital economy, FSIs can use APNs to address the rising demands for speed, scalability, security, and sustainability. By integrating photonics into their operations, they can enhance efficiency and secure a competitive advantage in an increasingly data-centric landscape.