Why choose colocation for financial institutions?

In short, colocation is the act of placing a firm’s servers within a third-party data centre instead of building and managing a dedicated facility. Unlike other popular options, such as the public cloud, where resources are shared, colocation lets you own and control the physical infrastructure while benefiting from enterprise-grade facilities such as advanced security, compliance-ready environments, scalable space and power.

Some choose to use colocation on its own, or combine it in a hybrid model with the cloud, providing the benefits of an in-house (autonomy and governance) and outsourced data centre (scalability and efficiency).

When you introduce colocation into financial services, it becomes strategically valuable. It can support latency-sensitive workloads, provide risk-managed environments with redundant power and cooling, and deliver compliance-ready frameworks that help institutions meet regulatory demands. Various platforms, from trading to online banking, require a highly secure, auditable infrastructure, and colocation provides that.

Introducing colocation into a financial institution is a strategic move offering higher performance and more flexible interconnectivity to financial ecosystems, cloud platforms, and market data providers.

Like any industry, financial institutions are facing a number of issues at the moment:

Rising cost of compliance

Regulators such as the FCA and PRA continue to expand requirements around detailed reporting and operational resilience. Meeting these expectations demands significant investment in systems, processes, and skilled staff. At the same time, frameworks such as GDPR impose strict obligations on data protection and cybersecurity. The result is a growing compliance burden that consumes both time and resources.

Intensified cyber threats

Protecting institutional and client data is critical. Cybercriminals are becoming increasingly sophisticated, and financial services remain one of the most targeted sectors. A successful attack can disrupt trading, payments, and customer trust within minutes.

Need for uptime in trading, payments, and digital banking

Customers and employees need access to financial platforms at all times. If online banking faces even a short period of downtime, this can significantly disrupt the flow of payments and operations. This would ultimately lead to severe consequences for markets and customer satisfaction.

Ageing infrastructure and energy inefficiency

The infrastructure that some financial firms currently use is starting to age. This makes systems less efficient and more expensive to run. Beyond increasing costs, it can also have a negative environmental impact and reduce ESG (Environmental, Social, and Governance) performance.

So, how does colocation fix these problems that financial institutions are facing? Here are some of the main advantages:

High physical and cyber security standards

As we’ve mentioned, there’s a strong need for robust security in financial institutions, and colocation can play a key role in meeting that need. By design, Datum data centres facilities offer high levels of physical security, with many also providing certified and audited security standards to help reduce the risk of breaches and theft. It’s important to note that while colocation providers secure the facility and core infrastructure, clients remain responsible for securing their own appliances, applications, and data.

SLA-backed uptime and resilience

Alongside strong security measures, colocation provides SLA-backed uptime commitments, ensuring infrastructure and platforms are continuously available. This is essential in the financial industry, particularly when it comes to trading and payments, helping to keep customers satisfied.

Regulatory alignment

Compliance is another crucial factor that colocation can support. Facilities are designed with features such as comprehensive audit logs, access controls, and certified infrastructure, which help provide the transparency required by frameworks such as the FCA, PRA, and GDPR. While these regulators do not directly certify data centres, colocation environments enable financial institutions to meet their compliance obligations more effectively.

Scalable space and power for growing IT workloads

Colocation also enables scalability. The financial industry is facing an increase in IT workloads due to the transition to paperless systems, the introduction of AI models, and the expansion of digital banking services. Firms therefore need more space and power without disruption, something colocation can provide.

Interconnectivity

A strategic benefit is that colocated environments allow financial institutions to connect directly to other infrastructures. This could include markets, cloud providers, or data feeds. Whatever the case, colocation offers broad interconnectivity across the industry, helping to reduce latency and improve performance.

No customer is going to opt for a financial institution that is known for data breaches and security issues. Fortunately, firms with colocation services prioritise security at the forefront of their infrastructure. Facilities are equipped with strong physical safeguards, such as 24/7 CCTV, biometric access, mantraps, on-site security staff and multilayered controls. While the provider secures the facility and core infrastructure, financial institutions remain responsible for managing application-level and network security measures such as firewalls.

Accreditations demonstrate to customers that financial institutions can be trusted. Certifications such as ISO 27001 and PCI DSS show that colocation providers meet recognised international standards for data protection and operational security. By hosting infrastructure in certified environments from trusted providers such as Datum, financial institutions can maintain oversight and governance while reassuring customers that their data is protected to the highest standards.

Many financial institutions are facing the problem of introducing infrastructure that scales predictably at an extremely high cost. That’s why they are seeking a more affordable yet effective option. Colocation offers the flexibility that firms are looking for by allowing them to expand their footprint within an existing facility, without the upfront expense of developing new on-site infrastructure

Performance is another factor that makes colocation so appealing to the financial sector. Most colocation facilities are located within key economic hubs, providing low-latency connections to critical platforms such as trading venues and market data providers. Financial institutions are reliant on real-time data, and this interconnection ecosystem enables them to access it, alongside faster transaction speeds.

By adopting colocation, financial institutions gain a future-ready infrastructure that enhances agility and operational efficiency. Flexible capacity means there’s an opportunity to scale rapidly in response to market demand, regulatory changes, or new technology adoption. It enhances agility whilst mitigating operational risk.