Have banks finally arrived in the cloud?

Banks have traditionally been more cautious than many other industries when migrating to a cloud environment. It is estimated that only 25% of all activities of the world’s largest banks are cloud-based. There were good reasons for this, however. For example, security, compliance, regulatory, and data residency concerns – especially when the data is stored outside of a bank’s home country. But there was also a lot of skepticism about the dominance of the big three US cloud providers, which offer much less oversight than is typical in the banking sector.

However, a change can be seen here. There have been several significant cloud deals recently: between HSBC and Amazon Web Services, Deutsche Bank and Google, and Banco Sabadell and IBM.

Have banks finally reached their destination on their way to the cloud? Most of the above challenges can be solved. For example, the security provided by the major cloud providers is often far better than traditional banks. The reason is: Cloud providers can recruit cyber security personnel much better and retain them more permanently. Of course, I am aware of the data leak at Capital One last year. But most banks tend to be pragmatic about such gaps: “Not if, but when.” I know of only one bank that has postponed its move to AWS as a result.

Cloud providers typically operate data centers around the world. The data location is therefore only a question of contract negotiations. Historically, cloud providers have taken the time to speak to regulators, understand their issues, and respond appropriately.

Here’s a quote from last year’s Bank of England study: “Banks should use cloud technologies that are mature enough to meet the high expectations of regulators and financial service providers. The results are business agility, faster innovation, better cyber security, and better services for homes and businesses.”

Cost savings are also a factor in moving to the cloud, but not the key one. Frank Wasson, CEO of First Entertainment Credit Union, sums it up like this: “It’s a myth that it’s cheaper. We have found that sometimes it is more expensive than what we can do for ourselves. But it makes you spend what you should have been spending all along. Do it because simplifying the environment also makes scaling easier.”

In the light of the current pandemic, banks are becoming increasingly aware of the need for flexibility, scalability, and agility. Of course, not everything can be moved to a cloud environment. But banks recognize that the cloud is driving modernization efforts, particularly the ability to innovate. Currently, banks are still among the most enthusiastic users of cloud-based software and video conferencing services to make working from home easier in this situation. Just as the global pandemic hit, Microsoft had completed the implementation of its team video service at Santander – for around 100,000 employees in global banking. 

Non-cloud applications tend to be overly complex, inflexible, and have limited use cases. The cloud, on the other hand, also enables the use of DevOps and microservices – the actual drivers for faster development, increased innovative ability, and more flexibility.

Does it matter whether your cloud is public, private/on-premise, or a hybrid? To quote software veteran Paul Maritz, “The cloud is about how you calculate, not where you calculate.” In other words, the benefits of the cloud come from using it. The strategic value of the cloud is clear and will not go away.

Consider these three aspects:

  • AI: AI-based technologies are having a major impact on banks in areas such as fraud, risk, marketing, and service delivery. However, AI tools require a large amount of high-quality data—otherwise, they are pretty much powerless. It will not be easy to provide all this data internally. With the cloud, AI not only becomes much more scalable but also offers the opportunity to benefit from real-time insights.
  • Platforms: As banks develop their innovation ecosystem, they draw on data sourced from third parties and partners. One-off partnerships are time-consuming and difficult to scale. However, for banks wishing to participate and benefit from these platforms, being in the cloud is vital.
  • Insights: Banks have large amounts of customer information. But their legacy systems often prevent them from turning that data into insights before it becomes stale. With the cloud, banks can promote a deeper understanding of customers and use these insights more quickly in their business decisions.

Deutsche Bank’s deal undoubtedly focuses on innovation, with both parties sharing revenues from jointly developed new products. CEO Christian Sewing commented, “This is both a revenue and a cost story.” Possible product areas are cash flow forecasts and risk analyses for treasury customers as well as digital services for private banking.

For a leading Latin American bank, we digitized their paper-based, labor-intensive auto loan approval process by migrating them to a Microsoft Azure platform. Customers now use their computers or mobile phones to upload documents and associate credit scores for assessment and approval. The new digital platform enabled the bank to implement automated, risk-based pricing, resulting in 25% savings in underwriting and processing. The result: sales up 40%; Customer satisfaction up to 35%; credit generation increased by $400 million.

Flexibility and scalability are important advantages in the current situation – against the background of constantly changing market dynamics. Many banks now regret not moving further to a more agile operating model.

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