Banks must embrace the cloud or risk destruction by tech-savvy challengers

Challenger banks have shown that the cloud shouldn’t be treated as a risk for the financial services industry, but as an opportunity for fundamental business transformation

  • By Senthil Kumar Venugopal, Group Vice-President, Oracle Financial Services | Friday, June 10th, 2016

The sooner major banks embrace cloud technology, the sooner they'll be able to stem the rise of agile, smaller challengers

Banks are, by their very nature, conservative, so it’s no surprise that they take a more circumspect approach to new technologies. While other industries are quick to adopt new devices, software and ways of working, banks have a much higher risk profile, which means they must always proceed with caution when considering implementing technological innovations – such as the cloud.

Whereas many different business sectors pioneered the use of new cloud services, the financial services (FS) industry, for the most part, preferred to wait until legitimate questions over security and compliance could be satisfactorily answered. Although this is a safe and sensible strategy, the conservatism of traditional FS institutions has seen them being overtaken by a new breed of tech-savvy challenger banks, whose use of the cloud enables them to provide innovative and customer-centric services at a far lower cost. This, more than any factor, is driving established FS businesses to make the move to the cloud.

The price of fear
There are many incentives for moving to the cloud, and these differ as much between individual companies as they do between sectors. For FS institutions, however, the most common motivation is the ability to compete with new challengers, such as internet-only banks and investment apps, and to cut the costs and complexity of their legacy infrastructure.

This natural conservatism – or, more bluntly, fear – has left many established FS businesses playing catch-up. The industry as a whole has seen how forward-looking businesses have used the power of the cloud to achieve much greater agility, lower running costs and quicker time-to-market for new financial products and services. The clock is ticking for those that have yet to embrace the cloud.

Industry analyst Gartner has predicted that, this year alone, a poor return on equity will drive more than 60 percent of banks worldwide to move the majority of their transactions to the Cloud. For an industry that is heavily dependent on shifting compliance and regulation requirements, this statistic is promising. The question for FS organisations today is therefore not ‘do we dare trust the cloud?’, but rather ‘how soon can we migrate?’.

Profiting from the cloud
Every FS firm is different and has unique needs, so it is good to know that reputable cloud providers do not take a one-size-fits-all approach to their services. That being said, traditional banks and other FS institutions are likely to demand certain outcomes from their cloud deployments, including a much greater degree of flexibility compared to that offered by legacy systems.

The cloud enables this agility by separating workloads from the operating systems, storage and layers underneath, allowing IT departments to test and deploy applications on the most modern infrastructure and architecture. Cloud platforms also allow IT teams to test new applications internally before rolling them out to customers. This means less successful applications can be abandoned quickly, saving IT departments time and money, and making the fine-tuning of new services more efficient. The overall result is that FS institutions can dedicate more time to developing innovative applications that deliver greater customer engagement.

Of course, the issue of security is still paramount for banks, which is why FS cloud deployments tend to balance flexibility with robust safeguards. For example, it’s more common for institutions to choose private or managed cloud services, which balance the requirements of agility and security. These models give organisations greater control over the management and security of the infrastructure components of their IT environments, while supporting the need for faster innovation and extremely high availability and performance.

Given the concerns regarding compliance and security, it’s not surprising most core banking services are located in private clouds. However, there are plenty of functions where banks can take advantage of public clouds and organisations can pay to access applications ‘as a service’ over the internet, rather than hosted in their own data centres. Applications such as enterprise resource planning, human resources or billing and revenue management all lend themselves well to the public cloud approach.

For other FS organisations, the most attractive offering for many of their infrastructure and application requirements is a hybrid approach, leveraging a combination of on-premises, private and public cloud platforms. The key to successful hybrid environments is interoperability of information across these various platforms and delivery models.

Meeting customers’ demands
Customer expectations are changing, and every FS provider needs to ensure they remain relevant to a population that prefers to engage with the world through smart devices and apps. Traditional banks must prioritise providing clients with on-demand and consistent access to services through all of these channels if they are to stand out from competing challenger banks.

The rise of mobile banking is a prime example of how customers today want to engage with their financial institutions anywhere and at any time. In response, banks should be providing them with applications that encourage and facilitate this preference.

Banks cannot hope to provide the level of usability, performance and reliability customers have come to expect unless these new mobile and internet services are based on the very best underlying infrastructure. To achieve this and develop innovative applications that deliver an excellent customer experience, FS organisations should be embracing cloud deployment.

The cloud presents FS institutions with the means to digitally transform their businesses and stay ahead of growing competition. Those organisations that have already begun to deploy cloud solutions – whether public, private or hybrid – have been quick to see the enormous benefits that can accumulate, including the ability to bring services to market faster, or to dramatically reduce operational expenses for their IT infrastructure.

The FS industry will always have unique requirements for security and compliance, which mean it will never be able to deploy the cloud in the same way as less tightly regulated industries. However, that does not mean it cannot achieve digital transformations that are every bit as fundamental and wide reaching as those achieved by businesses in other sectors.