The need for increased customer satisfaction, faster product development and agile systems is pushing the banking and financial services industry to adopt latest digital technologies. Banking industry is recognizing the need for differentiated and personalized products and services to stay competitive. The industry has always been at the forefront of innovation embracing technology for efficient digital transformation.
Further, the proliferation of mobile network operators (MNOs), payment service providers (PSPs), merchant aggregators, retailers, FinTech companies, neo-banks, and super platforms has led to an exponential transformation in the banking & financial ecosystem. The rise in the demand by consumers for convenient and safe banking and banking on fingertips has led to an influx of digital, simpler, accessible, faster, and quicker solutions to meet the increasing demand.
Why cloud banking?
Banks by 2030 are expected to be invisible, connected, insights-driven and purposeful. Invisible owing to evolving distribution models using open APIs and 5G to connect finance with homes, machinery, vehicles, and other devices; Connected as a trusted advisor to offer embedded financial services; Insights driven relying on data to build customer trust offering personalized services and financial intimacy; Purposeful while aligning its services with environmental, moral, and social values.
Cloud is one such technology which is expected to help banks meet the above characteristics. It allows banks to store its servers and data off-site within secure data centres which can be accessed by users via internet. It is typically the technology which facilitates applications, data storage, data processing, data security, information delivery over the internet through one or more cloud service provider (CSP). Cloud is also one such technology which most of the banks are expected to adopt in the coming years. Its use case in the industry is expected to boost data handling capacity along with high levels of agility, security, and scalability.
Customers generate 2.5 quintillion bytes of data every day making banks and financial services to spend over $67 Bn on cloud services per year, with overall IT spending growing steadily. Further, 2021 Gartner CIO Survey revealed that only one-third of banks are well-staffed to support critical cloud capabilities. The Covid-19 pandemic has forced most of the banks to re-think on their cloud and infrastructure strategy and going forward, overall spending on cloud computing by banks is projected to increase from 2022 onwards.
Cloud technology for banks enables them to be more agile, scalable, and flexible as the technology operates in a dynamic, contact-less environment. The migration of traditional data centers to a cloud server helps a bank increase security, boost data-handling capacity, and provide access to new delivery channels. The main drivers for adoption of cloud in banking include the following:
- Agile innovation: Cloud offers relocation of services from administration of IT infrastructure towards innovation and faster delivery of products and services to the market.
- Risk mitigation: Cloud helps lower risks related to capacity, redundancy, and resiliency. It offers more data security and equips banks with more control.
- Scalability and flexibility: Cloud offers multiple server connectedness helping a bank to scale or de-scale its processing capability based on market demands. The technology provides banks to adjust its requirements as per the market environment without any additional cost.
- Process efficiency: Cloud helps deliver secure and touchless services further helping streamline banking processes. The technology also helps banks to focus on other banking sector developments such as new products and services and personalized services based on market demands.
- Cost benefits: Cloud enables reduction in initial capital expenditure required for establishment of traditional IT infrastructure. Further, during peak demand periods, cloud offers efficient computing capacity for the banks enabling business efficiency.
Cloud computing is also influencing other emerging trends to help solve complex business and technological challenges for a bank. These include:
|Storage||Reporting and analytics||Containers and APIs||Master data management|
Includes email archiving and storage of voice and chat
|Leveraging cloud as an analytical platform for real-time||Exposing data and services through APIs and microservices to enable faster and easier access to data||Providing consistent client views across channels and identifying cross-sell opportunities|
Application of cloud in banking
Cloud in banking is typically in three areas “above the line” to create new business frontiers and in three areas “below the line” to optimize the organization. Applying cloud technology in these six areas help banks improve efficiency and enhanced business performance. These areas include
- Synchronizing the enterprise: Cloud helps improve business integration through sharing data and move quickly to solve customer problem.
- Business innovation: Helps leverage other tools such as ML, AR, VR, IoT platforms, natural language processing to increase revenue, cut cost, consistent operations and enhanced personnel productivity.
- New talent and new ways of working: Rise of new skills set around DevOps, DevSecOps, agile and UX is expected to improve automation and human augmentation leading to improved productivity, connectedness, and transparency.
- Resilient operations: Enhances overall bank resilience by moving away from physical outages or disruptions. Further helps gain ability to replicate data and app services across more than a single data centre or region.
- Enhanced IT security: Cloud solutions provide high security standards when implemented correctly with trained and skilled security personnel.
- Scale computing costs as needed: Cloud enables more flexibility to shift according to market changes and financial priorities and facilitates granular spending controls.
There are mainly four types of cloud service models adopted by banks:
- Business Process-as-a-Service (BPaaS): Used for standard business processes such as billing, payroll, or human resources
- Software-as-a-Service (SaaS): Typically used for business services such as accounting, CRM, ERP, invoicing, HRM, content management, and service desk management.
- Platform-as-a-Service (PaaS): This allows businesses to streamline the development, maintenance, and support of custom applications, lowering IT costs and minimizing the need for hardware, software, and hosting environments
- Infrastructure-as-a-Service (IaaS): This cloud model allows purchase of servers, software, data centre space or network equipment as a fully outsourced service.
Further, cloud can be deployed via four main models in banks. These include:
- Private clouds: This is solely for a specific bank and is managed by the bank only or a third party and exists on or off the premises. It is the most secure of all cloud options but comes at the expense of some scalability and cost.
- Public clouds: This is made available to the public or a large industry group and is owned by an organization that sells cloud services
- Community clouds: This is a deployment model in which the cloud is used by a community of users with similar needs and concerns.
- Hybrid clouds: Typically made up of two or more clouds (private or public) that remain unique entities but are linked to provide services.
Additionally, there are some key challenges which banks need to be vary of while implementing cloud solutions. This includes security and confidentiality of financials and personal data; regulatory compliances which requires banks to keep the data in the home country and not mix it with others on shared servers or databases; misalignment of bank’s existing technology with its business objectives and legacy infrastructure and legacy sprawl of a bank often poses a migration barrier to a cloud-based solution.
Despite its various advantages and potential, banking sector has been slower than expected to adopt the cloud as they find it difficult to give up their legacy on-premises applications. However, the COVID-19 pandemic is expected to give a push to the market and most of the banks are now increasing their cloud investments. Most of the banks are investing in private cloud deployment while public cloud demand is also on the rise. Capital One is one such bank which realized the potential of the cloud and started its migration to the AWS cloud in 2012 and closed the last of its eight on-premises data centres in November 2020. Further BNP Paribas has developed the Dedicated Cloud built on IBM’s public cloud technology and augmented by its security and controls to resolve 200 compliance requirements. JP Morgan Chase replaced its core banking system with google inspired system known as Vault, which is a cloud-native system from UK fintech Thought Machine. Further U.S. Bank selected Microsoft Azure as its primary cloud provider for its application portfolio modernization and quickly adjust to evolving customer needs.
Cloud technology can transform a bank’s digital landscape helping them to achieve business goals, compliance and data security, and deliver an omnichannel customer experience. Accessing the cloud can increase banks’ ability to innovate by enhancing agility, efficiency, and productivity. Retail and wholesale banking industry leaders are now increasingly focusing on leveraging the cloud to drive innovation and new capabilities, optimize the organization, reduce infrastructure costs, and support
improved business performance and shareholder returns. It is expected that most of the banks will adopt cloud solutions in the coming future to keep a pace with the evolving needs of its customers.