Functions such as customer management, human capital management, and financial accounting are being moved progressively to the cloud. Some banks are also warming to the idea of using cloud technology to support services such as know your customer (KYC) verification.
Yet, despite the clear advantages of cost reduction and scalability, most banks have traditionally been reluctant to shift their core banking functions from in-house servers to the cloud. They point to factors such as security and reliability as reasons to keep these functions in-house.
Now, however, these attitudes appear to be changing. Many banks are putting strategies in place to migrate core services such as consumer payments, credit scoring, wealth management, and risk analysis to the cloud. This significant change is being driven by several factors, some of which include developments such as the European Union’s Payment Services Directive and open banking that require secure and cost-effective data sharing.
Another reason for the change of heart is the changed mindset of the regulators. Earlier, financial-sector regulators exercised caution in terms of cloud technology, however this is now changing.
For example, the Australian Prudential Regulation Authority (APRA) acknowledged the risk associated with the cloud but also recognised the risk of status quo. ARPA also showed confidence in the advances made in safety and security, and the need to take a cloud-first approach by updating its risk advice associated with cloud.
The rise of the fintech
The shift of core services to the cloud is also being driven by the rising competition from next-generation fintech firms. These are cloud-native banks with the ability to onboard customers remotely in minutes, roll out new services in weeks if not days, and meet compliance requirements at lower costs.
Another push has come in the form of the COVID-19 pandemic. Banks have realised they need the flexibility and resilience that the cloud can offer to help them operate in rapidly evolving conditions.
The unusual demands placed by the pandemic on systems and services have tipped the scales to a point where financial services firms must rethink their approach to digital transformation, with special attention to a cloud-aligned culture. This is essential if the industry wants to rapidly adjust to the “next normal”.
Fresh areas of focus
As greater attention is placed on the role that the cloud can play in delivery of core banking services, there is a range of areas that banks need to consider. These areas include:
- Establishing a robust digital foundation
The cloud market is expanding rapidly and choice for services is broad. While the big three hyper-scalers are an obvious choice, there are also a few other players gaining traction such as IBM, Oracle, and Alibaba Cloud. This will lead organisations to embrace hybrid cloud that will need a robust digital foundation to adopt cloud at scale in a secured and compliant way.
- Reduced capex
Enterprises are focusing on abstracting complexity at various levels of IT by embracing the platform approach and enhancing the speed of IT consumption. Physical infrastructure is abstracted into cloud-based platforms while data is being consolidated into data lake platforms to drive better analytics and intelligence. As a result, the capex spending traditionally required for in-house data centres can be shifted into other areas.
- Better IT security
Cloud platforms offer the latest in security and can be more secure than on-premise servers. Financial services firms have relied on control and compliance-based security for years, however these practices are vulnerable to growing cyber threats.
Cloud providers are looking to provision industry-specific security and regulatory measures such as end-to-end data encryption. This makes it easier for financial services organisations to stay compliant while migrating to cloud.
- Boosting innovation
There is growing evidence that the cloud is a fundamental factor in the ability of fintech firms to innovate. Cloud in financial services can leverage new technologies and tools such as augmented reality (AR), virtual reality (VR), natural language processing (NLP), machine learning (ML), and the internet of things (IoT).
- Improved enterprise synchronisation
The ecosystem in which financial services firms operate is expanding, resulting in increased collaboration both internally and with external partners. Cloud platforms allow businesses to integrate collaboration through shared tools and platforms. This is a critical ability as it leads to faster decisions and improved innovation cycles.
Remaining with existing legacy systems will limit the ability of banks to respond to changing market demands and ensuring optimal customer experiences. By embracing the potential of the cloud for their core services, they will be in a much better position to flourish in the years ahead.
Dean Robb, vice-president, HCL Financial Services