Banking on the Cloud

Banks are investing heavily in technology. The largest banks spend billions each year, typically investing around 18% to 20% of their total operating costs on technology. About one-third of the technology budget for European banks – and just shy of half of that for US banks – goes into new investments. Much of this investment is driven by the need to serve customers in new ways, but where exactly are banks investing, and why?

EY Tech Horizons research highlights how investing in cloud technology is central to banks’ transformation and innovation agendas. According to the research, cloud is in the top three technology investment areas in the next two years, and is one of the leading three key technologies that is expected to drive shareholder value upside for banks in the same period. The discussions at a recent Financial Services Leadership Summit (FSLS) I attended in New York, very much validated that the move from legacy mainframe systems to cloud platforms is inevitable. One senior banking executive warned that those that delay cloud adoption “are at risk of getting completely trapped” in legacy technology.

The move to cloud helps banks reassess their cost structures - moving away from a high fixed-cost model of investing in physical data centers and buying hardware. It also offers banks the ability to keep pace with clients’ expectations with greater agility and innovation, unlocks new ways of managing and analyzing data and strengthens security.

Recent Celent research confirms that about half of banks globally have prioritized migrating workloads with significant manual intervention (such as identity proofing and digital identity) to public cloud infrastructure to deliver greater personalization, increased speed-to-market and reduced cost-to-serve.

How are banks benefiting from the cloud?

At EY, we monitor how banks are driving innovation. We see that while many firms have already used cloud for specific functions, they are now adopting a more mature cloud strategy and accelerating adoption across the enterprise, using cloud to bring new value propositions to market. These include automating credit scoring and rating, offering “prediction-as-a-service” to merchants, providing personal shopping services and developing unique investment products in a cost-efficient manner. Other examples include:

• Building flexible platforms to address customer pain points. One multinational bank transitioned its customer data to the cloud, taking advantage of data analytics and artificial intelligence (AI) technology to lead to more personalized and predictive services. By using the cloud for providers’ machine learning models, the bank was able to reduce the time spent predicting customer offers from 14 days to just a few hours.
• Choosing cloud-based solutions to automate procedures. A major global bank acquired a cloud-based FinTech start-up to provide businesses with cloud-based accounts payable automation technology. It helps in automating their payables process by adding new functionalities, bringing all payment types together on one cloud-based platform and supporting clients by improving the reconciliation and approval process.
• Using the cloud to develop new holistic offerings. One neo bank provides a 100% digital mobile-based banking application (app) serving multiple needs for individual and business customers. The app lets users pay their bills, analyze their consumption and transfer money through one channel, enhancing customer convenience.
• Radically transforming the cost base of the industry. Cloud-native, purely digital neo banks start off with a radically lower technology and operations cost base, enabling them to invest in driving customer growth via a better customer experience and lower fees.
• Enabling new ways of working. In response to the pandemic, one cloud provider securely deployed a desktop-as-a-service (DaaS) solution for one of the largest global investment banks to enable remote work for thousands of users in less than a week.

Getting cloud right

Discussions at the recent FSLS highlighted that the move to cloud is not without complexity. Banking executives emphasized regulators’ concerns about security and resilience, which means that banks must demonstrate they are considering third- and fourth-party risk and addressing concentration risk.

Banks can deploy multi-cloud or hybrid cloud strategies to tap specialized capabilities from different providers, get the most cost-effective model for specific workloads, avoid vendor dependence and ensure greater resiliency. But even in a multi-cloud environment, a specific critical product or service might sit with a single provider. Even with banks adopting a multi-cloud strategy, data is hosted by a mere handful of large global cloud providers. Banks need to be able to answer how they can restore mission critical processes at speed in the event of a catastrophic failure.

Similarly, executives also raised questions about data ownership. What rights does the bank or the cloud provider have to data that is hosted in the cloud? Who is responsible for data in the cloud? To what extent can you work with other third parties, or integrate your data with data from other sources, when it is in the cloud? And increasingly, banks need to navigate regulation across different jurisdictions around data residency.

Moving to the cloud requires making some clear choices. Banks must choose the right cloud service partner and deployment approach based on their current and future operating models. This will enable them to address any regulatory, compliance, cybersecurity and data privacy issues. Understanding the cloud supplier landscape across your organization is critical to making better choices.

Investing in the right workforce and skill sets to manage your firm’s broader technology agenda will be critical, but financial institutions are being forced to address unique challenges in attracting and retaining tech talent. This was another topic that was discussed at the recent FSLS meeting. In competing for a limited pool of talent with highly desirable skills (such as being cloud native application savvy), participants cited the inability to keep leading-edge talent motivated and on a satisfying career trajectory as a key limitation. Addressing the internal culture to create a more desirable work environment and even using emerging technologies to help identify, attract and retain internal talent, will help position firms as strong contenders.?

What does the future hold for banking in the cloud?

Embracing the cloud fully does not just mean moving existing processes to the cloud. To paraphrase one of the executives at the FSLS, it isn’t as easy as just signing a big contract with your cloud provider and moving all your stuff to the cloud. Instead, processes must be reimagined. Ultimately, accelerating cloud adoption should transform banking, not just by reducing costs and improving efficiency, but by transforming customer propositions.

The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.