COVID-19 Accelerates Cloud Adoption

Cloud computing and its related technologies have seen accelerating growth for the last decade. While the current pandemic is clearly changing most firm’s planned initiatives, the shifting priorities are accelerating cloud migration around the themes of digitization, data management and process supply chain.  At a time when the world is watching its leaders, a firm’s technology strategy is a clear reflection of the depth of the strategic vision. Following is a summary of these trends based upon over 60 interviews held with financial services experts during the lock-down this spring.

Prior to the outbreak of COVID-19, experts were forecasting 15-20% growth in cloud computing investments for 2020 with a predicted range of total investment this year from $260 - $320 billion. The rationale is compelling. Cost reduction for managing infrastructure alone is forecasted by most projects to be between 30-40%. Infrastructure use cases create self-funding opportunities for the longer term to allow businesses to reimagine the customer experience across end-to-end processes, increase speed to market and empower and engage a company’s workforce in the future of its franchise.

The outbreak of COVID-19 and the mandated social distancing across most of the Western economies put 2020’s business priorities back in flux. Projections that the US economy will contract approximately 30% in the second quarter will be felt across every industry segment and will serve as an accelerator to the earnings pressure across all financial services sectors. In short, current economic conditions will rapidly identify the industry’s winners and losers.

Leadership through difficult times has been a popular subject in the press recently.  Both political and business leaders are being challenged to establish vision and supporting actions in response to the pandemic and the Black Lives Matter movement. Their strategic technology decisions in the face of this crisis will also have long-lasting effects. In many cases, firms will have a choice between taking a traditional approach or embracing cloud technologies. Three business priorities in 2020 will likely illustrate these choices: 1) Digitization, 2) Data Management and 3) Supply Chain. The White Paper concludes with a comment on cloud security.

Digitization

When the US initiated broad-based self-distancing guidelines in March, the tide went out instantaneously. The resulting landscape laid bare every process and policy that had not been updated since the 80s as well as numerous activities that were not as quite as automated as everyone might have hoped. Thousands of people needed laptops. Thousands of remote connectivity solutions needed to be deployed. In some companies, contingency procedures have worked very well. In other cases, skeleton crews were required to go into the office, despite employee concerns.

One conclusion many people have reached is that Remote Working is Here to Stay. In the first few weeks of self-containment, some companies were still in denial about their level of digitization. Workarounds and small on-site teams were able to on-board new clients and employees. Automated service messages and mass email communications mollified customers that were unable to reach service representatives. After four weeks, however, it became clear that these methods were not sustainable because competitors were demonstrating their agility to respond with effective solutions:

• One FinTech firm that provides a Small Business Administration (SBA) loan platform which powers loan approvals for ~20% of the non-Tier 1 market provided such an example. Within 48 hours of the publishing of the CARES Act, they presented a prototype of their new application to handle Paycheck Protection Program (PPP) loans. Most traditional companies had not even decided who would be on their project team.
• Companies that had invested in remote contact center technology were able to pivot immediately and continue providing the same level of service to their clients, securing long-lasting loyalty. Once such company added over 1,000 new agents within 3 ? weeks to meet COVID-related demand. Another replaced a 700-person offshore service center in the same timeframe and enhanced their supervision in parallel.
• Financial Services companies with a strong cloud foundation were able to repurpose compute capacity within days. As market volatility skyrocketed, volumes blew past the “2.5-3x high watermark” that most financial services companies use to benchmark their capacity needs. Volumes were actually 10-20x historical highs and it was clear to those in the industry which firms were able to react quickly and process these volumes. Some firms required weeks to dig out from the backlog.

The pace of competition has been accelerating for years, but the pandemic is throwing into stark contrast the capabilities of those firms that have established a clear technology strategy with those that have not. There seems to be a 180o change in attitude across the banking community; those that once saw FinTech firms as competition now see them as enablers and a faster path to modernization. Integration partners and custom technology development houses are becoming more common than traditional consulting partners because of the immediate impact they can provide. The great news is that the next generation of technologies can offer rapid solutions to many of these challenges.

Data Management

Unfortunately, one of the most common phrases used alongside data management is “garbage in, garbage out.” Simply stated, the greatest tools and decision-making engines return poor recommendations if the data used as input is not clean. Eliminating data-free decisions within financial services is a top priority at most firms and the pandemic accelerated data initiatives at many.

The two most-cited data challenges over the last twelve weeks were risk related. The first involved PPP loans. Rob Nichols, president of the American Bankers Association reported that banking institutions processed the equivalent of all 2019 SBA loans within the first week of the new program. At the same time, many banking institutions were struggling to bring data silos together to evaluate the risks of lending to their existing customers. Their competitors, meanwhile, were gathering market share. Digitally oriented banks with existing expansion plans were well-positioned to evaluate and take on new clients, some looking to add a full 5% to their overall assets as a result of PPP.

The other risk area where data management has been a primary focus is within treasury. Within Capital Markets the new FRTB regulations (fundamental review of trading book) further refine Basel requirements and define capital requirements for trade activity. Market volatility, widespread draw downs on lines of credit and depression-era levels of unemployment have put immense pressure on Treasury groups to provide risk assessments and forecast scenarios to support alternative capital plans. For most in Treasury and Risk positions, self-distancing has not been a relaxing time to reconnect with the family.

Companies that have migrated data management to the cloud have an immense advantage over those trying to improve on their own for three reasons. First, the partnership programs with SaaS (software as a service) providers is plug and play. The speed at which you can implement a new partner platform is truly only constrained by the time it takes to sign an NDA for the pilot program. Secondly, the cloud makes it much less expensive to experiment and allow business and technology practitioners to work together in real time to solve challenging data issues. Finally, the cloud offers access to additional data sets to enrich data-driven decisions. Consider the following examples:

• One of the leading global exchanges has leveraged a cloud-based SaaS provider to enrich their data service offering. The platform provides the exchanges’ clients with the ability to integrate and analyze their data with that of the broader market to gain new insights. This is a perfect example of how traditional market participants are leveraging cloud infrastructure providers and their partners to enrich their own service offering and grow their customer base.
• One capital markets firm was struggling with the time and expense of its efforts to scrub its internal data as well as the external data it purchased to drive its treasury risk engine. 20 people were reviewing their data on a full-time basis. After experimenting in a sandbox application in the cloud, they were able to automate data cleansing down to 1 person-hour and the 20 FTE were able to do the value-adding analysis that was the original intention of their group.
• In Asset Management, data management is arguably the largest area of investment. In fact, data and data management was the fastest growing expense category in financial services in 2018-19. At a time where Asset Managers and both Pension and Sovereign Wealth Funds are outsourcing a variety of functions, they are investing in alternative data. In one such case, the CDO was able to leverage publicly available retail sales data and machine learning to predict whether retailers were on target to meet their quarterly earnings. In 2019, he said that his estimates beat the street consensus 83% of the time.

Data management continues to be a focus across financial services and is key to many modernization efforts. As referenced above, data validation is critical not only necessary in new revenue generating models, but also key for decision modeling and risk analysis. Data integration is also a critical part of system integration, which is becoming a problem for many firms not accustomed or staffed to managed end-to-end data flows. In these cases, the FinTech solutions can become bolt-on technology problems.  Whether your Information Architecture challenge is risk-, capital- or client-oriented, the cloud infrastructure and FinTech partners offer accelerated opportunities to rationalize.

Supply Chain

Businesses around the world are discovering exactly how resilient their Business Continuity Plans are. Since mid-March, companies have experienced numerous challenges to their daily production:

• Employees do not have firm-owned (secure) computers or remote access
• Exception processes require manual intervention that cannot be resolved remotely
• New customers cannot be on-boarded without at least one person in the office
• New employees or consultants cannot be on-boarded virtually
• Support centers do not support remote connectivity
• Outsourced vendors were never prepared for remote processing
• Customers cannot complete all transaction types remotely

As contingency plans failed, many activities we repatriated. Surprisingly, firms found that the work could be done by a fraction of the offshore staff and in some situations the quality of work improved. In other situations, policies and procedures were rapidly re-designed to function in a virtual world. Within four weeks of lock-down, many companies had already structured the review of these challenges and most are now working on the blueprint for the new normal. While many questions are still pending to inform return to the physical office, notable cloud-based platforms have emerged, beyond the ubiquitous Zoom:

• Redesigning processes has never been easier than with the tool sets on the market. Whether through Robotic Process Automation (RPA) or low-code / no-code platform solutions, business and process owners can virtualize processes in a matter of weeks.
• Technology teams are working to adapt the development process to a remote methodology. Daily stand-ups are still possible within the agile development methodology and this still seems to be the most effective way to maintain a high level of communication throughout development. On-line white boarding a collaboration tools are seeing a large take-up. Combined with cloud-based software development kits and integrated testing software, the pace of development has also become a competitive advantage for the cloud savvy.
• Even in physical environments, cloud-based platforms offer new solutions in a post-COVID world. One company whose platform was originally designed for employee tracking in an active-shooter scenario (which is now more likely than having a fire, according to the FBI) has expanded their software to become an AI-powered incident response system, capable of tracking employee interactions to support “test and isolate” strategies.

Companies are rethinking their supply chains and themes of ‘America First’ and ‘Jobs First’ may migrate from CEO communications to firm action plans in the next few months. Certainly, the cost dynamics of jobs that can be done 100% remotely invites reconsideration of the status quo.  Without exception, companies are looking to simplify policies and automate procedures. Not only are cloud-infrastructure and cloud-based platforms providing solutions, but in most cases the desired transparency and reporting are already integrated into the product.

Cloud Security

As Deloitte’s research highlights, cloud-based technology has dramatically improved the business of protecting sensitive client data. The types of vulnerabilities that caused the largest data breach in history can now be automatically identified.  Some services now utilize Machine Learning to automatically resolve them. In most organizations, as was the case with the 2017 Equifax breach, these vulnerabilities are known, but can wait on a list to be prioritized for months. 

For those that are not familiar with Cloud Infrastructure, the automation of repetitive tasks is one of the core tenants that provides improved performance at a lower cost. Active scanning of data vulnerabilities, automated alerts and self-healing processes are much more effective than traditional manual controls. In fact, the largest risk now is likely moving to the cloud rapidly without a good understanding of how to control roles and responsibilities for access to the applications. (But do not worry, there are tools to monitor that as well!)

But security is not just a technology issue. New York state regulators now require both Technology and Business leaders to be represented on bank data governance programs. At an ABA-sponsored webinar on April 23rd, 120+ compliance professionals ranked Cyber Security and Fraud as their #1 and #2 concerns. At that time, social distancing was relatively new, and many banks were still trying to figure out how to virtualize their processes and still maintain the required oversight.  As evidence of the pace of change, it is likely that cloud-based platforms will serve as the resolution to many of today’s physical process challenges.

While not exhaustive, the market research supporting this white paper was meant to illustrate how business leaders are revisiting their 2020 priorities. Best practice across organizations has already seen leading firms organize their teams to focus on three themes: 1) responding to the immediate need to digitize policies and procedures, primarily concerning the treatment of customers and employees through the crisis; 2) establishing a data management strategy to accelerate and improve their decision-making capabilities; and 3) re-evaluating their supply chain in light of the location flexibility that leading providers have already demonstrated in the COVID-19 pandemic. It is likely that a coherent cloud strategy will underpin the winning strategies.