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Cloud for core financial services: The inevitable future
Rahul Singh President, Financial Services | January 4, 2021
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Cloud adoption is growing exponentially across industries. Once a revolutionary technology, cloud has now become the foundation of businesses that want to stay agile, innovative, and cost-effective. The financial services industry is a major user of cloud-based Software-as-a-Service (SaaS) for its non-core applications. Functions such as customer management, human capital management, and financial accounting are being moved progressively to the cloud. Several banks have warmed up to using cloud technology for services such as KYC verification. Analysts say that public cloud spending will grow from $229 billion in 2019 to almost $500 billion in 2023. Of this, one-third will be accounted for by three industries – professional services, discrete manufacturing, and banking. The time is ripe for an increasing number of financial services providers to consider moving their core offerings to cloud services.

The earlier reluctance to move core activities to cloud technology has softened. Many banks are putting strategies in place to migrate their core services such as consumer payments, credit scoring, wealth management, and risk analysis to cloud. This is a significant change driven by several factors, some of which include developments such as PSD2 and open banking that require secure and cost-effective data sharing.

Another significant reason that has advanced the approach to cloud is the changed mindset of the regulators. Earlier, the regulators exercised caution in terms of cloud technology but this is changing. For instance, the Australian Prudential Regulation Authority (APRA) acknowledged the risk associated with the cloud but also recognized 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 regulator recommended that banks must develop contingency plans that allowed cloud services to be provided through alternate means if required.

The other pressure for incumbent banks is from next-generation fintechs. 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.

For incumbent banks, the need to upgrade core systems and integrate the latest technologies has become an immediate priority. The COVID-19 pandemic has provided the push, accentuating the importance of migrating core systems to cloud and upgrading them. The unusual demands placed by the pandemic on systems and services have tipped the scales to a point where financial services organizations 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’. It must use cloud to address new and ongoing regulatory changes, fresh customer demands, the deployment of emerging technologies, and the relentless competition from agile fintechs.

As we turn the corner into 2021, financial service providers will need to reset their priorities, going much beyond leveraging cloud for scalability and cost efficiency.

As we turn the corner into 2021, financial service providers will need to reset their priorities, going much beyond leveraging cloud for scalability and cost efficiency. The new areas to focus on will include:

Robust digital foundation: The cloud market is expanding fast and choice for services are aplenty. Whilst the big three hyper-scalers are becoming the obvious choice, few other players are also gaining traction such as IBM, Oracle, and Alibaba Cloud. This will lead organizations to embrace hybrid cloud that will need a robust digital foundation to adopt cloud at scale in a secured and compliant way. As the COVID-19 pandemic has shown, the cloud is perfect for crisis situations. A well-architected digital foundation supported by resilient operations ensure that organizations get access to their systems and data irrespective of employee location and devices.

Technology platforms: Enterprises are focusing on abstracting complexity at various levels of IT by embracing the platform approach and enhancing speed of IT consumption by business. Physical infrastructure is abstracted into cloud-based platforms. Data is getting consolidated into data lake platforms to drive better analytics and intelligence. Software products are offered as capability platforms such as APIgee and CI/CD to simplify and speed up the development processes. This results in accelerated time to market and enhanced developer experience, while significantly reducing capex investment into data center infrastructure and space.

Enhancing IT security: Cloud offers the latest in security and is more secure than on-premise servers if implemented correctly. Financial services have relied on their control and compliance-based security for years. These practices are vulnerable to growing cyber threats. Service integrators are having laser sharp focus on creating robust cyber security solutions for the financial services organizations. Cloud providers are also looking to provision industry-specific security and regulatory measures such as end-to-end data encryption. This makes it easier for the financial services organization to stay complaint while migrating to cloud.

Driving innovation: There is growing evidence that cloud is the fundamental factor in the ability of the fintechs 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). This can unlock new processes that improve customer interaction and experience with portable real-time services. Fintechs have already led the way in cloud-based innovation through open banking platforms. Cloud in banking simplifies the business processes of some of the leading banks such as KYC as a Service to enhance customer experience.

Enterprise synchronization: The ecosystem in which financial services operate today is expanding. Collaborating internally and with external partners is critical to success. Cloud in banking allows businesses to integrate collaboration through shared tools and platforms. This is a critical ability as it leads to faster decisions and improved innovation cycles.

Legacy systems will hold banks from realizing their vision of improving revenue generation and building a business that is resilient and responsive at the same time. Cloud has demonstrated success for challenger banks. There is no time to waste in moving core systems to cloud services and building a secure future.