Banks have always been early-adopters of technology no matter how cautious they often have to appear. In the early years of the personal computer, it was always a bank at the head of the queue to upgrade its Microsoft Windows machines to the new Intel chip, or the latest version of Windows, mirroring their earlier enthusiasm for mainframe systems. Nothing has changed much at the heart of this drive to be at the bleeding edge of technology.
Over the next few years, banks will maintain this progressive tradition and carry on driving the migration of applications such as loan origination and management systems, API management systems and CRM into the Cloud. However, there has been a strong suggestion that the challenger banks are driving the real innovation. But is that the case?
It may be more accurate to place that particular honour at the feet of the fintechs. After all, they have arguably been the real trigger for much of the innovation which has swept over the banking industry.
With their trim operating models and asset-light financial structures, both fintechs and challenger banks have been able to utilise the benefits of the new cloud providers at an earlier stage than the traditional banks and have followed in the footsteps of the Googles. Amazons, Facebooks and Alibaba’s (GAFAs) as they grew unhindered by the traditions and legacy systems of the older banks.
For purposes of this blog, I would categorise a challenger bank as a small, recently-created bank that competes directly with the longer-established banks. Often they do this by specialising in areas underserved by bigger banks (examples in the UK are Barclays, HSBC, Lloyds Banking Group, and Royal Bank of Scotland Group).
They were able to make use of a large number of multiple cloud providers for all of their storage and computing requirements. They made ‘cloud-first’ a massive advantage for them.
“It has been claimed that with various cloud-based challenger banks, the cloud providers are disrupting the banking system without a single banking licence between them.”
This has had the effect of pushing the banking industry in a much more strategic direction in its approach to the Cloud. The industry is increasingly using in-built analytics, machine learning, project collaboration and artificial intelligence capabilities for very specific uses – directing new technology into improving the customer experience and for building an ‘insights-driven bank’.
Analysts have claimed that over 30% of banks worldwide now say that 50% of their expenditure over the next two years will be on new cloud-based applications. These banks will approach cloud services with more innovation and flair than even the challenger banks have been able to muster.
A saviour or something more
The prevalent notion that a simple move to the Cloud will automatically resolve all issues is just not the case. This is particularly true within the present governance framework. But the regulators are starting to loosen up now that they can put strict security practices in place, and they recognise the potential of cloud architecture to introduce increasing levels of service resilience.
Managing the data explosion
Financial institutions are increasingly augmenting their channel strategies. In addition to existing channels, and after a shaky start, they are beginning to become more aware of the potential of the Internet of things (IoT) and sensors for capturing customer data in real-time, generating vast amounts of useful data.
Being nimble – innovation at speed
Banks are collaborating with partners and even other banks globally over cloud-based project management platforms, using sandboxes, DevOps methodologies and cloud-based modular software. These modules can be located on servers of different cloud service providers, and banks are starting to use use them for decentralised, Cloud platform-agnostic software development. This is helping banks and their partners to grow and innovate without fear of failure. This is because there is limited start-up money in fixed investment at risk.
Cloud can mean fewer cyberattacks
It is a fallacy that the Cloud is intrinsically unsafe. Providers that adopt global best practices are arguably in a better place than those still wielding legacy technology with all its dependency on fallible human staff. The increasing use of AI-driven security within cloud domains is adding to the already high levels of security best practice offered by Cloud Service Providers.
A few cans need to be kicked down the cul-de-sac. Firstly the idea that cloud migration will always produce cost savings and applications will always work better in the cloud need to be thoroughly understood.
However, it is still the case that regulations related to the Cloud can remain unclear in some territories. These global aberrations remain to be ironed out, eventually leading to welcome uniformity. In this context, it is still interesting to consider what real effect GDPR (and similar regulations in other geographies) will have in the longer term regarding data privacy.
Banks are increasingly looking at Cloud through the long-lens of the business case rather than just technology. They are doing cost-benefit analysis, examining the flexibility and customer-centric services (and micro-services) that can be quickly provisioned. They are looking at the real benefits of Cloud and avoiding moving just because it seems inevitable.
There is no doubt that the challenger banks have helped drive Cloud adoption in the recent period. But as Cloud has developed and scaled it is the big banks, in tandem with the fintechs, who are in the driving seat.