Recent events in the financial sector have got banking executives scratching their heads as they struggle to come to terms with the changing landscape of how people make financial transactions.
Many of these business leaders are realizing that a failure to transition and align with the new technologies will see their firms grovel in apparent defeat as emerging financial companies take over the industry.
According to a March 2016 report by Citi GPS (PDF), banks in Europe and the United States are approaching a tipping point, largely contributed by the emergence of fintech. Fintech now threatens to disrupt the banking industry in ways few can imagine. In fact, it is expected that when the industry reaches this tipping point, massive job cuts will be inevitable.
Fintech is not the only technological occurrence that is forcing banks to rethink their way of doing business. The cloud is the other major disruptive force. While cloud computing has been around for many years now, there has been no other industry that has been as slow in embracing the cloud as the banking sector.
While the reasons for the slow uptake of the cloud in the banking sector are understandable, technology is often unforgiving. A failure to embrace it could prove to be the worst mistake of the traditional banking system. This revelation is perhaps what is driving big banks to invest heavily in fintech startups.
World Economic Forum reports that investment in financial technology firms has soared from less than $2 billion in 2010 to over $19 billion in 2015. According to a 60 Minutes report, the big chunk of this capital flow into fintech is coming from big financial institutions that are realigning themselves in order to prepare for a certain and ruthless disruption the industry is about to go through.
When cloud computing started becoming commonplace in work environments, the banking industry chose to reticently watch. Given the many regulations the banking industry had to comply with, it was unsurprising that most banks would take their time to embrace as disruptive a technology as the cloud while it was still at its infancy.
Today, many banks are rethinking their cloud computing strategy. According to CIO, almost all banking industry players are testing the cloud. Six years after Goldman Sachs began its cloud computing experiments, most of the bank’s workload today operates within a cloud framework – about 85% of the total Goldman Sachs workload.
Coming from a company that many consider the gold standard in the banking industry, this development is the clearest indicator that banks are now ready to deal with the challenges that have, in the past, hindered them from embracing the cloud.
Indeed, there is every indication that the banking sector is ready to find innovative solutions that will make it possible to make the switch to the cloud, joining a long list of many other industries that have done the same.
Cognitive of the apparent change in the prevailing attitudes towards cloud computing, Amazon Web Services (AWS) is approaching big banks to pitch its cloud solutions. Wall Street Journal reports that the popular public cloud vendor has already approached Goldman Sachs, Citigroup and JP Morgan among others.
Challenges that have kept banks away from cloud computing
While the challenges that have for long made banks stay away from the cloud are still in play, many banks have gathered the courage to deal with them in order to enjoy the many benefits of cloud computing. The following are the major challenges that banks face in the cloud:
Regulation and compliance
From the beginning of time, dealing with other people’s money has always been a sensitive matter. In the present world where money is the focal point of most people’s lives, world governments have found it necessary to strictly regulate any business that operates in the financial industry.
In consequence, only the financial institutions that consistently follow the set rules are allowed to continue operating in this space. Typically, the governing laws dictate to the banking institutions precisely what they must do when storing customers’ personal and financial information.
By shifting to the cloud, many bank executives fear that their firms could lose certain pieces of information, including their customers’ personal and financial information. This would, almost definitely, result in awfully negative publicity and incredibly hefty fines.
Every bank has a sacred commitment of keeping its data secure. The sensitivity and value attached to banking information make it a sought-after commodity for hackers and information thieves from around the globe. This also makes it extremely vulnerable. It, therefore, requires the highest attainable level of security.
At IBM, a single data breach costs it between $145 and $154 for every account that has been compromised. In the event that the information that has been compromised is financial in nature, the average cost of the breach for each customer account could be greater than $154. No wonder it has taken bank executives such a long time to consider introducing cloud computing to their company internal systems.
To this day, many financial institutions still struggle to hand over control of their business data and applications critical to their daily operations to an outside party. Many banks have felt that doing so would make them less flexible and negatively affect their agile nature.
Furthermore, few financial institutions can handle putting themselves at the mercy of their cloud service providers. Among the worries associated with doing this include falling behind certain critical software updates, an event that could create fault lines in the network. In a perfect world, banks would rather have total control of every one of their business processes.
How banks are overcoming these challenges
The most effective way that banks can embrace the cloud is by choosing a cloud services provider that would be a perfect fit for their particular challenges in their business processes. In 2013, AWS was hired by the Central Intelligence Agency (CIA) to offer cloud solutions for government intelligence agencies.
This was not only a lucrative deal for the company, it also helped AWS make a case for its cloud solutions as secure enough to be used in industries that are highly regulated, like the financial sector.
On the other hand, some banks are choosing to invest in private cloud architecture, instead of using third party cloud solutions. Bank of America is leading the way with this approach having set aside considerable funds with the intention of reinventing its datacenters by the use of private cloud infrastructure.
Bank of America hopes to persuade its technologists to do away with their old approaches to data storage and usage, and instead embrace a more ambitious style. It has created a new team that will be responsible for developing the bank’s next-generation business architecture.
While it might be difficult to project how this new embrace of cloud computing will pay out in the financial sector, one thing is clear, it will no longer be business as usual.
As financial dealings get a much-needed reshaping by the rise of fintech companies and mobile financial innovations, traditional banks will have to shed off their old attitudes towards financial transactions and embrace the way of generations Y and Z.
Embracing cloud computing seems to be one of the first moves by the banking industry towards becoming financial institutions relevant to a 21st century populace. And as many banks are finding out, the cloud is not as insecure and uncontrollable as they initially thought.
Moreover, they will have little to worry about if they find a cloud solutions vendor that has the expertise, the experience and the resources to deliver solutions that would adequately meet the needs of an industry that is always under a microscope.