The future of banking is predicated on cloud computing as cost, flexibility, speed and a desire to tap into fintech innovation drive uptake by challengers and established banks.
Cloud computing capacity and services mean that small challenger banks, often using financial technology (fintech) developed by others, can compete with big established banks on the provision of mobile and data services, 24×7 automated support and other functionality. Previously they would not have been able to afford to, unless they grouped together in IT service provision collectives.
It’s not only small banks using the cloud, new digital-only neo-banks such as Atom, Tandem and Fidor are all trying to infiltrate the market too and grow at the expense of established financial institutions (FIs). Monzo, Starling and others seek to offer innovative ‘gamification’ techniques on cloud-based mobile banking platforms that will keep customers coming back.
The cloud allows them to bring their offerings, and any new functionality, to market quickly and cheaply; at a lower operational cost; and without the legacy traps encountered by established banks, which previously built out their own systems in a closed, proprietary fashion, or took over other banks whose systems they couldn’t then integrate.
What used to be too expensive for new entrant challenger banks such as Metro Bank UK, which still have branches, or the entrepreneur-focused OakNorth bank to build has ceased to be so. The latter even uses Mambu’s SaaS-delivered core banking system to run its entire ledger and associated operation. Another external provider delivers storage and services to it in the cloud. It is a pure play cloud operation.
A flexible core such as OakNorth’s should enable a bank to incorporate new technologies more easily into their systems as well, such as blockchain payment apps or artificial intelligence chatbots, future-proofing its IT estate. This is another benefit of the cloud, alongside:
- Reduced cost
- Enhanced IT and business flexibility
- Faster speed-to-market for new services and functionality
- Ability to accommodate fintech innovation developed outside the bank.
Appropriate security, service level agreements, testing and risk control mechanisms to prove to regulators that FIs remain in control of risks to their data, via encryption keys; of their capital; operational resiliency; and so forth, will all be required to operate in the cloud. But authorities have indicated these mechanisms are all acceptable, removing barriers to FI cloud adoption.
Cloud & APIs
A cloud-based model lets smaller banks take advantage of fintech innovation via the use of middleware wrappers that can more easily be accommodated into a bank’s core operation. Services can be accessed in the cloud without the need to build or even host the systems themselves.
Open application programming interfaces (APIs), which are being encouraged by the EU’s Payment Services Directive 2 (PSD2) regulation and the UK Competition and Markets Authority's (CMA) Open Banking initiative, should also encourage a further wave of innovation. This too can be hosted in the cloud.
The two trends – towards the cloud and open APIs – should mutually support each other in helping to grow a more open and competitive European retail banking industry.
Big banks respond to the challenge
Established banks aren’t idly standing by as new cloud-based models emerge from potential challengers that are still small enough not to represent an existential threat. Many big banks are using the cloud themselves for their own operations, typically private or hybrid varieties, in order to try to increase their own speed-to-market with new products and to overcome expensive legacy constraints and achieve internal cross-departmental efficiencies, releasing data across complex internal IT estates.
Cloud computing can enhance flexibility for big banks too, with appropriate security, so that new services, compliance solutions and technologies can be bolted on to existing big bank cores. Alternatively, it can help large FIs slowly and securely move such mission critical cores into the cloud, in an orderly controlled fashion, delivering a more modern digital platform that is fit for the 21st century.
Most advanced established banks want a service orientated architecture (SOA) that is more suited to the technology revolution that has overtaken banking in recent years. A cloud-based architecture, especially if it’s allied to open APIs, can enable this.
In an era of falling return on equity where compliance costs and capital bases have gone up there isn’t the budget to fund bank’s own technology developments anymore, so the popularity of the cloud has soared as a place to host developmental initiatives and deliver new services.
The fear of creating yet more siloed systems that cannot integrate with other parts of a large FI’s retail, investment or commercial banking operation is another key driver, but the positive ‘push’ factor of modernity, cheaper running costs and innovation-ready platforms is just as strong a driver to the cloud.
By Neil Ainger