Cloud computing brings promises many banks are still reluctant to believe, but an educated leap of faith into the new data access model might just be a prerequisite for their survival.
It's every machine for itself: the 3-million swarm of the world's ATMs has no data centre to connect to and get commands from. Lingering in isolation, each cash-spewing device fulfills its tasks independently getting a manual, and thus, cumbersome update when necessary.
Such a broken network could be restored by solutions similar to the one introduced in the spring last year with the name Kalpana. Kalpana moves ATM operations to the cloud so the machines themselves are run remotely. From then on, everything happens on a server level.
For service providers, everything changes too. Operating costs are lowered, as there is no need to expedite a technician whenever another feature is to be added to a given automatic teller. Deployment of new, personalised services is enabled, but this questions how withdrawals can be made using a smartphone. The resilience also gains a considerable boost as it is much harder to illegally deprive an ATM of its crispy contents by taking over the machine's internal computer when the latter is part of an integrated, interconnected system.
Still, as shown by Wincor Nixdorf, an ATM manufacturer, less than 20% of banks have made their ATMs go online and this might serve as a reflection of a wider trend. Despite their virtues, the financial industry's confidence in numerous cloud solutions is seeing a rather modest growth, but modesty, in turn, might not be a virtue here itself.
Plug and play
Two centuries ago, factories had to build their own power generators in order to operate. The necessity became a thing of the past once electrification was introduced; suddenly it was sufficient to plug into the network to see the glow of light and hear the hum of machinery.
Today, the above analogy is the most common one used to describe the very nature of the cloud: it makes computing power become a public resource, a potential utility - just like an electric current. "Cloud-computing is a model for enabling ubiquitous, convenient, on-demand network access to a shared pool of configurable computing resources,” states the official, more widely accepted definition provided by the US National Institute of Standards and Technology (NIST).
With cloud computing, businesses don't need to invest in software licenses, databases, workstations or network devices. All they are obliged to is to pay a monthly subscription fee in exchange for access to desired solutions that are already present.
However, the possibility of paying for what one needs when it's needed, responding quickly to an ever-changing market with new apps developed within days and creating services precisely adjusted to customers' habits and buying behavior, cannot fully alleviate banks' queasiness about transferring their key resources to a virtual sphere. There are three reasons for this.
Under the overcast sky
The first reason is vulnerability. In a recent Ponemon Institute survey carried out among US IT professionals, it was forecasted that for every 1% increase in the use of cloud services, it would result in an increased risk of a data breach by 3%. It is vital then that cloud-based services meet the most restrictive security requirements.
The second is control, or the fear of losing it. The challenge is to ensure that the data is always available and that the interested parties know and freely decide upon what happens to it. But not everything can be predicted. Critical downtimes happen."If something goes wrong, and regulators or the media find out the bank was using a cloud provider, the bank could be held up as an outlier and have that business decision questioned," Dan Latimore of Celent told American Banker. And so banks remain distrustful about moving their operations to the cloud, especially the core ones.
The third reason revolves around the lack of compliance. If the rules on which the cloud is founded upon vary between countries, then how does one know which rules apply to a service hosted in Sweden or Italy, for example and whether or not it is available thousands of kilometers away? Problems related to inability to comply with operational and regulatory requirements were the reasons why at the beginning of 2015 the Australia's Bank of Queensland decided to scrap a $10 million cloud-based CRM system trial.
According to last year's Cloud Security Alliance survey, which spanned representatives of financial institutions from 20 countries, cloud services are mainly used in the industry for processing non-critical, power-hungry data operations, which include application development and testing, customer relationship management and email hosting. Our own experience shows that banks, on the whole, are not interested in cloud solutions, especially when it comes to transactional customer service.
Surviving the game
But this is about to change. As estimated by Gartner, more than 60% of banks worldwide will turn to processing most of their transactions in the cloud as soon as this year. Due to being forced to do so by poor return on equity and the urging pressure to streamline their businesses in order to catapult financial institutions onto the cloud.
On top of that, contemporary banking is gradually being taken out of essential products and services by young and vibrant fintech startups. This is a serious problem as it has been recently projected by McKinsey that these startups are targeting the most lucrative areas of banks’ activity, which could deprive the latter of almost two-thirds of revenue from loans, payment processing or wealth management over the next decade. "No other industry over the last 250 years has faced as much competition from new entrants as banking is facing today," notices Brett King, CEO of Moven, a mobile banking startup.
These entities don't think twice about utilising the cloud to innovate and drive down costs of market entry. But where are the traditional banks?
According to the newest Millennial Disruption Index, their doorsteps are less eagerly crossed by the youth than the ones of dentist offices. Nearly 75% of Generation Y would rather have their teeth examined than go to a bank outlet and one-third believes that in the future, they won’t need a bank at all.
It is survival of the fittest and this is shown more as the end of the legislative road of the Payment Services Directive (PSD2) is approaching Europe in great strides, alongside new regulations that are to come into force in 2017.
By Piotr Ålusarski, Content Marketing & Communications Specialist, Financial Services, Comarch.