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was all-in on AWS. It was one of the very first US banks to not only commit in a big way, but also to announce it loudly and proudly.
Despite that, change has been slow going, says Mitchell. “A lot of this ties back to these banks feeling locked in to their legacy providers. These solutions are old, complex and expensive.” The use of cloud, adds van Engelshoven, was seen early on as the perfect tool for the dev/ops process but now “we see more and more acceptance of cloud for normal production use augmented with public cloud capabilities for scaling of critical production resources.”
There was no need to consider cloud before cloud-based vendors took the first steps, says Danilkis. Banks had no alternative available to them and so trusted in their existing legacy systems. UK challengers like Monzo, Starling and others are coming into the market and deciding to build their entire technology portfolios via the cloud. Banks both looking to use the cloud and vendors starting to offer the service has been something of a two-pronged attack on the industry. Where before there was a gap in the market that hadn’t been tested, now there are plenty of companies aiming to get in behind the pioneers as fast followers.
For van Engelshoven it’s a business decision first of all. “CEO’s are looking to make their operating model flexible, especially in terms of minimising the amount of fixed costs in their franchise,” he states. “As newer technology can be frequently consumed in a ‘pay as you use’ model, this fits well with the overall changes banks are trying to make to their operating model.” This factor has become even more pronounced given that for regulatory capitalisation requirements “the investments in IT assets can marginally be capitalised.”
Mitchell argues that it’s a question of both. For many financial institution leaders, there’s still a need to understand and embrace a digital-first view of banking. The pressure is on, though: “Today’s customer expectation is set by major technology players, such as Apple, Google and Amazon. Customers expect a modern user experience, speed and agility of service offerings, and multi-channel integration. Fortunately, newer technologies are available to address these requirements at significant speed and reduced costs, to transform these businesses.”
“The spotlight is on the CEO,” states Danilkis. “Because
of everything that has gone on in the FinTech space people on the tech side in banks are now being looked to and asked ‘what does our future look like’.” As always, it boils down to market share. Despite total market domination still being in the hands of the big banks, investments, savings and lending assets handed out by challengers in the UK were on the up by as much as 31%, according to a KPMG study. “They’ll be looking over their shoulders at their competitors and wondering which of them will be using the cloud,” adds Danilkis.
Tripping points
For Mitchell the biggest hurdle is legacy technology providers. The vendors have placed a “grip” on the market that stifles innovation. Cloud providers, “need to have the appropriate governance and security measures to protect sensitive data.” All of the major stumbling blocks, believes van Engelshoven, have been surmounted, with the exception of regulatory approval. “There will always be a positive tension between technology and regulation,” he says. “A regulator’s mission is to set boundaries for good use of technology whilst technology is trying to move current boundaries.” Since cloud technology enables the opening up of the banking industry, regulators should be more keen than usual to ensure its success.
What does cloud have in store for us in the future, then? “The next question for a lot of banks [looking at cloud] will be an operational one,” states Danilkis. “Banks will be asking themselves ‘how do we make this transition’ – do they do it by business units, new products or go for a big bang.” What they need to do, he adds, is to look at where their biggest bang for their buck would be. “Either if there are products out in the market having a tough time or if there are products that need to be launched I would say those areas should be the first point of attack.” A bank should break down its specific “pain points” and work out where they do and don’t need a cloud-based system.
“Like electricity, cloud will become a given,” says van Engelshoven. “It would be safe to assume that one would be able to source and compose a complete core banking platform [entirely using the cloud].” This would enable, he argues, a bank without a core banking system. Combined with other specialised services, the cloud will be able to build “a flexible and scalable, yet differentiated open operating model. In five years this will be a new norm.”
www.ibsintelligence.com © IBS Intelligence 2017
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