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Why Cloud Migration in Banking Isn’t Just a Side Conversation Around Digital Transformation
Cloud banking has an unquestionable and underestimated potential to completely transform a financial institution. But it feels like we hardly ever talk about it. It hasn’t claimed the spotlight for any prolonged period of time in online tech or finance publications like other fintech topics often do. You don’t see it making the daily headlines in TechCrunch or BetaKit or Forbes. Although if you really look for it, you’ll find traces of it here and there. Still, cloud banking is not by any means newsworthy.
Instead, cloud banking has generally been part of a quieter internal conversation among finance and technology professionals. A boardroom topic for those frustrated banking executives focused on quarterly growth figures but endlessly challenged by aging legacy banking systems, complex technological infrastructures, and increasingly demanding consumer expectations in banking. Although it’s a key topic of strategic discussions for many financial institutions focused on the modernization of their businesses and platforms, cloud banking seems to struggle for any real attention in the larger discourse of finance and technology.
Over the past few years, it seems like cloud banking has been more of a side conversation for the industry—one of many other important side conversations—in a wider discussion about digital transformation, the emergence of open banking, and the importance of application programming interfaces (APIs). But moving to the cloud has quickly become a prerequisite for banks that plan on maintaining their market shares as the industry braces for a slow, calculated, paradigmatic shift to consumer-directed finance and the emergence of a new financial ecosystem.
Cloud banking is no longer a topic for side conversations.
Why Has Security Been a Concern for Banks and Financial Institutions That Have Been Slow to Implement Cloud Banking?
Over the last several years, cloud computing has quickly become a staple of our technological lives. In business, the cloud has become the preferred way to manage and share documents and files simply because of its convenience. It’s provided the opportunity to work from anywhere while promoting new opportunities in seamless cross-team collaboration. Things can be created together, duplicate versions and outdated files aren’t as prevalent as they once were, and our data and information are always up to date. Those benefits have made many businesses more efficient. Companies that adopted the cloud early on were at an advantage when the COVID-19 pandemic hit and suddenly forced the industry to shift to remote workforces because they were already prepared to work remotely.
For the early adopters, it made positive impacts on a larger scale, providing a platform for many businesses to improve the way they collect and analyze data in order to make informed business decisions. It provided an opportunity to redefine business continuity plans and deploy reliable disaster recovery solutions. For many tech companies, it even streamlined software testing and development processes leading to new opportunities to explore ideas, adopt agile methodologies, and innovate.
Still, banks have been slow to implement cloud platforms. But why? That reluctance toward cloud adoption in banking has often been attributed to the preference for on-site configurations that make meeting stringent compliance and security requirements more manageable. It’s not us, they say. It’s the regulators.
But is the inability to meet compliance and security requirements on the cloud really a viable concern? How do you know? Or is it more likely that having control of the physical hardware has become something we’re just accustomed to? After all, it can be hard parting with those large portions of our physical infrastructures that have helped us build our reputations for trust based on our commitments to security.
Canadian banks are known for their security—and they have to be.
But so is Amazon.
Cloud service providers like Amazon invest billions of dollars into cloud security to ensure they maintain the highest standards for privacy and data security. Amazon Web Services (AWS), a cloud platform and infrastructure often used in cloud banking deployments, is the most flexible and secure cloud environment available today—it’s trusted not only by financial institutions but also government military operations that leverage it to manage and execute top-secret workloads. On top of that, AWS allows financial institutions to easily monitor and receive third-party validation for key global regulatory requirements.
For some financial institutions, there’s a chance AWS could exceed the security standards of current financial institutions. That’s because their commitment to the security of their digital infrastructure and physical facilities is a top priority, too.
Why It’s Impossible for Banks to Forecast Return on Investment (ROI) for Cloud Migration
When security is not the primary concern for cloud banking migrations, what else is holding modern banks and financial institutions from making the transition to cloud banking? Perhaps one of the biggest reasons that banks have failed to make the transition is that it’s hard to calculate whether the cloud is worth the upfront investment. It’s a simple question that can be incredibly difficult to answer: How is a cloud infrastructure more cost-effective than what we’re already doing?
Here’s the thing.
Cloud banking has the potential to make internal teams more agile and more efficient. A cloud banking infrastructure can give product development and technology teams more flexibility by providing the ability to conduct rapid testing or explore innovative product development initiatives without the overhead of acquiring and maintaining physical hardware. It can also cut down on both time and resources—information technology teams working with cloud banking infrastructures won’t need to order equipment and wait for it to arrive. They won’t have to set it up in a physical space and configure servers and other hardware and all the peripheral equipment that goes along with it. Additional computing power is simply always available when it’s needed. It’s scalable. It’s instantaneous. On top of that, when hardware or computing resources are no longer needed, either because of decreases in activity or realignments in business initiatives, banks can simply shut those resources down and scale back, which results in cost optimization benefits that can’t be measured upfront.
So, how do you capture that in terms of ROI?
In banking and in business we measure our return on investment quantitively—it traditionally comes down to numbers and timelines—and comparing the costs of hosting platforms on-site as opposed to hosting platforms on a cloud doesn’t always provide any significant monetary benefits on the surface. You can’t look at direct, comparative cost savings in order to rationalize and forecast a return on investment. You could, but you would be missing something. The benefits of cloud banking aren’t exactly direct benefits related to cost savings—they’re almost always ambient, affecting large areas of banking in other process-driven ways.
That’s one of the problems with trying to justify an investment in cloud banking: How do you measure the value of improved scalability, increased agile development and testing capabilities, opportunities in automation, hardware flexibility, and internal resource efficiencies-all in terms of an ROI? The inability to present a convincing return on investment in the form of a forecasted amount—and evaluated, comparative cost—over a period of time makes the case for cloud banking more challenging.
It’s impossible to capture a quantitative return on investment for cloud banking—unless maybe you count opportunities.
Even for industry professionals that can articulate exactly how cloud banking’s benefits outweigh its risks, it’s a challenge: How do you convince decision-makers that an investment in cloud banking will produce an immediate, tangible return on investment in the near future? If we’re looking at quarterly or annual figures, it may be harder than you think. This inability to justify the change might also be what’s held the industry back.
Instead, decision-makers see infrastructure change as a massive undertaking. They’re not wrong! It is a massive undertaking. This is not simply an update to infrastructure—it’s a migration. This kind of change requires considerable resources and considerable time and comes with a considerable level of risk to day-to-day operations. Without promising a significant impact on the bottom line, cloud banking has simply not been a priority until now.
On top of that, there’s been this underlying notion that banks are immune to advancements in technology. Banks know they’re outdated. With the majority of core banking systems designed in the 1980s and 1990s, banks have operated with the same underlying technology for decades. For many executives, it’s OK that bank technology is old because we all know it’s old and, frankly, there’s not much we can do about it. On the plus side, it’s safe, it’s secure, and it works.
But why has that been enough?
Fortunately, consumers are catching on. The industry is waking up. Fintech innovation is no longer just a threat but is now actively reshaping the industry and allowing newcomers to capture market share and real consumers—particularly the maturing generation of millennial consumers that have grown up alongside innovations in consumer technology and have developed new expectations from service providers that leverage technology to deliver personalized services. We know what technology is capable of, so why aren’t we seeing it? they wonder. Today’s consumer is different and is known to value customer experience over customer service. That’s only going to become more evident in the financial services industry in the years ahead.
Regulators are seeing new opportunities, too. Opportunities for change and increased market competition. That translates to opportunities for consumer choice. As open banking has emerged in jurisdictions around the world, Canadian regulators have already reviewed the merits and benefits of open banking, and they are now exploring how they can mitigate data security and privacy risks to promote the development of consumer-directed finance. With a paradigmatic shift in the Canadian finance industry on the horizon, are banks better off on their closed, private infrastructures? Or is it better to get on to the cloud where they can become more flexible and learn how to innovate?
What if we consider the ROI of cloud banking in terms of meeting the demands of the future? Digital transformation is about transforming banks. But the overall discourse of digital transformation shouldn’t be a distraction from addressing the foundational infrastructural changes that are required to make a true digital transformation possible. Cloud banking is the first step to transforming banks. More importantly, it’s the first step to transforming our banks’ troubled relationships with technology so we can align our banks for the future.
Forget ROI for just a moment. What do you know about migrations? We often talk about cloud banking as a migration, right?
Migrations are necessary when the conditions of an environment are no longer favorable or suitable for a species to survive. Now, it’s not always the environment itself that changes—often it’s the elements of the environment that influence its change and lead to its unsuitable or unfavorable conditions. Consumers, APIs, fintechs, and regulators—these are all elements that are or will be driving significant change in the banking industry. For banks considering a cloud banking migration strategy, they’re asking themselves two questions.
Does cloud banking provide more suitable conditions?
Or is this about survival?
https://bankingblog.accenture.com/middle-market-banks-top-three-cloud-myths (Retrieved May 6, 2021)
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