Banks have been cautious when it comes to moving to a cloud environment – more so than other sectors. It’s estimated that only 25% of the activities of the largest global banks are cloud-based. But there have been legitimate reasons for this. For example, security, compliance and regulatory concerns, data residency (especially if it’s held outside the bank’s home country), the dominance of three US cloud providers (and their lack of supervisory oversight compared to banks).

But recently there have been a number of significant cloud deals taking place: HSBC (AWS), Deutsche Bank (Google) and Banco Sabadell (IBM).

Are banks finally living in the cloud rather than still on a journey to it? Most of the issues mentioned above are solvable. For example, security provided by the major cloud providers is often far more secure than traditional banks, because these companies can attract and retain cyber-security personnel of a much higher quality. I’m aware of the Capital One breach last year, but most banks tend to be pragmatic about breaches – ‘when, not if’ – and I know of only one bank that postponed its move to AWS as a result.

Cloud providers typically offer data centre locations around the world. Data location is just part of contract negotiation. Cloud providers have taken time to talk to regulators, to understand their issues and respond appropriately.

Here’s a quote from a Bank of England study last year: “The bank should embrace cloud technologies, which have matured to the point they can meet the high expectations of regulators and financial services. It offers the advantages of business agility, faster innovation and cyber-defences to provide better services to households and businesses.”

There are cost savings to be had, but that’s not the business driver. Frank Wasson, CEO of First Entertainment Credit Union, sums it up well: “It’s a myth that it’s cheaper. We’ve found that sometimes it’s more expensive than what we can do for ourselves. But it makes you spend what you should have been spending all along. Do it because simplifying the environment makes it easier to scale.”

Given the current pandemic, banks are becoming much more aware of the need for flexibility, scale and agility. Of course, not everything can be moved to a cloud environment, but banks are recognizing that cloud drives modernization initiatives, particularly the ability to innovate. Banks have been among the most enthusiastic adopters of cloud-based software and video conferencing services to facilitate working from home. Just as the pandemic hit, Microsoft completed the rollout of its Teams video service to 100,000 staff across Santander’s global banking operations, building on a cloud contract struck with the Spanish bank last year.

Applications that are not cloud native tend to be inherently clunky, inflexible and have limited potential. Cloud also enables the use of DevOps and microservices, which are the real drivers as they speed up development, increase innovation and offer much more agility.

Does it matter if your cloud is public, private/on-premise or some form of hybrid? To quote software veteran Paul Maritz: “Cloud is about how you do computing, not where you do computing.” The point is to start generating the benefits from using it. The strategic value of the cloud is clear and it is not going away.

Consider these three drivers:

• AI: AI-based technologies are having a major impact on banks in areas like fraud, risk, marketing and service delivery. But AI tools need lots of quality data – otherwise they are pretty much powerless. Bringing all that data in-house will not be easy. With the cloud, AI not only becomes much more scalable but it gives the opportunity to apply real-time insights.
• Platforms: As they develop their innovation ecosystems, banks are turning to data sources from third parties and partners. One-off partnerships are time-consuming and hard to scale. The path to ecosystem development in banking will be accelerated by the emergence of firms pursuing platform strategies. For banks to participate and benefit from these platforms, however, being in the cloud will be table stakes.
• Insights: Banks have vast amounts of customer information, but their legacy systems may have prevented them from quickly gathering insight from that data before it went stale. Cloud enables you to quickly drive deeper customer understanding and deliver those insights faster into the market.

The Deutsche Bank deal certainly focuses on innovation, with both parties sharing revenue from any new products developed together. CEO Christian Sewing commented that it “was much a revenue story as it is about costs.” Deutsche has access to Google’s data science, AI and machine learning capabilities. Potential product areas include cash flow forecasting and risk analysis for treasury clients and digital services for private banking.

For a market-leading Latin American bank, we digitized their paper-based, labour-intensive car loan approval process by moving them to a Microsoft Azure platform. Customers now use their computers or mobile phones to upload documents and link credit scores for assessment and approval. The new digital platform enabled the bank to implement automated, risk-based pricing, resulting in 25% savings for underwriting and processing. Pre-check and document handling time was reduced from six days to a few minutes. Revenue increased by 40%; customer satisfaction increased by 35%; loan generation increased by $400 million.

Clearly, flexibility and scale are major benefits in the current environment, given the constantly changing market dynamics. Many banks now regret that they have not moved further towards a more agile operating model.

Is now the time to start living in the cloud?

Learn how banks can rethink how they respond to overwhelming demand, in the light of Covid-19, for financial support and advice from businesses and consumers.