Why cloud is the future for banks

By Phillip Finnegan

December 22 2019
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The rise of neobanks, alternative finance providers and a vibrant fintech start-up scene in Australia and New Zealand is driving significant investment in cloud-based infrastructure for traditional banking institutions. Our recently launched Culture of Innovation Index found that at a global level 92 percent of corporate banks are either already making significant use of the cloud, or planning to make further investments next year. Locally, banks are expected to invest 5-10% of their resources in cloud-based services in 2020, a figure that continues to grow year-on-year.

Banks realise that the cloud enables them to offer new services to their customers, improve overall customer experience and react to market demands more quickly. Coupled with the understanding that cloud and hybrid cloud environments can be configured to meet the required regulatory and security standards, banks realise that cloud capabilities are becoming table stakes for financial institutions that are looking to innovate.

Better customer experience through faster deployment

Mobile commerce and seamless digital customer experience have become central to business success in the past ten years, with consumers and merchants expecting real-time service and intuitive usability. Neobanks and fintechs – most of which were born on cloud infrastructure and focus heavily on user experience – are challenging the big four, adding further pressure on the incumbents to innovate and add value for customers.

Incremental improvements or minor value-added services, such as offering basic spending insights and categorisation, is no longer a unique selling point for customers. Banks need to think bigger about the services and tools that will be true game-changers. For example, data-driven insights can be used to provide timely notifications to customers about their spending habits, helping them to stay on budget.

It’s important to remember that entering the cloud is the means and not the end – however it’s the first step on this journey towards improved customer experience. Banks can reallocate time and resources that were traditionally spent maintaining IT infrastructure to activities that will delight customers. It also enables greater collaboration with fintechs and startups, streamlining IT integration through the use of Application Programme Interfaces (APIs) that fintechs can connect to more easily. This enables banks to offer a greater range of complementary services that strengthen both parties’ collective offerings.

Streamlining operations and scaling for agility

Banks traditionally run their own data centres which can be costly, resource-intensive and difficult to scale.

To illustrate, imagine a scenario where a bank is looking to expand operations into a new country or territory. Historically, banks would look to buy new data centres to ensure their network could handle peak demand. However, banks were spending millions of dollars to run and maintain data centres that are only partially utilised. Further scale had to be built into these operations, which may not be achieved in the short term.

This model of operation is highly inefficient, as the infrastructure needs to be ready to handle peak demand from initiation onwards, even if the volumes are usually significantly lower.

Using the public cloud’s ‘operating expense’ (OPEX) model, where services can be scaled up and down according to demand, provides much greater flexibility and cost optimisation. This model also empowers banks to focus resources on customer experience innovation and quicker product iteration, rather than backroom maintenance.

There has been some initial hesitation on the part of banks to adopt the cloud as it requires moving sensitive data to a new environment, which is perceived as opening up security vulnerabilities. Importantly, regulatory bodies needed to be engaged to ensure compliance of these systems. However, banks increasingly understand that the big cloud providers spend more on security than banks could on their own. And these cloud providers can also engage national regulatory bodies and provide a holistic view, based on their experience in a range of markets globally. Furthermore, hybrid cloud environments, which combine the benefits of a public and private cloud, allow institutions to leverage a ‘best of both worlds’ approach.

Adopting the cloud enables banks to offer better user experiences, increase the pace of innovation and streamline operational cost: essential ‘must-win’ areas for banks with the rise of nimble neobanks and agile fintech startups.

By: Phillip Finnegan, Managing Director – Pacific, ACI Worldwide

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