On The Road To Cloud, Banks Still Have Far To Go – Forbes

COVID-19 accelerated technology transformation in financial services, but progress has slowed again.

The COVID-19 pandemic jolted the change metabolism of many banks. As lockdowns went into place, banks needed to meet their customers where they were, which was increasingly at home. Everything from account openings to loan applications and investment advice had to move online, and for many banks that meant using the cloud to quickly stand-up new services and product features.

Banks that shifted work to the cloud were able to handle millions of government assistance applications within weeks of the programs being announced. They distributed call center staff to their kitchen tables within days and updated desktop and mobile apps so that customers could do most of their banking from their sofa. For a moment, it looked like the big old banks had closed the gap on the digital startups that had been siphoning off customers through better tech.

But rather than using 2020 as a springboard, the adrenaline seems to be wearing off and the rate of change in the traditional banking industry is decelerating again. Despite the press releases and grand pronouncements, a recent global survey from Accenture ACN shows that big banks have only 8% of their overall workloads and just 2% of their core IT functions — such as payments and core banking — running in the public cloud. Some of that deceleration has been due to legitimate concerns around privacy and security and the realization that the duct tape used in last year’s sprints needed to be replaced with more permanent solutions.

There is also the somewhat uncomfortable fact that two of the largest public cloud providers (Amazon AMZN and Google), are experimenting with providing financial services, competing directly with the banks their cloud businesses currently serve. Economics are also reasserting themselves with a recognition that speed to market is only one element of a business case and that fully depreciated data centers remain a cheap infrastructure option for many bank services.

But these arguments risk missing the forest for the trees. Looking beyond the next few quarters, it’s clear that the long-term winners in the banking industry will be predominantly cloud-first, as the winners are in almost every other consumer facing business. Dig into the survey numbers and there are many positives. Although banks’ overall cloud migration is in the single digits, that figure hides material changes in parts of the business that face fewer technological and regulatory hurdles. Seven of ten banks in the Accenture survey reported having moved all or part of their enterprise software — desktop, human resources, CRM and the like — to the cloud. That makes sense, since most of their employees are familiar with off-the-shelf software and it lets banks outsource to popular providers. But just one out of six has done the same with the core functions of payments, capital markets and core banking.

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The macro case for moving bank technology to the public cloud remains as compelling now as it was before the pandemic. Evangelists within the banking industry estimate ongoing IT savings of 20% when banks move to the cloud and new products get to market in half the usual time. More elusive and abstract — but no less important — are benefits associated with increased flexibility across the organization and more innovation, something incumbents could use right now. 

So why the hesitancy? Why take the step back and tap the brakes rather than press the accelerator and double down on the experience of 2020? One explanation is uncertainty around the appropriate cloud architecture. For a while, there was a trend towards monogamous relationships and declarations of strong bilateral partnerships, but increasingly banks are realizing that different cloud providers have different strengths and weaknesses. The waters have also been muddied by the idea of ‘private cloud’ being pushed by both software providers and those technology companies who don’t find themselves in the top tier of the public cloud world. The result is lots of board debates about the right mix of private and public and the need for a portfolio approach to vendors in this space. All of which adds complexity and slows down decision making.  

Having closed much of the digital deficit last year, traditional banks can’t allow the gravitational pull of the old way of doing things to undermine their future competitiveness. When you look at Klarna, PayPal, Robinhood and Stripe, no part of the banking industry is safe from attack by well-funded cloud native attackers that see the banks’ traditional margins as their opportunity. These firms aren’t saddled with decades-old databases or the need to integrate legacy software systems that accumulated through years of mergers. They can also rent regulated balance sheets when they need them to deliver on their product promises. They typically operate more like Software-as-a-Service companies than banks and a critical part of their customer proposition is the ability to use the cloud to quickly test and scale new features and products.

Banks can take a lot of pride in how they responded to the big, sudden shifts in consumer habits brought on by the pandemic. Migrating some parts of their business to the cloud on a tight deadline proved they can do it when they have to and surprise even their most jaded customers. But the risk that we are now seeing is that the digital gap is opening once again, and the traditional banks are unable to sustain the metabolism of change that we saw in 2020. As the world emerges from the COVID-19 pandemic, banks need to find ways to recapture and institutionalize the startup spirit of last Spring. One way to do that is to push on with public cloud migration and create the type of flexible and frequently updated platforms that are required to keep pace with their most aggressive fintech competitors.  

Failure to do so could see many banks consigned to ‘balance sheet for rent’ business models earning low multiples while they watch fintechs earn sky-high valuations for essentially repackaging and reselling their services wrapped in a better user experience.

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