What Drives Banks to Cloud Adoption and Where Are We Now – Overview
Here we will examine cloud adoption in banking and where we are now on the journey, and what challenges are causing some banks to remain hesitant.
Are Banks Moving Towards the Cloud?
Prior to the COVID-19 pandemic, the banking industry was already beginning to focus on digitization efforts that were moving it ever closer to cloud adoption. Now, more than two years later, research conducted by Statista shows that globally, there are more banks achieving their business priorities while involving cloud computing, versus those who are currently not making full use of the benefits cloud has to offer. Consider the following statistics for the four regions studied:
|Region||Using Cloud to Some Extent||Using Cloud to a Great Extent|
Source: Business priorities in the banking industry achieved through cloud computing worldwide in 2021, by region, Statista, 2022
Today, traditional banks are moving towards the cloud, enabling them to keep up with digital developments within the financial services sector. Meanwhile, they are under the pressure of competition from cloud-native competitors who are using the cloud to enable them to keep up with digital developments within the sector and to reach new markets. And we must also remember that now that the urgency of the past two years has calmed down, more banks are striving to mature their cloud adoption, with much of it being ad hoc during that period.
Why is Cloud Adoption on the Rise?
It is estimated that more than 80% of banks now have a clear cloud strategy moving past the urgency necessitated by the pandemic. Reducing costs remains the biggest driver behind banks’ adopting the cloud. According to a report by the Economist Intelligence Unit (EIU) for Temenos, 43% of global bank respondents cited that cost was their main driver. This is in comparison to 21% of respondents stating that improving customer service was their reason for moving to the cloud. Additional top drivers highlighted within the EIU report include, 34% of respondents wanting to adopt AI and 40% seeking business agility, elasticity and scalability.
Incumbent banks are seizing the opportunity to cut their costs and improve customer service by adopting Software as a Service (SaaS) and cloud services. But they are also more cognizant of the need to use their incumbency to fend off the competition from newcomers and FinTechs, who are already taking advantage of what the cloud has to offer to enter into banking services.
How Banks Are Accelerating Their Cloud Journey
Research and advisory experts, Gartner, Inc., have studied how banks are accelerating their cloud journeys. Previously, the common way of thought was that banks were likely to put their new systems of innovations in the cloud but would never consider moving their core banking to the cloud. However, that is no longer true as an increased number of banks are migrating a substantial amount of their existing services to the public cloud. Modernizing their current applications is a critical driver for cloud adoption in the banking industry.
Acceleration in Bank Cloud Adoption Continues, But Concerns Persist Regarding Cybersecurity
Despite the acceleration, banks still have far to go with cloud adoption in the banking industry. Hesitation still remains among banks as they go forward with open banking and banking as a service, that are all cloud dependent. There are still concerns over whether the security, privacy, compliance and governance of data that will be stored by third-party cloud providers. Currently, 60% of banks surveyed in the EIU report perceive this as their greatest risk with moving forward with cloud adoption in financial services.
A recent New York Times article explains the hesitancy that some banking executives have about moving their core banking to the cloud. At the top of the list of their concerns is that banks are tightly regulated by governments regarding consumer privacy and deposits. While they acknowledge the potential for cost savings, they are concerned about the potential for cyberattacks.
Other banking executives are more optimistic about public cloud adoption in financial services, as they acknowledge it is possible to do so with high levels of security to protect data and information. Cloud providers, themselves, are moving at a rapid pace to develop better security, compliance and control structures to help address cybersecurity concerns. In fact, because cloud providers are investing so heavily in securing their cloud infrastructure, it is typically safer than on-premise, client-owned systems.
Challenging Time-Critical Decisions to be Taken
Given the entrance of fintechs, disruptive changes of user behavior, increased end-to-end requirements to secure supply chains, banks need to act. A standstill for incumbent banks might gradually exclude them from the rapidly changing market. Cloud adoption is a major technical enabler for banks looking to scale and evolve their business. Delaying this process or a failed cloud adoption will hinder their overall success. For fintechs and challengers, there is a short window of opportunity where the market emerges into a new equilibrium. Missing it now probably means losing the opportunity for good.
On the other hand, a wrong technology decision and a precipitous and uninformed IT architecture decision could lead to open security flanks or an unagile technical infrastructure unable to cater for the dynamic value orchestration which customers demand.
Article series on driving market forces and key facts on agile security meshes
This series of articles provides an in depth view on the driving forces in the market and the status of the competitive environment. They will also provide insight on the major pillars of successful self-disruption and cloud innovation from a commercio-technical perspective. In summary: how to design an architecture of security meshes that is both agile enough to respond to customer requirements and secure enough not to provide open flanks for intruders.
Second part will be available soon.
Blog post by Dawn Turner and Dr. Ulrich Scholten