Banks have been slow to adopt cloud computing, mainly due to security concerns and a fear of ending up on the wrong side of the regulator. However, cloud is now seeing a groundswell in acceptance across the financial industry, as Joy Macknight reports.

The cloud

“Cloud is an inevitability,” says David Gledhill, group chief information officer and head of group technology and operations at DBS, a bank renowned for its bullish stance on new technology. “Therefore, the faster DBS moves to cloud, the more advantages we gain from being an early mover and creating cool tech.”

In July 2016, the Singapore-based lender announced that it was moving up to 50% of its compute workload to Amazon Web Services (AWS) cloud within a two-year period to achieve cost savings, increased resilience and the ability to rapidly respond to customer demand.

DBS expects a 75% reduction in IT operational costs due to cheaper hardware, licensing and storage. The bank is not solely “lifting and shifting”, but taking the opportunity to automate and re-engineer its workflows.

Asian catch-up

In general, Asia-Pacific banks have lagged their European and American counterparts in cloud adoption, but the situation is evolving rapidly. IDC Financial Insights, a market intelligence company, predicts that 80% of Asia-Pacific financial firms will be running a hybrid architecture – combining enterprise private cloud and public cloud – by 2018.

Indicative of this change, at the beginning of 2017 Mitsubishi UFJ Financial Group (MUFG), the largest financial group in Japan by Tier 1 capital according to The Banker’s 2016 Top 1000 rankings, announced that MUFG Bank was shifting to cloud computing, with an expected saving of Y10bn ($87.2m) over five years.

MUFG Bank is using AWS cloud to support a variety of business functions, such as internal operations, client service and its fintech offering. “Fundamentally, [cloud] enables us to be agile, efficient and relevant in many different places around the world at any given time,” says Masahiro Matsui, chief manager of the IT strategy department at the bank. “For us, the biggest risk to cloud computing is not embracing the possibilities it affords.”

Benefits beyond cost cutting

As Mr Matsui and Mr Gledhill suggest, the pull of cloud is much more than just a cost-cutting exercise; migration is also being used as a catalyst for fundamental change. Commerzbank, for example, clearly views migration to cloud technology as key to its '4.0' strategy, which aims to transform the German bank into a digital enterprise.

“Digitalisation is one of the most outstanding topics in our new strategy, Commerzbank 4.0, and cloud supports our transformation efforts,” says Gerald Ertl, divisional head for digital transformation corporate clients at Commerzbank. “With cloud, we will achieve much better functionality and faster release cycles, as well as lower costs.”

Today, cloud is being deployed to support Commerzbank’s customer relationship objectives. To gain a single view of each customer, the bank is replacing four customer relationship management (CRM) systems with Microsoft Dynamics, which will go live on premise this year and move to public cloud next year, according to Mr Ertl.

“The cloud is helping financial services businesses better engage customers, improve operations, increase business agility – even build upon existing business models with new revenue opportunities,” says Mark Russinovich, chief technology officer of Microsoft Azure, the tech giant’s cloud computing platform and services.

Scalability and agility

Cloud technology enables banks to scale in a way unimaginable previously. For example, Swiss bank UBS is currently using Azure for its risk-management platform, which requires enormous computing power to run millions of calculations daily on demand. “The result – speeding up calculation time by 100%, saving 40% in infrastructure costs, gaining nearly infinite scale within minutes – means the firm can have more working capital on hand and employees can make quicker, more informed decisions for their clients,” says Mr Russinovich.

A pay-as-you-go model and the ability to spin up extra capacity release the bottleneck of on-premise data centres. Oracle Public Cloud, for example, can provision a database in eight minutes, according to Mark Atherton, group vice-president, financial services, at Oracle. “It is a fully automated process to configure, define security settings and go live in minutes – that is a powerful model,” he says.

Mr Gledhill uses the illustration of DBS’s mobile-only Digibank in India, which has signed up more than 1 million customers since its launch in April 2016. With cloud, DBS does not have to physically plan the size of its data centres to accommodate growth. “We don’t have to throttle demand or be careful about business offers and campaigns because of limited capacity. The scalability of cloud means those concerns aren’t concerns any longer,” he explains.

In addition, cloud helps to accelerate bringing new products and services to market. Likhit Wagle, general manager, global banking and financial markets, at IBM, which has a dedicated Cloud for Financial Services offering, says: “With the agility and speed that is required, particularly in the development of new applications to support new customer journeys, there is no question that a cloud environment enables in a way that is just not possible in a legacy environment.”

Many banks have gone from delivering new digital products every few months to being able to launch in weeks, according to Gavin Jackson, AWS's managing director for the UK and Ireland. “Because the cost of cloud is low and elastic, banks can throw several times more experiments at the market to see which ones will stick. With prolific experimentation comes more failure, but the cost of failure goes down dramatically with cloud,” he says.

“Cloud adoption is driven by new technology that is cloud native,” says Michael Mueller, CEO of Form3 Financial Cloud, a cloud-based payments processing platform. “These don’t just provide the cost benefits of a cloud deployment but also benefit from the rapid and iterative approach to the deployment of enhancements for all customers, particularly in a multi-tenancy environment.” Like Mr Gledhill, he believes that the winners will be those that utilise true cloud-native systems, rather than putting old technology in the cloud.

Data governance and security

A thawing in many regulators’ stance has also spurred on banks' interest in exploring cloud technology and its potential to transform their business. The UK’s Financial Conduct Authority (FCA), the Monetary Authority of Singapore, the European Banking Authority and the Australian Prudential Regulation Authority have recently introduced guidance around the use of cloud technology in financial services. Other regulators, such as the US’s Financial Industry Regulatory Authority, have been vocal about their own use of cloud.

However, regulatory hurdles to adoption persist, especially restrictions around data residency. Many countries have strict rules requiring certain data, such as sensitive personally identifiable information, to be stored within the jurisdiction. Such rules are proving to be a barrier to cloud adoption, particularly in countries where providers do not yet have data centres in place.

Additionally, inconsistent requirements in each jurisdiction make it “tricky” to implement a global strategy, according to Yvonne Dunn, partner and financial services technology expert at law firm Pinsent Masons, which partnered with the British Bankers’ Association on a recent discussion paper, ‘Banking on Cloud’. “The whole industry should work together to get as much consistency as possible in the regulation of cross-border data transfers,” she says.

While data security remains a paramount concern – underscored by the WannaCry global cyber-attack in May – both banks and regulators appreciate the high level of security being built into mature cloud offerings. For example, Oracle has built its cloud infrastructure to the highest common denominator, not just in financial services but across all industry sectors, including defence, according to Mr Atherton. “Oracle’s ability to invest in security capabilities is much greater than what many banks can do on their own,” he adds.

To put a figure on it, Mr Russinovich reports that Microsoft currently invests more than $1bn in security research and development every year. It has also created a dedicated group of worldwide security experts, the Microsoft Enterprise Security Group, to deliver solutions, expertise and services for customers.

Private versus public

Given the inconsistent regulatory environment and sunk costs in proprietary data centres, it is unsurprising that incumbent banks have not yet moved their entire IT estate to the cloud. But many are preparing the way. DBS, for example, is currently moving from legacy operating systems and databases to a cloud-ready x86 platform on premise, which is then “a short hop” to public cloud, according to Mr Gledhill.

Not all banks are comfortable enough with the technology to make a straight leap to public cloud, so are running a private and public hybrid model. Licheng Zhang, senior manager at Alibaba Cloud’s Cloud for Financial Services division, says: “A hybrid cloud strategy is a good choice for a bank at the beginning, as they need to gain experience [with the technology] on private cloud before moving to a public cloud.” With strong traction among internet-native Chinese financial institutions, Alibaba Cloud has a dedicated private cloud environment to assist in the transition to public cloud.

Mr Wagle believes that banks will continue to have a combination of workloads sitting on private cloud, which may increasingly be off premise as regulators become more confident that they meet security, resilience and data privacy requirements. “This is particularly true if the workload is off premise with an external provider in a multi-tenanted environment,” he says. “This will require resilient firewalls that prevent any contamination of data between different players.”

While most regulators are not comfortable with such a set up now, Australia, Canada and Singapore are moving in that direction, according to Mr Wagle.

Powering the challengers

Oracle’s Mr Atherton expects the migration to public cloud to happen faster than most anticipate. “Technologically, there is nothing that prevents a bank from running on a SaaS [software-as-a-service] model,” he says, pointing to the fintechs and challenger banks that are building SaaS-only businesses on the cloud.

For example, in May 2016 OakNorth Bank became the first UK bank to have all of its core systems hosted on the cloud. The bank and its cloud provider, AWS, worked with the FCA to address the concerns raised by a fully focused cloud strategy, such as data protection under the General Data Protection Regulation. Once the regulatory framework was in place, the challenger bank migrated its non-core services first, followed by its core banking systems. Speaking at the Global Digital Banking Conference in London in May, deputy CEO Graham Oliver stressed flexibility, scalability, speed, security and the cost as reasons for being all in the cloud.

Similarly, ClearBank, the first new clearing bank in the UK for more than 250 years, has all its operations in the cloud. On track to launch in the third quarter of 2017, the bank has built a hybrid cloud infrastructure. “ClearBank uses a public Azure cloud that customers plug into, as well as a private cloud across two UK data centres that provides the scalability, flexibility and elasticity of cloud but within a private secure environment,” says executive chairman Nick Ogden.

Eugene Danilkis, CEO of Mambu, an all-in-one SaaS core banking engine, says the conversation has now progressed from moving peripheral parts of the bank onto cloud to launching new products and entering new markets – effectively running the core system on the cloud. “These conversations have picked up in the past six to 12 months, from tier-one banks down, looking at cloud as a new baseline for new product propositions,” he reports.

The future is cloud

Microsoft’s Mr Russinovich does not believe that moving to the cloud is an “all or nothing” question for banks. “Financial services firms may choose to keep some applications running on their own infrastructure. Those same firms will move other applications to the cloud to capitalise on the scale, power and advanced capabilities the cloud brings.

“The real magic happens when these business applications connect seamlessly together – no matter their function or where they reside – to allow data and intelligence to flow freely, delivering the results that business leaders need,” he adds.

Mr Gledhill sees the real benefit of cloud coming from the software platform layer. "AWS, for example, has a stack of offerings, including machine learning, GPUs [graphics processing units] and FPGAs [field-programmable gate array processors] for data analytics. It provides a wealth of off-the-shelf tools – and that is the ultimate advantage of a cloud environment. Amazon releases more than 1000 new features a year – a bank on its own will never be able keep up,” he says.

While this raises the spectre of vendor lock-in, about which the regulators have voiced concerns, Mr Gledhill argues that a bank will not be able to reap the true benefits that cloud brings unless it goes beyond the infrastructure stack.

Ultimately, big data will be the tipping point for cloud adoption, according to Mr Gledhill, because of the type of tooling, capabilities and specific engines needed for machine learning and artificial intelligence.

AWS’s Mr Jackson agrees, saying: “If a bank wants to change the customer experience and harvest value from data – not just historical data but real-time data from multiple sources, such as wearables, cars, the Internet of Things – then a brittle static infrastructure is neither secure nor agile enough. The cloud is the only way to fully manipulate data and turn it into tangible value for customers.”

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