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The opportunity for Cloud in banking

Each choice around cloud computing means 'decommissioning' part of the IT and process stack

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We are all well aware the banking industry is facing many challenges; unhappy customers, increased regulation, strong competition and decreased levels of profitability.

The question is; what do banks do to overcome them? Traditional commercial banks across the world must master the transformation of their product offerings, channels and customer service to reflect the demands of the “changing consumer”—connected, impatient, empowered, and demanding.

Banks need to reinvent their operations to enable a more competitive, customer-centric, efficient business model. A failure to achieve these things will expose banks to nimble, low-cost online and mobile providers of personal financial management and payments services—resulting in loss of relevance to customers and therefore, their prominence in marketplace.

As banks adapt to these changes, cloud computing will play a major role. Cloud’s combination of low cost, high scalability, unlimited processing power, storage, agility and speed to market, and variable pay cost structures all support the qualities that banks need to compete and win in the future.

Already, some newer banking entrants—unburdened by complex and costly legacy systems—are using cloud to support core banking applications. In my view, there will be three key trends in banks’ use of cloud computing:

  • Cloud-based financial services offerings will leverage social and mobile media to transform customer relationships

  • Private clouds will play a pivotal role in core banking, enabling banks to keep control over the location of sensitive customer data

  • Cloud based shared services will dominate non-core banking activities

Wider trends are also likely to emerge as a result of the ways that Cloud computing will impact banking.

1. Customer relationships will be redefined
The overarching impact of cloud computing will be how it redefines the relationship between consumers and their providers of banking products and services. Cloud computing will make these services more convenient, more accessible, easier to use, and more personalised to the individual.

2. Cloud computing will steadily progress at all levels of the stack
As more banking cloud products and services emerge, usage of cloud models will advance at all levels of the IT stack. The pace of Cloud adoption will vary by bank and geography due to regulation and the status of their legacy systems. Newer and smaller banks have less overlapping legacy systems and infrastructure, and will be quicker to adopt cloud technology higher up the stack. Larger banks may be culturally more resistant to expanding their adoption at the higher levels. That said, some large banks are already picking specific activities and radically cloud-enabling them with SaaS and BPaaS—underscoring the fact that cloud computing adoption is not an all-or-nothing choice.

3. Non-banking cloud-based competitors will keep up the pressure
Rather than being technologically innovative, the emerging generation of cloud-based, socially-driven money management tools are customer services and experience innovators. They will continue to ramp up efforts to win customers not just from banks, but from each other. Banks must, therefore, continue to respond to these competitive pressures in order to avoid disintermediation.

4. Emerging market banks will lead cloud-based innovation
In emerging markets, banks generally have less systems and infrastructure legacy than their counterparts in mature markets, making it easier for them to adopt cloud models. At the same time, banking innovation in emerging markets is being accelerated by faster economic growth and distinctive social needs.

5. Collaborative cloud-based shared services will emerge between banks
In a similar way to telcos sharing network infrastructure, banks will start to collaborate to pool non-differentiated activities into joint ventures (JVs) using “private clouds” within a closed group of banks. These JVs could provide shared services that interact with customers in more engaging ways while simultaneously freeing banks from the burden of routine transactions.

6. Cloud-enabled collaborative bundling will expand across and beyond financial services
Banks’ growing use of cloud computing to enable dynamic and responsive bundling will trigger an industry-wide drive to make third-party financial and non-financial products interoperable in the cloud. This will enable a bank to operate as an integrator and aggregator of a diverse array of products, using its differentiated cloud-based bundling capability as the “glue.” In this environment, banks will compete either by being a financial services ecosystem leader, in which case they use their technology as a platform for other companies in the ecosystem; or as an ecosystem participant, a role that may be most appropriate for smaller or niche players and which will leverage the technology provided by the ecosystem leader.

7. Payments in the cloud will be a key focus
Consumers’ migration to digital, mobile and contactless payments will affect buying habits, channels and customer service. The preparations for when these services reach critical mass are intensifying convergence and competition between banks, retailers, telcos, card issuers and other participants in the payments value chain, especially around the consumer interface and digital mobile payments channel. Banks are still an integral part of the payments value chain—but they risk losing overall control as new entrants claim different parts of it. This focus will be sustained by the cloud’s huge potential across the entire payments arena.

To move decisively and securely to its cloud-enabled future, it is vital for each bank to have a clear cloud strategy specifically tailored to its business. Given the range of variables and choices involved - from public to private cloud, from IaaS to BPaas - mapping out this journey is a complex, yet necessary task.

Many banks are facing a reality that their current governance and organisation are not yet ready to tackle such choices. The fundamental issue is that each choice around cloud computing effectively means “decommissioning” a portion of the IT and process stack, ranging from business capabilities to infrastructure.

The human capital perspective may also be critical, since cloud providers will not welcome any significant transfer of staff that would affect their business model. All of these considerations underline the need to prioritise both strategy and execution in moving to the cloud. One without the other will fail.

Posted by Emmanuel Sardet, global Technology and Infrastructure Services lead for Accenture Financial Services

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