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Established financial services companies have long had to balance the running and operating of legacy systems, some of which still run code originally developed 40 years ago, with the digital transformation of their IT estate and wider business. Coronavirus may have accelerated acceptance and development of net new digital, but many organisations have still had to rethink their tools, processes and operational models.
The pressure to modernise and improve customer experience has been exacerbated by the rise of neo-financial institutions born into a cloud environment that gives them a natural advantage when it comes to agility, scalability and innovating at speed. Some incumbents have responded faster than others, creating digital islands or even new operating companies to own innovation and drive the shift to new ways of working and more continuous delivery of updates and features.
New research by Reply and Imperial College London, based on interviews with executives at financial institutions, cloud services providers and regulators, found that though cloud adoption is evolving rapidly, the deployment models and extent of adoption are influenced, broadly, by four key factors.
“Firstly, they vary geographically,” says Freddy Gielen, executive partner at Reply, which supports industries including financial services in designing and implementing innovative solutions and developing new business models. “For example, the UK’s regulatory stance is more cloud friendly than, say, countries in the Middle East, so the location where an institution resides majorly impacts acceptance.”
The second factor is defined by the sub-segments of the financial industry. Asset management firms, for example, generally find it easier to adopt the cloud than those in wealth management where there are stronger concerns about data privacy.
Thirdly, banking incumbents will naturally approach it differently than neobanks that were built in the cloud. And finally, idiosyncratic factors also have an influence. Though two financial services companies may say they adopted cloud technology, one may have done so only for development and testing while the other migrated core applications.
“Size also plays a big role,” says Professor Nelson Phillips of Imperial College Business School. “If you’re a large incumbent bank with several clouds, public and private, dealing with different providers, you’re much further along because the drivers in terms of efficiency and scale are really important. If you’re more of a regional bank in a single European country, the drivers are less straightforward.
“Just moving things to the cloud is not entirely sensible. You first have to clean up the data and think about your software and how you’re going to do it. It’s not just lift and shift; it’s lift, fix and shift.”
Scalability and cost efficiencies are principal motivators of cloud adoption, but as companies become more sophisticated they also see the value around innovation. The likes of Starling Bank and Monzo have been able to innovate at speed due to their cloud foundations. And with Microsoft Azure providing cutting-edge technologies such as artificial intelligence, machine-learning and the internet of things, coupled with the Azure Cloud Migration Framework, cloud is also fuelling powerful innovation for others in the financial services sector too.
The pandemic has all but confirmed that interest rates, having been near zero since the 2008 global financial crisis, will not be anything other than ultra-low in the medium or even longer term. This means the traditional business model of retail banks, their net interest margin, is hardly viable if they do not search for additional revenue streams.
While retail banks will continue to lend, they also urgently need to find new ways to create customer value. In this age of social media and interconnected application programming interfaces, or APIs, neobanks that have spent the last few years creating an excellent user experience for customers online are already now testing and even releasing new kinds of products they can generate revenue from.
To compete, incumbent banks must also create an agile and innovative environment that enables their people to find new ways of making money.
“One way of tapping into new business models is to grow the premium customer base, who pay monthly fees, but to deliver new services and a pristine customer experience, incumbent financial institutions need to be able to match the cloud-driven agility of their neobank rivals,” says Gielen. “Modernising the mainframe is a common roadmap item that enables incumbents to compete. It can be a multi-year undertaking, but technologies such as AWS Serverless are providing organisations with a portfolio of services to deliver on this, as fast as the bank can adopt change.”
The model emerging as the technical environment of choice in this new world of banking is multi-cloud. While hybrid cloud typically meant a workload that could run in many places, a multi-cloud model allows workloads to be moved between any clouds in an environment, depending on what is the most optimum platform at any given time. This could be influenced by technical functionality, but also a commercial relationship.
Reply helps companies get the best out of each cloud product, but also maximises the benefits of everything wrapped around a multi-cloud environment, including automation, performance and security
Across processes, applications and technologies, Reply addresses the main core issues of the financial services sector, fostering success through the introduction of innovation along the whole economic digital chain. In the area of multi-cloud IT environments specifically, financial services organisations benefit from the deep relationships that Reply has developed at the highest levels with the leading cloud vendors and platforms.
Though multi-cloud is an enabler of agility and innovation for financial institutions, particularly those seeking new business models, it does also introduce a number of challenges around how to migrate to, operate and govern such an environment. Companies with large legacy estates will run into common challenges, including billing, costing, availability, disaster recovery, security classifications and data locations.
“Manoeuvrability is very important, but managing a multi-cloud environment, for a short-term business initiative or as part of a longer, multi-vendor strategy, still has its headaches and pitfalls,” says Gielen. “As a premier partner with Google Cloud, Reply’s clients can leverage the value of open standards like Kubernetes and TensorFlow along with multi-cloud management products such as Google Anthos.
“Reply helps companies get the best out of each cloud product, but also maximises the benefits of everything wrapped around a multi-cloud environment, including automation, performance and security. With a number of our clients, we’ve iterated that forward into a cloud management platform that can essentially manage from one place what’s happening across multiple cloud vendors. Our commitment to open source and being able to build portable applications that can run on any of those clouds is also very strong, as well as supporting where each of the cloud vendors might specialise.”
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