Thursday, 14 August 2014

Are banks slow in taking on the cloud?

© Neuro, Commons Wikimedia
Of late, there has been a lot of hype around why banks remain sluggish in adopting the cloud. As we all know, the banking services industry as a whole is often accused of being slow to implement innovative technology, with around 75 per cent of banks in Europe, for instance, using outdated core banking systems.

In part, concerns over security have created a barrier to the deployment of cloud technologies. These include the lack of visibility into the service provider security measures, the potential for unauthorised third party access to data, plus the lack of control over where data is stored.

In addition, banks in many parts of the world are governed by regulations which state they have to keep applications and customer data on premise. Whilst some regulators have given their blessing to cloud technologies – such as the Dutch banking regulator – others are still uncomfortable with the security and compliancy issues they perceive in public cloud systems. The French financial regulator, for instance, has been cautious to allow French FIs to calculate risk metrics in the cloud for fear of lack of transparency and difficulty in reproducing results. As a result, the FIs have to rely on ageing IT systems, many of which are no longer fit for purpose, rather than take a gamble on the cloud.

This means that a number of established players are struggling to deploy new services and products, allowing market entrants to compete against them. Part of the issue is the aforementioned complex web of regulations, which force banks to be hesitant in embracing new technologies. The other part is the sheer complexity of the existing IT environment. Migrating such a set-up involves re-writing applications so that they are able to function in the cloud, which is a daunting prospect for any bank, and some legacy systems are just too expensive to abandon altogether in favour of a new one.

That being said, a hybrid approach is becoming an ever more attractive option for banks. By mixing the two, banks can ensure that simple data management is done across standard cloud technologies, while complex or sensitive calculations are maintained on internal systems. Other cloud benefits include: less maintenance for the bank to carry out itself, meaning there would be less management involved on the part of the bank; the fact that capacity can be shared, because servers are virtualised, which results in higher levels of utilisation; plus cost saving, through reduced spending in IT support.

2014 has witnessed a pick-up in banks supporting cloud-based models. Take ING Direct Australia, for example. The online banking subsidiary of Dutch lender, ING, completed a project in May to shift its back office IT set-up to a private cloud. COO Simon Andrews said the main incentive for ING Direct to move its operations to the cloud was to separate its IT to make it work more as a service for the bank (read the full story here).

By 2017, industry analysts expect cloud spending to reach $3.2 billion (up 45 per cent from last year), but only time will tell whether banks will continue to overcome legacy issues, embrace the cloud and compete against start-ups that are more technology-centric.

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