How cloud can prove beneficial for banks

by CXOtoday News Desk    Jul 15, 2013

Cloud computing

The ubiquity of cloud is driving organizations to move to the cloud regardless of its concerns regarding security, compliance and data integration issues. Kristine Pfeiler, research director at Gartner writes that even banking institutions have begun embracing cloud computing across the services spectrum. While banks seeking agility, faster time to solution and lower, more-flexible cost structures in IT delivery are consuming cloud services — 51 per cent of North American banks have some form of adoption of software as a service (SaaS) — they remain sceptical about security and are reluctant to put core areas of functionality and information in the cloud, significantly limiting the market potential of cloud computing. In the midterm (2012 through 2014), data integration and compliance issues are likely addressable by cloud providers; however, security concerns will likely not be overcome in the near term or midterm for solution areas that process information classified as restricted or viewed by banks as proprietary.

Pfeiler explains that banks are adopting cloud services, with SaaS being the most-widely deployed form, mainly in peripheral, non-core solution areas, such as collaboration, customer relationship management (CRM) and HR, but exceptions do exist. Adoption varies by banking segment, with more small-tier and large-tier banks adopting SaaS than banks in the mid-tier segment. Driven by the need for agility, speed to solution and lower, more-flexible cost structures, banks plan to increase their spending on cloud services. There is a growing interest and adoption in the cloud as an infrastructure utility. Most examples to date are in private cloud services in large-tier banks.

Data integration challenges, security issues, and compliance concerns are still preventing banks from adopting cloud services across a broader span of business areas. The cloud cannot be a “black box” from an audit perspective.

Gartner provides the following recommendations to organizations:

• Examine how your offering fits in the banking solution landscape with regard to size of institution and solution area.

• Craft specific messages for line of business (LOB) buyers for everything beyond infrastructure at large-tier banks.

• Develop a product strategy, either through the customer’s own product development system or through partnerships with other complementary providers that handle data integration challenges such as large volumes and integration real time.

• Structure offering to fulfil security requirements based on how financial services institutions (FSIs) would classify the information processed in your offering. Providers that process confidential or restricted data should consider private cloud models.

• Address all compliance and audit requirements on their product offering, such as physical data storage, access to data, encryption and so on, stemming from regulatory acts. In the US, for example, this could include Statements or Auditing Standards No. 70 (SAS 70), the Gramm-Leach Bliley Act (GBLA) and the SarbanesOxley Act to compete broadly in cloud computing for financial services.

Industry Drivers of Cloud Adoption

According to Gartner, in the current economic environment, banks are trying to manage recovery as well as look to grow the customer base and handle a host of new and changed regulations. For many institutions, absorbing acquisitions is also a top focus of management. All these factors lead banks to consider cloud computing as an alternative delivery model to meet these challenges. Cost, speed to solution and agility are driving financial services firms to explore, evaluate and adopt cloud computing.

The first and most-widely cited driver is cost. There are two facets to the cost driver. The first aspect is overall cost reduction, which can be gained through avoidance of infrastructure cost as seen in SaaS models, quicker development cycles through platform as a service (PaaS) and increasing utilization of infrastructure components, thus reducing total infrastructure needs overall, as is the case with infrastructure as a service (IaaS). The second aspect is enabling banks to increase control over the IT infrastructure with regard to fixed versus variable costs, and operating expense versus capital expenditure. The ability to change the IT infrastructure economics gives banks more flexibility and control over costs to react to what is becoming an increasingly volatile economic condition. IT organisations within banks have always had to meet high expectations of delivery times; sometimes with mixed success. With technology innovation becoming more of an enabler of new banking products and channel innovations as well as increased regulatory changes expected, a bank’s ability to quickly adapt to the changing landscape or become a market innovator by leveraging technology is a distinct competitive advantage. Cloud computing can offer faster initial implementations by eliminating the need for lengthy hardware acquisition cycles or capital investment project reviews.

Banks are also looking to the agility that cloud computing offers across the cloud services spectrum, but specifically, when looking at IaaS. Large-tier banks and “megabanks” have extremely large sets of data and very high transaction volumes in solution areas that are loadintensive and read-intensive, such as risk management, trading algorithms, pricing, quantitative analysis and payments processing. Megabanks are adopting or considering private cloud (internal to bank) IaaS for the ability to reduce overall infrastructure cost through consolidation of servers, data centres and higher utilisation of their server footprint.

Industry Inhibitors to Cloud Deployment

Despite the advantages, the majority of banks are reluctant to move mission-critical applications to cloud computing over concerns and challenges related to security, compliance and data integration. Security breaches can result in fraud, data thefts and other losses, but most important to a bank is the reputation risk. Cloud computing can also be perceived as complicating compliance with a loss of control of the IT infrastructure. Furthermore, data integration challenges can eat away at the cloud cost advantage. All three challenges will need to be adequately addressed by the cloud providers if the market is to move beyond peripheral solutions. It is important to note that these fears and concerns while not completely absent, are not hindering adoption of private cloud, in which cloud technology is deployed internally to the bank, specifically private cloud as an IaaS.