For any bank considering a cloud migration, the key to success is having an inventory of applications and a future roadmap of how these will change going forwards. In both of these areas, banks do seem quite well prepared.
However, banks are currently only making limited use of private cloud, but are doing enough to explore and understand general cloud issues. Public cloud usage at the moment is generally very low amongst all financial institutions, although all banks claim to have strong growth plans over the next 5 years, with the tier 2 banks actually being more adaptable to such change than the tier 1s. This is due to a number of factors – tier 2 banks do not have the legacy and technology complexity of tier 1s; they are more nimble and aggressive, and some of their key (third-party) applications are already being ported to the cloud by software vendors. However, some tier 1 (and tier 2) banks are planning to move directly from internal legacy systems directly to cloud native systems – CloudMargin in the collateral space being a good example of this.
In the overall public cloud marketplace, Amazon is dominant with around 33% of market share – more than the next three biggest combined. However, in the capital markets space, Microsoft leads the way, closely followed by Amazon then Google. When speaking with banks, IBM is the only other major player that is mentioned.
How is cloud technology being used?
In terms of how the cloud is being used, software as a service (SaaS) is slightly ahead of platform as a service (PaaS) and infrastructure as a service (IaaS). To enable true technology estate transformation, the best way of moving the applications to the cloud is to re-engineer them, streamlining business processes and using cloud native software that can create rapid improvements. The ‘lift and shift’ of existing applications and code can provide some improvements in performance and is being used for end-of-life systems, whilst native cloud applications are being used for new elastically scalable systems, and those requiring intensive compute power and data processing such as machine learning and artificial intelligence.
Regarding which functional areas of the business are embracing cloud more rapidly, unsurprisingly, development and testing lead the way, with the front office being the biggest business area, followed by risk. Risk is a prime candidate for early adoption, given the very large computational requirements to manage this complex area, particularly in light of the new demands that will be placed on firms by the incoming FRTB regulation.
With respect to the overall benefits of using cloud, it is logical to expect that cost reduction is the primary objective; however, in speaking with banks, we find it is actually the flexibility, capacity and agility of cloud that appears to be the main drivers for change. The flexibility and capabilities of an elastic cloud combined with the high computational ability is inspiring firms to think of new ways of using the technology to transform their business. The ability to rapidly add computing power for front office / risk requirements, and to scale it back when not required is seen as being particularly useful.
Looking at the risks and issues of adopting cloud, regulation continues to be a concern because of the continuing uncertainty and consistency of the approach being taken by the regulators around the globe, although the EBA has been attempting to clarify this. Data protection, driven by the new GDPR regulation in Europe, and the ability to see where all data is stored is also deemed to be important. Security is nowadays less of an issue as banks nowadays have more trust in cloud vendors to deliver levels of security that are better than they might otherwise be able to deliver individually.
Looking ahead, we believe the usage of public cloud is set to expand rapidly as firms overcome their reticence and embrace the cloud benefits of scale, speed and efficiency, with the advantages outweighing any risks or concerns. Fully adopting cloud involves many different areas, from new, agile ways of working through to the actual native cloud technologies themselves. In order to do this, banks are identifying the many areas where they will need help from experienced external providers in order to truly maximise the benefits; the challenge being to find suppliers who have the breadth of new skills in the numbers required.
Where do the banks need help?
Generally, the vast majority of banks have insufficient cloud knowledge in-house, which results in slow progress and a lack of vision for transformation across the whole technology estate. The areas in which the banks identify where they need most help include:
- The evolving skill sets needed to deliver widescale technology estate transformation
- Lack of experienced people on cloud projects
- Changes in operating models (including internal billing and service management)
- Security and environment design
- Public cloud adoption framework and related operating model
- General public cloud (knowledge) capacity
- Where to obtain practical cloud knowledge from (cloud vendor, local consulting, offshore)
- Approaching regulators with their cloud based strategy
- Containerisation knowledge and delivery
- In-depth understanding of the security / compliance requirements of cloud matched to differing regulatory environments
- Migration of large vendor apps to the cloud (e.g. Murex)
Time to go ‘native’
For banks to truly maximise the benefits of cloud (reduced costs, extended capacity, elasticity and increased agility), native cloud capabilities must be enhanced with the support of external providers. The shift to public cloud in investment banking has been slow to start, but we now see that banks are willing to embrace the opportunity and accelerate their cloud transformation programmes. There is now a widespread agreement amongst banks that by tackling the challenge with the right partners, they can catch up rapidly and ultimately become ‘cloud native’; to truly maximise the benefit of modern cloud technologies.
To find out more, download GFT’s latest cloud adoption research paper.