Cloud computing in banking is becoming an increasingly important component of financial institutions’ digital transformation strategies. Banks are looking to cloud technology to reduce costs, improve scalability, support artificial intelligence initiatives, and deliver more responsive digital experiences to customers.
Adoption has accelerated as financial institutions respond to changing market conditions and increased competition from fintechs and challenger banks. While established banks can use cloud infrastructure to modernize legacy operations, newer financial services providers can leverage it to enter markets and introduce products more quickly.
Almost half (47%) of banking IT executives told The Economist Intelligence Unit that incorporating the cloud into their organization’s products and services will help them achieve their business priorities “to a great extent,” while 72% indicated the cloud will help them achieve their business priorities in some way. Mercator predicted cloud’s penetration of financial institutions in our 2021 Outlook. This year we identified cloud and six other issues that will drive major changes in the payments market in the years ahead:
“Cost is the biggest driver of cloud adoption (43%), followed by the adoption of AI (34%) and improving customer experience (21%). Business agility, elasticity and scalability are together cited by 40% of respondents as top drivers.
The report ‘Capturing value in the cloud’ finds banks have generally been slower to take to cloud computing than other sectors. But the adoption of software as a service (SaaS) and cloud infrastructure has accelerated since the start of the pandemic, as banks seize an opportunity to cut costs and ramp up their digital transformation projects, with 82% of banking IT executives saying they now have a clear strategy for adopting cloud. This comes as established banks figure out how to use incumbency to fend off fintechs and challenger banks, while the newer entrants use the cloud to advance quickly into new market opportunities.
According to the report, banks are tapping into the cloud to speed up their ability to gain insights from data, and in turn to be able to innovate faster. Yet barriers stand in the way of a wholehearted embrace of the cloud—including security, privacy, compliance and governance concerns. These challenges are leading firms to invest in both technology and talent.”
The growing adoption of cloud technology reflects a broader shift in how financial institutions approach technology investment. Instead of relying entirely on traditional infrastructure, banks can use cloud platforms and software-as-a-service solutions to access greater computing capacity, improve flexibility, and potentially reduce the costs associated with maintaining complex internal systems.
Cloud infrastructure can also support other areas of banking innovation. Financial institutions increasingly depend on large volumes of data to understand customers, identify risks, and develop new products. Greater computing flexibility can help banks analyze that information more efficiently while supporting technologies such as artificial intelligence and advanced analytics.
However, moving banking systems and data to the cloud introduces important considerations. Security, privacy, regulatory compliance, and governance remain significant concerns, particularly given the sensitive information financial institutions manage. Successful adoption therefore requires investment not only in technology but also in employees with the skills necessary to manage cloud environments effectively.
Competition is likely to provide another incentive for adoption. Fintechs and challenger banks can use cloud-based infrastructure to develop and scale services rapidly, placing pressure on established institutions to increase their own technology agility.
As these pressures continue, cloud computing in banking could become an increasingly important foundation for digital transformation. Banks that successfully balance scalability and innovation with security, governance, and compliance may be better positioned to respond to changing customer expectations and competitive demands.
Overview by Tim Sloane, VP, Payments Innovation at Mercator Advisory Group
