Turning to cloud services was initially a cost-saving endeavor for many banks. While that remains a key benefit, the migration of more applications to the cloud has opened doors beyond just cost savings. Cloud vendors give banks more flexibility to scale their data usage up or down based on demand. The pay-by-use model can help save money during less data-intensive periods, a benefit that is often unattainable with on-premises data storage.
In Cloud Vendors and What They Bring to Payments, Matthew Gaughan, Analyst, Payments at Javelin Strategy & Research, dives into how the cloud has changed banking practices. The result has been a wave of innovation—particularly in payments—and increased flexibility to meet consumer demands in an age of real-time transactions.
Adapting to the Cloud
In previous modernization periods, banks found themselves flat-footed due to their reliance on legacy technology, unable to respond to changes as quickly as needed. Learning from that experience, they have spent the last decade proactively addressing these issues, including diving headfirst into the cloud.
What benefits are they seeing? Cloud services allow financial institutions to be more agile and respond faster to changing technology and consumer preferences. Cloud providers can upgrade and update their offerings more frequently— and cheaply—than would be possible on-premises.
However, this doesn’t mean these efforts are completely outsourced. “They’re not just completely relying entirely on their cloud provider,” said Gaughan. “There’s a concerted effort within many of these banks to upscale a lot of their employees to be cloud proficient and get certifications that allow them to understand it. It’s really an enterprise-wide effort in a lot of these places.”
U.S. Bank, for one, has announced that it planned to cloud-certify 7,000 technology employees across its organization.
Data Security Concerns
Banks are entrusted with handling highly personalized and sensitive data and are understandably wary of exposing that information to outside contractors.
“That’s a reason why, for some time, they decided to go internally and build out their private cloud first,” Gaughan said. “Then these third parties started offering their own financial services-specific offerings, handling such data in a way that puts compliance and security and privacy at the center.”
In the past five years, third-party providers have become more specialized in addressing the unique needs and requirements of financial services. Around 2020, all major cloud providers—Amazon’s AWS, Google Cloud, Microsoft Azure—rolled out their own versions of financial services clouds. While they may differ in certain details, each has tailored its services specifically for the financial services sector.
Banks are also developing their own solutions, making the use of third-party public clouds just one approach they are taking. Many are adopting a multi-cloud approach, which often involves a combination of public and private clouds, with the latter being internally maintained and built out.
Another recent innovation has been solutions powered by artificial intelligence and machine learning. Google recently started to set up teams focused on emerging areas within payments and financial services, such as the blockchain. In early 2022, Google established a team to create the infrastructure necessary to facilitate blockchain transactions. More recently, they rolled out an anti-money laundering capability that uses machine learning to help prevent fraudulent transactions.
Banks are also migrating different applications to the cloud, such as real-time payments. In JPMorgan Chase’s most recent letter to shareholders, the bank announced plans to have 70% of its applications hosted in the public or private cloud by the end of the year.
Across the Enterprise
For a decade or more, banks have been utilizing the cloud in various ways. Nowadays, it’s taken on a new level of importance, with many banks adopting an enterprise-wide approach to data storage.
Once simply an IT-specific endeavor, cloud technology is now used for applications across the board, from the front office to various operations. Bank leaders have seen how important it is that everybody has a general understanding of how these cloud services work. It could affect their job in ways they might have not anticipated and improve their ability to serve customers in all areas of a financial institution.
“You’re seeing an evolution of the cloud’s original offerings,” said Gaughan. “This is still pretty early stages, but we’ve seen a lot of changes in just four years. There’s a lot more on the way from a technology perspective.”
