What was previously unthinkable is happening in the banking sector on a global scale. Financial players, predominantly banks, are overwhelmingly adopting a cloud-first strategy, including investing in multi-cloud environments. The flexibility and cost efficiencies brought by the cloud seem to have won over the hardwired traditionalists who were once loyal to legacy platforms.
Leaders in the banking sector increasingly recognize that the cloud is more than a technology. It is an ultimate destination for banks and financial institutions to store data and applications and provide better experiences for their customers.
With a growing number of banks seeing value in migrating their workloads to the cloud, many transformative solutions – customer relationship management, financial services, enterprise resource management, customer engagement and customer service – are already cloud-based. The cloud is helping them innovate IT strategy and build new capabilities and services to address business imperatives swiftly. As banks increasingly move beyond legacy IT systems to modernize and automate their platforms with cloud technologies, they deal with a myriad of choices and challenges – from solution design and execution to multiple vendor management and security and regulatory compliance. Should a bank stay private or adopt a hybrid environment? How to tackle the security and compliance challenges? Can mainframes impede the modernization of customer service? In this article, we answer the questions that are most often posed to us by our clients.
How are banks leveraging the cloud to create new business frontiers?
A new era has dawned in which traditional banks are being challenged by the advent of next-gen branchless banks such as Varo or SoFi. Competing purely on sophisticated technology, end-user convenience and hyper-personalized customer service, these new-age digital banks are already shaking the ground of their established counterparts – and more disruption is sure to come.
As banks seek increased agility, scalability and flexibility to compete in this changing landscape, the only recourse is digital transformation––automate, accelerate, modernize––and scale your business seamlessly through rapid digital deployments.
Yet, the cost and effort to migrate workloads to the cloud may be a major concern for financial institutions, in addition to the expertise and skills required to implement such a strategy – key factors when companies seek to leverage cloud technologies while deploying elaborate workloads. External cloud providers such as AWS, Microsoft Azure and Google Cloud Platform (known collectively as the “hyperscalers”) offer capabilities that can shorten the development time needed to build such capabilities in-house.
The next question is which hyperscaler to choose. In this context, the market trend is to pick more than one in what is known to us as a multi-cloud strategy, typically with one as the major and another as the minor. Such a strategy enables diversification of risks (business continuity and lock-in), encourages competitive tension and enables leverage of the different supplier benefits (AWS scale and commercials, Microsoft O365/other products, Google analytics/AI, etc).
How do banking institutions manage multi-cloud effectively?
While multi-cloud is a practical approach for running disjointed, hybrid cloud environments, adopting a multi-vendor/multi-cloud strategy can be complex and challenging; specifically, we see companies struggle to develop a common understanding of architectural features and governance, manage demand effectively and stitch together multiple commercial billing models.
What steps are needed to help adapt the organization’s culture and mindset to manage a multi-cloud ecosystem effectively? We have listed the best practices for an effective multi-cloud strategy where they can impact the most.
- Avoid provider lock-in so you can adapt to marketplace changes without having to re-platform when moving from one vendor to another.
- Continuously monitor providers’ offerings as they mature and evolve, since they may offer better pricing flexibility for different cloud platforms that enable an organization to move workloads from one cloud to another to better meet business needs and apply best practices built on one cloud platform.
- Make sure your IT provider management team has deep and up-to-date industry insights to evaluate the providers and determine the best-of-breed sourcing options among the different platforms, hyperscalers and their respective USPs before embarking on a digital journey.
- Consider a formal organizational change management program as a part of an overall strategy to ensure the future state is successfully landed and managed.
Which workloads are NOT suitable for the public cloud?
The COVID-19 pandemic and its after-effects have pushed most global banks to accelerate the migration of their applications to the cloud. Yet only approximately 30-40% of workloads are in the public cloud now. Understanding which workloads are suitable for the public cloud (and which are not – for example, batch processing) and which cannot for technical or regulatory reasons be pushed to the public cloud are becoming ever more crucial parts of developing a robust cloud strategy. The in-house IT teams need to develop a list of the right workloads they can safely shift to the cloud, which can then be prioritized according to business needs. Workloads such as standard corporate services, workforce productivity applications and omnichannel deliveries, including mobile, are often front runners for cloud environments.
Specific analytical workloads, customer database workloads and transactional workloads involving treasury applications, investment banking data, retail banking and even critical core banking financial data with batch processing functionalities may be better suited to private clouds. However, there are notable exceptions within every one of these categories. This distinction and assessment of associated risks become the cornerstone of a robust cloud strategy for any BFS institution.
How can the cloud drive better customer experience (CX), build loyalty and brand reputation?
One of the main drivers for leveraging the cloud in the first place is to improve customer experience. The pandemic significantly accelerated the number of customers engaging digitally with their banks. Not only did this cause significant issues with bandwidth/capacity, but customer journeys were exposed to excessive friction and frustration. By shifting to the cloud, banks hope to improve speed to market for new products, enable contact center agents to provide better service and allow scalable capacity, all of which will enhance CX. In turn, that should lead to better intimacy and stickiness and ultimately increased revenue per customer.
However, moving to the cloud is not a silver bullet. To make and measure real progress and achieve CX transformation at scale, banks need diagnostic assessments of the current state of customer experience and a view of how it compares with market best practices to identify gaps and opportunities, then draw a clear roadmap for change. To match the demands of modern clientele, banks need a strong CX experience that combats user friction and integrates the ease-of-use of Uber or Amazon with their financial service applications/platforms. Combining granular consumer data analytics and audience behavioural research can enable accurate customer segmentation based on different personas. This delivers a highly personalized customer experience in which ordinary interactions are converted into meaningful customer conversations to optimize every customer journey – sometimes referred to as “mass personalization.”
How can we leverage the cloud to move workloads off the mainframe?
As previously noted, the main reasons banks are moving to the cloud include cost variability, enterprise agility, support for compliance and innovation to drive an enhanced customer experience. Yet, 92 of the top 100 global banks use IBM Z mainframes as their core banking system. Mainframes run 30 billion transactions per day and handle 90% of all credit card transactions – a vast footprint across the banking industry, making the mainframe as the real “workhorse” for the past three decades.
It is equally valid to say that banks are trying – when practical – to move away from the mainframe due to a dwindling talent pool, the high cost of running applications on the mainframe and the perception of core modernization being easier when leveraging cloud technologies.
Despite these compelling drivers, most banks have not been able to make the mainframe redundant – not even close – primarily because of the cost of migration and the risks involved. Moreover, today's mainframe architecture is the best and most secure platform for some workloads (for example, large volume, IO-bound financial transaction applications), at least for the foreseeable future. Therefore, we see an emerging solution to gradually build new cloud-native infrastructure in parallel and migrate code from the mainframe over time (in a “strangler pattern”), where such migration makes sense.
Is IT the “gatekeeper” or should we have a “user marketplace” approach?
Traditionally, IT teams within large financial institutions have held the budgets for and controlled access to technology across the enterprise. This orthodoxy is now being challenged by a shift toward increased collaboration between central IT teams and lines of businesses to support the evolving organizational needs. Modern banks are creating cross-functional teams with IT teams becoming collaborators and trusted business partners in enabling banks to grow more agile, intuitive and responsive to continuous change.
In the case of cloud management, financial institutions must select one of two predominant models. The first reflects the more traditional environment in which IT is the “gatekeeper,” controlling access to the cloud, provisioning capacity and storage based on demand and selecting which hyperscaler is the right fit for which workload. This option helps from an infrastructure security perspective and means cloud costs can be more tightly controlled. The alternative is often described as a “user marketplace” model in which the users (from across the enterprise) can select their cloud option, making decisions for themselves in terms of suitability and cost.
In determining the suitable model, factors to consider will include:
- Information security
- The degree of required control exerted by IT
- Costs (and cost management)
- User expertise
- The complexity of the organization
How do we govern the cloud, manage demand and implement FinOps?
Implementing the cloud is only the beginning of the journey to ensure financial institutions obtain business value from the new operating model. Effective governance is mandatory, and this usually necessitates an upgraded framework because the way the cloud is used is very different from typical legacy systems. One major difference is how demand needs to be controlled, especially if the bank has selected the user marketplace approach described above. Guardrails and approvals need to be defined and baked into the model. In addition, the emergence of FinOps means enterprises must implement a new way of accounting for cloud commercials. This requires collaboration between multiple parts of a firm, including IT, Finance and the business. Failure to implement such robust cloud governance will inevitably result in uncontrolled demand, cloud sprawl and escalating costs.
Why ISG?
ISG helps financial institutions determine:
- The optimal strategy for leveraging a combined mainframe/cloud environment
- Select the right third-party partners (including hyperscalers and service integrators)
- Design the most appropriate cloud commercial frameworks (including FinOps insights)
- Measure the success of the new operating model
Our comprehensive research-driven approach, including market trends, design, roadmap and best practices, can guide financial institutions to formulate a winning cloud strategy for 2022 and beyond. Talk to us for better decision-making based on unrivalled expertise and actionable advice.
About the author
Owen Wheatley
What he does at ISG
To say Owen Wheatley comes prepared to work through your operational concerns and transformational needs is an understatement. As ISG’s Lead Partner of Banking and Financial Services, he treats his 25+ years of experience in this ever-evolving, customer-centric field as a replete lexicon of applicable knowledge, relevant learnings and potentially executable solutions. In doing so, he makes the ethereal and theoretical, actual and obtainable.
Past achievements for clients
Knowledge-sharing is second nature to Owen. He provides his clients with market insights and meaningful thought leadership and helps them understand what similar (or different) organizations in comparable situations have done regarding transformational change. Many of Owen’s clients have sought his expertise to strengthen their customer engagement on the digital front, enhance the employee experience to improve the customer one and navigate new ecosystems—like integrating emerging partnerships—endemic to the industry. He makes sure that untangling this complexity and harnessing your new relationships always lead to your number one goal: driving better results for your banking or financial institution. In fact, Owen:
- Led a consulting team to design a commercially groundbreaking and elaborate deal for one of the largest hedge funds in the world to reimagine its middle and back-office operations, lessen the bureaucratic demand on the front office and serve institutional clients better. The measures of success for this co-designed and collaborative project included defined stages of excellence and experience metrics, delivered in a commercial model which positions all parties for success.
- Managed a large team of advisors to provide market insight and an "outside-in" perspective to multiple major North American banks looking to transform their operations, including indirect auto lending, core banking, cheque processing and the entire cash ecosystem.
- Led a team of experts in helping to transform the HR technology and operations of a major European bank, including designing the right strategy, creating the roadmap and business case, selecting the right partners for a new ecosystem and ensuring expedited and effective implementation.
