Out-Law Analysis | 30 Sep 2022 | 12:11 pm | 4 min. read
The reasons for financial institutions to move systems and data to the cloud have never been more compelling – and the barriers to doing so are diminishing.
Firms that do not embrace cloud solutions risk being left behind.
It is five years since Pinsent Masons collaborated with UK Finance on a study that highlighted the challenges that banks faced when moving to the cloud.
The challenges identified in 2017, such as issues concerning the management of data, the effective supervision of cloud providers, and concerns around data location and access, have not entirely gone away, but the barriers to cloud adoption have reduced.
A major difference now is that regulators are demonstrably more positive about the cloud for financial services, albeit not without some reservations. Not too long ago, the idea of a major bank running systems on the public cloud would have been laughed out of the room, but that is happening now.
Cloud providers have also become more mature. Compliance programmes, continued policy engagement with regulators and contracting positions which accommodate regulatory requirements are now expected aspects of the market’s leading cloud service providers.
Public cloud adoption is still relatively new among European insurers, but that is likely to change. One of the main growth areas for cloud adoption in insurance is in relation to underwriting and pricing, where greater use of artificial intelligence (AI) to drive decisions means that greater processing power is needed.
There are several main drivers for moving financial services operations to the cloud.
For one, there is growing pressure on financial institutions to put new services online – that demand has only been heightened by the pandemic.
Cloud solutions also enable financial institutions to make strategic use of data as they enable data siloes to be broken down and allow financial institutions to have a more rounded view of the end customer. Operating in the cloud also offers the computing power needed to generate more frequent, accurate insights. Established financial institutions have enormous data lakes, but struggle to use them strategically if the data is stuck in siloes.
We have also seen the emergence of open application programming interfaces (APIs) in Europe and beyond: APIs drive inter-connection between banks and third-party solution providers, and that in turn spurs on banks to adjust their underlying architecture to make it more customisable and scalable.
There are also growing demands on financial services firms over the need to be resilient, withstand shocks such as the pandemic, and ensure ‘always-on’ availability.
There are a several other benefits that financial institutions perceive they can derive from moving to cloud-based solutions. Flexibility and scalability are two examples.
Financial institutions are working with AI and machine learning solutions as part of processing data and generating customer insights. Given the scale of the data held by established financial institutions, this kind of activity can quickly soak up the capacity of an on-premises data centre, whereas cloud offers a more flexible solution.
In addition, the volume of transactional data can be unpredictable, which makes the flexibility that cloud can offer attractive.
There remain regulatory issues around adopting cloud solutions in financial services that firms must navigate and other contracting considerations in relation to cloud service arrangements to carefully consider too
Cost savings are another factor. The installation and maintenance of on-premises IT systems is lengthy and costly, whereas using the cloud reduces the hardware cost and can move the charging model to one which is service-based, where costs vary depending on the level of use.
Perception over security risk has also changed for the better.
A few years ago, concern around security was one of the main reasons why financial institutions and their regulators were wary of moving to the cloud. However, given the rapidly evolving threat landscape, cloud infrastructure is arguably better protected than in-house. Major cloud providers are a significant target for hackers, though, so security concerns have not gone away, but financial institutions tend to focus on the fact that the cloud provider’s business is much bigger than a single financial institution, which provides the incentive to keep up with security threats and avoid significant outages.
There are also growing environmental drivers towards cloud adoption in financial services.
The discussion around the environmental impact of cloud is not always straightforward – while on the one hand moving to the cloud can reduce an individual financial institution’s energy bills, critics might say it is just moving the problem elsewhere and does it really reduce energy consumption overall. There does appear to be good evidence that moving to the cloud has an overall positive impact on energy use, as it seems that the increase in data centre use gets mitigated by overall efficiency.
Barriers to cloud adoption have diminished since 2017. Nevertheless, there remain regulatory issues around adopting cloud solutions in financial services that firms must navigate and other contracting considerations in relation to cloud service arrangements to carefully consider too.
Cloud migration needs to be treated as a business project, not an IT project, and it needs senior executive sponsorship. That means that the cloud solution is truly treated as the infrastructure platform for business development and change, as opposed to an end in itself.
This also links to the need for culture change in financial institutions – the move to the cloud needs to sit within an overall vision and strategy and not be buried in the technology team.
Good governance is also vital – moving to the cloud is not just about lifting and shifting data and systems from an on-premises solution to the cloud. Financial institutions also need to adjust operating models and governance for this to be successful. Cloud governance will encompass everything from information security to cost management and the management of outsourcing risk, and how to use data in new and innovative ways while remaining within regulatory guardrails.
As financial institutions seek to move to the cloud to take advantage of the benefits it offers and join challenger firms and fintechs who were ‘born in the cloud’ that are providing growing competition, there is little room left for financial institutions unwilling to consider any cloud adoption at all.
30 Sep 2022
30 Sep 2022