The case for cloud adoption in financial services grows stronger

Firms that do not embrace cloud solutions risk being left behind.

What has changed in the last five years?

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.

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.

Drivers of cloud adoption in financial services

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.

The benefits financial institutions perceive

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.

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.

Cloud vital to competitiveness

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.