THE CLOUD CHALLENGE.
Although financial service firms understand the benefits, Jannah Patchay explains why they have been slow to embrace the technology.
As recently as two or three years ago, financial institutions still approached cloud technology with more than a few degrees of caution. Whilst many, if not a majority, of firms have moved towards some degree of cloud migration and adoption, questions of cybersecurity, resilience and regulatory compliance still loom large on their agendas.
There is though, a widespread recognition that greater cloud adoption is an absolute necessity in order to remain competitive and innovative in today’s market. This can be attributed to greater regulatory certainty around treatment of cloud outsourcing as well as the disruptive potential shown by emerging cloud-native financial service providers.
Indeed, the rapid ascendance of artificial intelligence (AI) and machine learning (ML) has been primarily enabled through the availability of large data sets and vast computing power in the public cloud. Conversely, those wishing to leverage the power of AI / ML to its full potential must first have a cloud capability.
Picking up the pace
Trade organisations such as Association for Financial Markets in Europe (AFME) are hoping to accelerate the pace of acceptance. In a recently published paper entitled “The Adoption of Public Cloud Computing in Capital Markets,” it underscores that the adoption of the public cloud is vital to the whole industry, including banks, cloud providers and regulators. AFME lists numerous benefits including “greater business agility and innovation; improved overall cost management; increased operational efficiency; enhanced client experience and service offerings; and effective risk mitigation.”
AFME members also identify cloud technology as one of four key technologies that has the potential to radically transform their industry, and a core building block for enabling adoption of other new technologies and innovations. However, the very participants surveyed also responded, in the same breath, a generally negative view towards widespread adoption of the public cloud in their industry over the next five years. Only 29% of respondents believed this would occur.
One reason is the prevailing view of the public cloud. Despite recognising the advantages, AFME members also indicated that their preferred style of cloud solution was a “hybrid cloud” encompassing elements of both public and private clouds, bound together by some interoperability of technology. This is perhaps symptomatic of a long-standing barrier to tech migration in financial institutions – the prevalence of legacy systems that may not be portable or supported by cloud platforms.
It is also borne of the trust issues historically associated with the cloud. Yousaf Hafeez, head of business development at BT Radianz, however, believes “This hybrid approach is the one we see most often among larger institutions. A hybrid solution gives customers all the benefits of a public cloud with a private cloud for applications or data they don’t want to put on a public cloud.”
In the EU, regulatory concerns around cloud usage have been widely assuaged by the introduction of the publication, in February 2019, of the European Banking Authority’s (EBA’s) Guidelines on Outsourcing Arrangements. These provide a comprehensive framework for the classification and treatment of outsourcing arrangements and service level agreements (SLAs). This is useful for cloud providers themselves, who can now incorporate these requirements into their own contractual documentation and practices.
There is also a growing awareness, and indeed, adoption of public cloud by regulators themselves. In the US, for example, FINRA is using Amazon’s AWS cloud service to store, manage and analyse the data that it utilises for market oversight. The UK’s FCA, on the other hand, is also migrating its MiFID transaction reporting and analysis capability to the cloud.
As for the issues of cybersecurity and resilience, Fiona Willis, an associate director at AFME and one of the report’s authors, says “We tried to draw out in the paper that actually, there are a lot of security benefits from moving to the public cloud. If you don’t know anything about the cloud, it probably seems like a less secure option than having data and applications hosted on premises. But actually, when you understand it, you see that it’s far more secure, it’s more resilient. We need to address the skills and knowledge gap in understanding how public cloud services work.”
Being cloud-native – designed and built on the cloud from inception – offers huge advantages to new market entrants. Historically, hardware and platform costs would have constituted a significant overhead for challenger banks – not to mention the complexity and expense of disaster recovery sites, failover and business continuity plans. Cloud-native firms can leverage many of these capabilities that are offered out of the box by experienced cloud providers.
In addition, they benefit from the ability to rapidly scale up and down in terms of resource utilisation, as required and based on fluctuations in their user and client activity. This enables them to focus people and resources on their core business strategy and offering to clients.
Twenty years ago, establishing a fully authorised banking institution that could challenge the incumbent market shares at far lower cost, whilst offering a customer-centric and responsive experience, would have been inconceivable. “Without cloud computing, Starling Bank wouldn’t exist,” says the bank’s chief technology advocate, Jason Maude. “It’s not that it would exist in a smaller form – it just wouldn’t exist.
He adds that: “The cloud essentially enables us to access the infrastructure that is needed to run a bank, without having to make any giant capital outlay at the start. It enables our culture of innovation, in that we can try things out and deploy them quickly and at low cost on the cloud, and if they don’t work then we can move on to the next idea.”
The mark of a cloud native firm is to have the innovation built into the culture of an organisation. Integral, a full-service workflow automation and trading technology partner in the FX markets, has been cloud-native since its inception 20 years ago. Integral offers liquidity, pricing tools, distribution, risk management and data science, in addition to a high-performance trading platform. Its clients include banks, brokers and asset managers – many of whom may not even have realised that they were using a cloud-based technology provider.
Vikas Srivastava, Integral’s Chief Revenue Officer, cites the ability to offer bespoke services as a key differentiator for a good cloud technology partner. “Don’t forget, we are talking about the OTC market,” he says. “To really serve your customers’ needs, you cannot ask them to contort to fit your requirements.”
He adds, “You need to serve them across all products, protocols and different regulatory requirements and you need to do that in an extremely reliable way. The needs of the customer have evolved and they are asking for more. If you don’t meet their requirements, they may seek out someone else that will.”
Richard Hall, CEO of CloudOrigin, a firm advising multiple sectors on cloud adoption and innovation, is more bullish on public cloud adoption, particularly in light of advances in AI / ML. “I don’t think the financial entities have grasped the fact that computing is almost commoditised to nothing,” he says. What would you ask if you had a genie to whom you could ask any question? Tell me who are my most profitable customers. Tell me what products and services they want, and give me the simulations that prove I should offer them. The magic genie is there. And it’s sitting and giving answers to other, smaller competitors now. Imagine the power if you could look at IT resource in that way.”