Coming the day before a decline in share price in late March that slashed $53 billion from Amazon’s market capitalization, news that JPMorgan Chase plans to enable institutional clients to access securities research via the retailing giant’s Alexa digital assistantOpens a new window was probably lost in a flood of market data.
Nevertheless, an innovation billed as a precursor to voice-activated trade execution is the latest in a stream of technological advances by banks that see their future in delivering more cloud-based banking services.
According to Chinese-owned US research and consultancy firm International Data Corporation, as the world of fintech keeps expanding, banks will contribute around 10% of the expected global spend on cloud computing of $160 billion in 2018Opens a new window . This includes spend on public platforms hosted by Amazon Web Services, the 16-year-old computing subsidiary that leads the market and accounts for around 10% of Amazon’s global revenues.
Creating Skills
As the example of JPMorgan Chase demonstrates, banks are motivated by the opportunity to target a wider range of customers, and cloud banking software can help as finance and technology increasingly merge. Led by credit-card specialist Capital One, which began putting client data in the cloud at the end of 2016, financial services companies ranging from insurers to credit unions and online brokerages have created a variety of so-called skills – instructions converted to computer commands by natural-language processing – that permit Alexa to generate account and pricing information at the customer’s request.
If reports that cloud-adopting insurer New York Life intends to equip its 12,000-strong agent network with an Alexa interface by year-end prove correct, the use-case will further substantiate the claims of consultants and cloud operators that the technology is robust enough to overcome the security, compliance concerns and cloud banking regulations of a tech-savvy and risk-averse industry, which they say has much to gain from adoption of cloud computing in banking.
By shifting more of their workloads to the cloud, experts argue, financial services groups can cut costs of infrastructure upkeep as well as gain flexibility by scaling systems to cope with demand. For banks, this includes the processing of non-cash payments from cards and smartphones, which are expected to reach $726 billion globally by 2020.
Storing data in the cloud makes it easier to deploy artificial intelligence, machine learning and other advanced technologies – including the natural-language processing that powers Amazon’s Alexa and digital assistants from cloud competitors Alphabet and Apple – for competitive advantage.
Cloud Banking Regulatory Disruption
Cloud banking systems and software enable banks to better protect themselves from potential disruption engendered by regulatory change, such as the European Union’s revised Payment Services DirectiveOpens a new window , which came into force in January.
Aimed at increasing competition, the “road map†provided by the legislation doesn’t yet reach to North America. However, digital natives who populate the fintech industry are advocates pushing hard for the adoption of equivalent standards by US regulators.
While the Boston Consulting Group estimatesOpens a new window that banks could benefit from wholesale cloud migration – with a potential to increase revenues by 20% and obtain a 30% reduction in expenditure – reticence among corporate executives is palpable. Much of that is down to security in the cloudOpens a new window , and much of it, too, is driven by regulation.
Like the payment services rules, the General Data Privacy Regulation will affect every bank within the EU’s 28 member countries when it becomes law at the end of May. Compliance with tightened reporting times are among the concerns, given that the cost of remedying data breaches are an order of magnitude higher when they occur with third-party providers. In fact, around half the institutions subject to the regulation won’t have achieved compliance by the launch date.
Data Vulnerability
Although the aggressive uptake of advanced technologies has been a hallmark of the banking sector almost since the onset of the information age, ceding control of IT infrastructure built over decades and at first-mover expense is no small undertaking.
Judging by the rise in data breaches that have followed cloud adoption across the industry spectrum, the concern appears well founded. According to research by the Michigan-based Poneman InstituteOpens a new window , which for a dozen years has surveyed global companies about their data security, more than a quarter of companies that have been hacked will suffer a further breach within two years – a statistic that doesn’t inspire confidence.
The institute’s 2017 report indicates that while costs for remediation fell by around 10% from the previous year, albeit in part due to a strengthening US dollar, companies in developed markets still spent around $140 per record to recover lost data. In addition, the size of breaches was up by 2.1% on average last year. Nor do these figures take into account the customer churn that follows breaches.
Redeploying Data Experts
Migration costs are an additional hurdle in moving from legacy systems and private cloud structures to hybrid and public clouds, with time to completion having an impact on profitability. Because few operators can provide the storage capability and global reach, and banks have yet to adopt universal requirements from service providers, the threat of monopoly pricing also acts as a constraint on uptake.
Internal applications run in the private cloud are predicted to double in each of the next two years. But as JPMorgan Chase’s migration from the private cloud underscores, banks are conquering their fear, and for more reasons than the cost savings available from scaling capacity with distributed computing.
Launched in 2016, the bank’s Gaia private cloudOpens a new window runs some 100 internal applications and is the first step in a comprehensive cloud strategy. One goal in moving to the hosted solution is to put the 5,00o-strong army of developers and data scientists that built Gaia to work creating the open application programming interfaces (APIs) that will enable the bank to expand its reach.
While big banks are likely to struggle early on to create visibility from mixing platforms and providers, consultants say that developing open APIs makes better use of the IT teams they employ.
Coupled with the resources in programming and data science maintained by the largest cloud-hosting companies, the on-demand payment structure for third-party storage and processing will make better use of both human and financial capital, including eliminating procurement delays and the time spent onboarding new hardware, as well as cutting costs incurred through over-provisioning.
The Lure of Flexibility
As standards emerge for data generated in business verticals, migration will reduce complexity and better align IT with business goals. Standards facilitate the application of artificial intelligence in data analysisOpens a new window and mining customer data for revenue opportunities and of machine learning that creates sources of competitive advantage in operations. Along with lowering time to market for product and applications development, cloud migration enables faster provision of more personalized services.
In an industry that has deployed IT to lower the cost of exceptions processing and to profit by milliseconds in high-frequency trading, the flexibility that results from incorporating fintech and migrating to the cloud reaches to the heart of the business model.
Having been shaped by competition and customer demand into technology specialists, banks are starting to find that streamlining the systems landscape offers them flexible and cost-effective foundations on which to derive value from innovation in cloud banking.