Technology and infrastructure in the financial services industry has long been seen as one of the key operational issues holding companies back. If they were struggling with growth, customer satisfaction, or compliance chances are that technology was a contributing factor to the problems they were facing.
In the past, financial institutions have been criticized for the slow pace of their technology adoption, and their entry into the cloud era, but given the issues many have had with legacy IT systems, that’s perhaps not a huge surprise. Technology was often seen as a cost center whose issues were too big to fix, and would swallow all resources directed its way without seeing much in the way of meaningful change.
However, these views are very much those of the past, with many now realizing that the cloud will have a significant role to play in extricating them from the pain of their old technology stacks, and CIOs are now far less risk averse and investment shy than they once were.
Just three or four years ago, many CIOs at financial services businesses weren’t interested in cloud technology. The perceived complexity of migrating workloads across from on-premises infrastructure or privacy concerns, were among the reasons cited for holding back. However, these arguments hold very little weight today.
In a discussion forum we recently held for our clients, with many leading global financial institutions in attendance, this shift in mindset was very apparent. In fact, cloud technology was top of the agenda for key decision-makers. According to a recent survey by Fenergo of global banks and asset management firms, almost two-thirds (56 percent) of senior decision-makers said investment in cloud technology was a top priority. That should be seen as an encouraging sign, because it’s going to be critical to delivering valued services to customers, operating an efficient business, and meeting regulatory obligations for the foreseeable future.
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Critical need for a cloud strategy
From the conversations at that event made it very clear to me that changing attitudes to data privacy, the relative strength of different architectures, the response to the rise of digital banking and what the developments in Artificial Intelligence (AI) and Machine Learning (ML) will bring are front-of-mind for Chief Information Officers within financial institutions today.
Our discussions with these IT leaders chiefly focused on the critical need for a cloud strategy in the financial sector, and how some of the concerns they had could be alleviated. Digital transformation and cloud migration has long been an industry water cooler topic for some time, we are now seeing those conversations translate into real action being taken. Indeed, just in the last year, over a quarter of our major customers have moved to cloud-based client lifecycle management (CLM) solutions and almost all new contracts are for cloud-based deployments. This is in stark contrast to 2019 when only a small minority of our financial institution client base opted for cloud-based CLM.
These changes are undoubtedly a result of a deeper understanding of the characteristics and benefits of cloud and greater confidence in its security - and this has led to a stark increase in adoption. , With previous concerns around data privacy and data identity management all but eliminated, we’re starting to see a real evolution in the way financial institutions use technology to respond to the needs of the day, – but waning concerns are not the only driver of change here.
The rise of digital-first banks, as well as how customer expectations and digital appetites have changed in recent years have influenced decision-making too.
Some might say that established financial institutions are just playing catch-up and trying to react to the current market dynamic, especially when it comes to cloud and digital investments. However, I’d say it’s largely irrelevant why they’re making these changes. The fact that they are is what’s important, and if different parts of the sector are pushing each other to go further and further in addressing some of the key pain points in their businesses – better-serving partners and customers as a result – then that can only be seen as a positive.
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The best way forward
What’s also positive is the specific cloud-based systems and solutions they’re adopting. This isn’t just a lift and shift with less sensitive workloads moving from on-premises environments to the public cloud, we’re beginning to see the cloud really permeate through financial institutions technology stacks – from the front office with customer experience, to the regulatory compliance technology used to onboard clients, conduct due diligence checks and detect red flags pointing to potential financial crime.
The kind of IT transformations we’re talking about are not made overnight and CIOs at any large organization, including those in the financial services business, will have many competing priorities to weigh up. It should also be said that this dilemma is often exacerbated by a lack of budget and resources to address them all in parallel. For the CIO, the best way forward then comes down to how important each shift is as part of the wider transformation strategy – what’s the investment needed, how long will it take to recoup in efficiency savings, what growth opportunities does it enable, what risks does it mitigate.
I’d argue that after laying the foundations of cloud strategy with a review and rearchitecting of the business underlying infrastructure, that regulatory compliance technology like customer lifecycle management solutions should sit fairly high up on that list. Not only can they significantly mitigate the risk of incurring eye-watering enforcement actions and the reputational fallout of having sub-standard processes for anti-money laundering and terror financing requirements, it can remove a lot of the friction customers can experience during onboarding with more manual processes.
The regulatory environment is one that continues to be very fluid with global task forces and domestic regulators in key jurisdictions constantly looking at ways to crack down on emerging financial crime trends and limit the impact of poor practice. And with that constantly evolving landscape, manual approaches to compliance simply introduce too much risk (ironically enough to a function intended to reduce it).
Using a system that can be updated to always be compliant, provides risk management teams and ultimately the C-suite and board with the confidence that they are future-proofed against evolving regulation and will avoid hefty financial penalties from regulators.
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Looking to the future
CIOs today are looking to their technology partners to help them make the right decisions for their organizations over the longer term, not just their tenure in the role. Transformation plans rarely, if ever, begin and end in any one CIOs time in the role – they are a continual process to move things forward for the organization – but the efforts of individual leaders need to pave the way for the next without tying their hands and forcing them down a path that may present issues later down the line.
Technology vendors should know this and play their part accordingly – acting as trusted partners, clearly laying out the merits and potential pitfalls of the options in front of them, and working with them to chart the best way forward. And that’s what we try to do every day – help our customers gain a competitive advantage by being at the forefront of innovation.
Now, the majority of banks we speak to are looking to the future. They want support with their digital transformation and cloud adoption journeys. Whether they’re simply looking to digitize existing processes or to tap into the power of AI and ML to make more intelligent decisions and look for fraudulent behavioral patterns, the fact that more conversations are being had in the financial service world about cloud are encouraging. That those conversations are also going somewhere gives me great confidence that the financial services industry is moving in the right direction and there are good days to come.
Niall Twomey, Chief Technology Officer, Fenergo