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Five advantages to open and cloud-based banking

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(Image credit: Shutterstock / issaro prakalung)

As the pandemic rages on, many firms have undergone, or are amid, digital transformation. The crisis has upended the way we live, work, play – and even how we bank. Just as remote work has forced operational alterations, customer behavior has likewise changed. Banks find themselves forced to quickly adjust to a reimagined future – or risk being left behind.

Today, as customer and regulator expectations continue to intensify and competitive pressures mount, IT infrastructure modernization has become essential. And as banking goes digital, the move toward open banking and analogous operating models is emerging as key to a prosperous future. 

Banks that have already adopted a cloud-based architecture are ahead of the curve and already reaping the rewards. For those who have yet to innovate, what strategies and tools can they employ to promptly close the gap? And, what benefits can they expect to see from their modernization efforts?

Rising customer expectations, agency regulations 

Prior to Covid-19, customers were already beginning to embrace online banking services. However, remote work, school and lockdown measures have accentuated the need for online access to services and boosted digital transactions. A case in point: US mobile banking grew 50 percent in the first half of 2020 alone. Consumers’ demand for evermore instant, digital access to their financial institutions, as well as seamless access to accounts and services at other institutions, continues to grow. 

And it’s not just customers whose expectations have increased. In recent years, the industry has seen a wave of new, more stringent regulations and standards. Worldwide and post-pandemic, regulators will likely be in catch-up mode, placing more focus on resiliency, IT modernization, open banking standards, and other lessons learned from the crises. In the US, regulators may also more actively follow changes in the political environment. 

Financial institutions that are further along in addressing these demands will be positioned to gain market share at the expense of those that are lagging – and they’ll also place cost-reducing pressure on those farther behind. The surest path forward is via the cloud.

Shift to cloud proves advantageous 

By converting more of their architecture to cloud-based services and solutions, banks can help secure a more prosperous future. As with any modernization effort, transitioning to the cloud requires human and financial commitments, but the return easily justifies the investment, including the ability to: 

  1. Meet (and exceed) customer expectations. The cloud provides faster (and more reliable) services and up-time than most institutions can achieve with their own IT infrastructure.
  2. Lower fixed overhead in IT assets. The institution can reduce its physical IT assets, saving the cost of purchase and related maintenance.
  3. Enhance cost structure. Firms can realize a cost structure linked more directly to, and scalable with, key revenue drivers such as the number of customers and number of accounts.
  4. Prepare for regulation. Cloud services can be deployed and upgraded quickly. Likewise, they can accommodate the most modern and standard software solutions needed for compliance.
  5. Achieve greater security. In cloud deployments, more cybersecurity management is done by the cloud provider, which is better equipped to handle evolving threats at scale

Applying advanced analytics & AI for an edge 

The thought of embarking on a digital transformation journey can be daunting, but analytics can help. Modern analytics tools are much more consumer-friendly than traditional ones. Complex analytics can now be done much more quickly than in the past – and they can be done by business users, no longer the exclusive domain of technical experts and programmers. This makes analysis easier and less expensive, and it enables the bank to extract more value from its data much faster than in the past.

Leveraging cloud and third-party solutions will be a critical strategic advantage for institutions. Longer-term cost and customer service advantages will also accrue for those who adopt a common architectural framework that supports institutional interoperability, such as the BIAN framework. Adoption of a services-oriented architecture not only enables such interoperability; it also reduces integration costs and facilitates speed to market by enabling the use of an ever-increasing number of high-quality, off-the-shelf software and solutions. This may be most true in the area of risk management and fraud solutions. 

As banks plan their future in the cloud, they can limit business disruption by following these principles:

  • Carefully prioritize and group services to be moved to the cloud in ways that minimize impact to external customers.
  • Carefully plan and execute change management – such as training staff on the new environment – to maintain customer service levels and internal processes. 
  • Consider impacts to cost structure of the existing IT infrastructure. For example, retiring the oldest and riskiest platforms first, ceteris paribus.

To the extent possible, institutions should try to separate changes that affect customers from the large modernization projects. To avoid too many moving parts, it may be wiser to initially implement existing customer interfaces on the new technology. This keeps the transition seamless from the customer’s perspective. When the migration is complete, any bugs have been ironed out, and staff is accustomed to the new environment. This leaves the institution better positioned to implement customer interface enhancements that take advantage of features in the modernized environment. 

Looking ahead to a digital future  

While the pandemic has fast-tracked digital transformation and created challenges, the modernization of digital infrastructures also presents opportunity. Adopting open banking and cloud-based architectures can help boost market share, operational efficiencies and compliance. Leveraging advanced analytics and AI with the firm’s own data – supplemented by data from industry consortia and third parties – will also help banks remain competitive and relevant, come what may. The sooner an institution starts, the sooner it can start reaping the rewards. 

Henry Lee, Sr. Risk and Financial Intelligence Consultant, SAS