Investigating Banks’ Slow but Steady Path to Cloud Adoption

The cloud is one of technology’s great innovations, enabling banks to wrangle vast amounts of data and comply with onerous financial regulations. While at one time firms had concerns over the security of the cloud, now it is regarded as highly secure with clear advantages over on-premise systems that rely on physical servers and disaster recovery centers.  

But with all the known benefits, banks continue to be slow to cloud adoption. According to Forbes, as of last year, 80% of enterprise organizations reported having fully deployed cloud solutions, while 79% of financial industry leaders have stated their banks are only in the early stage of cloud integration.* Indeed, many banks continue to rely on legacy systems for mission critical functions. In fact, it’s estimated that 75% to 85% of banks’ risk systems are managed on-premise.  

Why move to the cloud?  

Market structure changes, cost constraints resulting from capital-heavy regulatory compliance, and the aftermath of the COVID-19 pandemic have all been driving more banks to consider cloud adoption. Firms are often motivated by goals to modernize their operations through improving efficiency and lowering costs. The cloud can be quite appealing to banks, as it offers increased speed and scale for heavy-compute consumers, ideal for firms processing high volumes and complex calculations. 

Cloud compute engines in and of themselves have become an industry game-changer. From just a technical point of view, cloud analytics engines and processes enhance performance, reliability and efficiency. Scalability and elasticity are also key factors aiding firms in the tech arms race and improving the client experience. Leveraging the cloud, users can bring processes and analytics to life that were once thought to be impossible using an on-premise deployment. For instance, a bank could run complex “what-if” analyses across an entire book of trades in near real-time by merely spinning compute resources up or down. 

But, what about the costs? 

As with most new technologies, the topic of upfront costs and ongoing operational fees are common considerations. Fortunately, a typical return on investment is achieved fairly quickly for banks choosing to adopt cloud technology.  

Many firms utilize the cloud to look after various risks, including financial, credit, and liquidity risks, which are calculated in overnight batches. The upfront cost savings of not having multitudes of servers in a server farm and “doubling up” by maintaining remote locations for disaster recovery—which all banks require—is significant. This is because servers have maximum capacity constraints at some points in the day, while sitting idle at other times.  

However, banks need to decide whether they will simply lift and shift solutions to the cloud or if they need to completely refactor their processes. The former may not be as cost-effective as envisioned. The latter lends itself to the proactive optimization of cloud compute power. This is where costs can be lowered. For instance, nodes utilized by newer cloud technologies can be spun up or down on demand, and clients are typically charged by the millisecond, so users get what they pay for. 

Current trends in cloud migration 

Attitudes toward the cloud have evolved over time.  Less than a decade ago, the cloud was perceived as an unsecure environment akin to a black hole. However, these days security has become one of the biggest selling points. While it is difficult to pinpoint the exact timeline cloud adoption will take—since it has become a very personal decision at every firm—a number of drivers are motivating changes as well as setting up roadblocks.  

At some banks, cloud adoption is happening cautiously in dribs and drabs, while at others it’s full steam ahead. Several factors motivate the adoption of the cloud, such as a given bank’s structure, location, and compute demand. Regional banks that don’t have global exposure and work from one location can more easily change or move to the cloud if they can avoid sinkholes such as regional silos.  

At the other end of the spectrum, large global banks may find it more difficult to coordinate new technology across locations, although there are many advantages to centralization on cloud. Different regulations in jurisdictions may also make this change especially challenging.  

Aite-Novarica report download  

Learn more about the banking industry’s path to cloud adoption, including the different ways banks are using cloud providers for derivatives trading and risk analytics, by downloading our insightful report: To Cloud or Not to Cloud- Factors Influencing Decision-making at Banks. 

*Source: Forbes: Tips For Banks Adopting Cloud Deployment In 2023