Cloud computing services are on the rise across the business landscape. The promise of low-cost, easily scalable solutions and improved operational efficiency has attracted big and small business interests alike. According to Gartner, the public cloud services market is forecast to grow 18.5% in 2013 to total $131 billion worldwide, up from $111 billion in 2012. Meanwhile, IDC estimates that by 2020, nearly 40% of the information in the digital universe will be in the cloud in some capacity.
Payments: Why They’re Already In The Cloud
As banks tentatively look to move more functions to hosted environments, perhaps one of the most natural to bring to the cloud is payments. After all, notes Celent senior analyst Gareth Lodge, banks are already doing some payments processing in the cloud, even if they don’t realize it. Lodge says several vendors already offer services run virtually that involve payments, such as hosted online banking and card processing, to which many banks already subscribe.
“We talk to banks and often hear them say, ‘We will never, ever use the cloud,’ and I tell them, ’You already are,’ ” he explains. “It’s more a lack of understanding of what the cloud actually is.”
However, Lodge acknowledges that there’s a big difference between doing some things in the cloud and performing all payments processing virtually. Part of the reason banks are hesitant to pursue cloud-based payments — and cloud services in general — is because the legacy architecture present in most institutions “makes it difficult to do,” he says. Regulatory and security concerns, and the generally risk-averse nature of financial services, also play a role.
But while it would be a bold leap, Lodge says there are many incentives for a bank to wholeheartedly embrace payments in the cloud. First, there’s a significant cost-savings aspect, he says, adding that about one-third of bank IT spend is on payments. Pointing to one channel, he adds, ”the ACH network has really not changed for decades, and banks are all looking to see how they can make changes in that cost base.” Further, Lodge says processing payments in the cloud would allow banks to conduct real-time analysis of customer payments, which would be a “game changer.”
“Real-time payments analytics can really influence and change a bank’s interaction with their customer,” he says. “But that requires single-message [processing], not batch, and high levels of availability — all things current bank systems, however good they are, weren’t designed to do in the first place.”
Another reason for banks to embrace cloud payments is to stave off the threat of disintermediation. Payments is perhaps the one area where a startup tech outfit can jump in and compete with banks right away. And they can often do payments better, says Mike Laven, CEO of cloud-based payments processing company The Currency Cloud.
“In a noncloud world, payments is owned by the bank or one or two vendors,” he says. “In a cloud world, you can have many different firms and disaggregation of the value chain. Similar to what’s happened in music and other industries, specialized vendors can take individual pieces of the supply chain and optimize it, and because those services are all hosted remotely, they can do them in ways superior [to how it was handled] in the past.”
Laven says that while it’s highly unlikely banks will ever be cut entirely out of the payments picture, they can be marginalized in the process and risk losing major revenue. “Ultimately funds flow into and out of bank accounts, and you need banks for certain things, like having reserve currencies, but there are other, more consumer-facing things that big banks can’t do as good a job of and can’t be as nimble and flexible,” he says. “Banks own the rails the financial system runs on, but the trains, cars and the food served on them can be run by smaller companies.”
But Celent’s Lodge believes banks eventually will adopt cloud-based payments, and cloud systems in general, industry-wide eventually because of the great promise of cost savings, efficiency and agility. He doesn’t venture a guess, however, as to when that will happen, given the notoriously cautious nature of financial services.
“As we’re seeing even more and more cloud-based core systems solutions being offered, it’s only a matter of time,” Lodge adds. “But banks are typically the last adopters of new technology.” – Bryan Yurcan
Managing Documents In The Cloud
Last month Barclays made headlines with a new service called Cloud It, a cloud-based document management system where customers can store their personal documents in Barclays’ private cloud. While some in the industry question the value of such a service, it’s an indication of a greater trend in that banks are learning to trust the cloud and feel more secure using it for a core application such as document management.
The biggest challenge to cloud adoption in document management used to be security and the threat of a data breach, Jones says. But those concerns are receding. “Everyone talks about security and cloud vendors worry about it every day. Their business depends on it. We’re starting to see cloud vendors put very hard security in place,” Jones says.
As more firms begin to experiment with the cloud, many are using document management as an early trial, making it one of the fastest-growing use cases for the cloud. A survey last year by AIIM found 46% of those in IT expect the cloud to be the de facto deployment for document management in the next three years — higher than the 41% that expected the same to be true for general software applications.
Barclays’ Cloud It demonstrates the growing comfort that banks have with document management applications in the cloud. At a time when banks are trying to rebuild trust with their customers, Barclays is willing to stake its reputation and its customers’ personal documents on the cloud.
Whether the service pays any dividends for the bank is yet to be seen, and some are skeptical that it will pay any. “We’re starting to see more banks leveraging the cloud to open statements and documents for customers,” Jones observes. “But I don’t really see the benefit for a bank in a full-fledged two-way content management system in the cloud unless they’re charging it.”
Barclays is offering Cloud It free to consumer and small-business customers, and sees it as a customer experience enhancement. The service’s aim is to help build an experience that makes customers’ lives easier, a spokesperson said via email.
Even those who are skeptical about Cloud It see other new opportunities for banks in document management in the cloud. For instance, banks increasingly are deploying cloud-based document management combined with e-signatures for mobile workers to get documents signed by customers.
One of Hyland’s customers, wealth management firm Hilliard Lyons, is looking into deploying just such a system for its off-base advisers, says Mitzie O’Rourke, a developer at Hilliard who works on the firm’s content management.
Although O’Rourke says she isn’t concerned about the security of the firm’s documents in the cloud, there still are challenges with any outsourced document management system that requires constant communication with the provider. “My concerns are around if they make a change to the servers without my knowledge. I have to be on the lookout for any changes,” she explains. “It’s simply an issue of communication.” – Jonathan Camhi
Platform-As-A-Service Poised For Growth
Platform-as-a-service may not be getting all the hype other cloud services do, but the PaaS market is growing slowly and is poised to see an increase in adoption, experts say. Whether that trend also occurs within the financial services industry remains to be seen.
Exact definitions of what constitutes PaaS vary slightly from source to source; online IT dictionary Techopedia perhaps sums it up best, describing PaaS as “a computing platform that is rented or delivered as an integrated solution, solution stack or service through an Internet connection.”
Gartner estimated earlier this year that worldwide PaaS revenue reached $1.2 billion in 2012, up just a bit from $900 million in 2011, a small share of the overall cloud services market. But banking, by and large, is not among those industries dipping its proverbial toe in the emerging PaaS market.
“It’s still something the technology vendors are talking about more than the banks really scrambling for it,” says Nancy Atkinson, senior analyst at research firm Aite Group. She adds that lingering concerns about data security in the cloud also hamper PaaS adoption among banks.
“They’re wondering how segregated the data is, and is their data completely walled off from someone else’s?” Atkinson says. However, she believes there might be some initial use of PaaS among banks as a way to sample new systems as they come out without fully committing to them. “Kind of like a ‘pay by the drink’ mentality, rather than having to pay for a whole platform,” as Atkinson describes it.
Atkinson believes that PaaS will be more highly adopted by bigger banks, either as customers or even as creators of their own PaaS systems that they can sell to smaller institutions.
One Bank A Step Ahead
One large bank already experimenting in the PaaS space is Charlotte, N.C.-based Bank of America. Bill Pappas, Bank of America Merrill Lynch‘s CIO for global wholesale banking technology and operations, says the bank has prioritized internal cloud hosting, designing a set of offerings around network storage and compute storage that it can manage on behalf of clients. While Pappas describes this more as infrastructure-as-a-service, it’s the framework that will allow the bank to pursue PaaS more fully, he adds.
Pappas notes that the cloud project is part of Bank of America’s overall strategy to modernize its infrastructure.
“Cloud does not exist in isolation. It needs to align with the business strategy,” he adds. “At Bank of America, we have prioritized the internal cloud, while demanding that issues of privacy, security, access of data, and data movement be resolved before going public.”
Overall, Atkinson believes that it although will “take awhile” for banks to fully embrace PaaS, it will ultimately be worth it.
“The benefit [for banks adopting PaaS] is they can bring new products and services to market quicker and there’s no restrictions of capacity, but it still can be very difficult for banks to make that leap,” she says. – B.Y.
Demand High But Challenges Persist For Cloud-Based Analytics
Unlike document management, placing data and analytics functions in the cloud still has significant obstacles to widespread adoption in the banking industry. The biggest challenge is around data privacy.
Many countries have different — and sometimes inhibiting —regulations around moving data across national borders, says Padmini Ranganathan, senior director, technology marketing for industries, SAP. That can be a big problem for providers such as SAP looking to deploy cloud-based data and analytics applications on a global scale, Ranganathan relates. “The regulatory issues make some markets easier than others, and banks are going to have to face those challenges as well to figure out these regulations,” she notes.
Furthermore, corporations and governments are becoming more sensitive about the issue of letting IT data cross international borders, says Rick Sizemore, a director at Alsbridge, which provides outsourcing consulting to financial institutions. For example, when one company that worked with Alsbridge had to send data outside of Belgium’s borders, it had to get a royal decree to do so, which took six months, Sizemore shares.
“With the news about the NSA’s spying, lots of multinational corporations have fears around their data traversing the U.S.,” he explains, adding that such concerns have prompted some companies he works with to consider moving their data centers outside the U.S.
Despite this regulatory barrier, there is a growing demand in banking IT for cloud-based data and analytics offered on a subscription basis, SAP’s Ranganathan says. SAP reached a deal with Hewlett-Packard earlier this year to offer its SAP Hana analytics solution-as-a-service.
“Now more than ever banks want to get closer to their customers and need to get to know them better, … but handling all of their data in-house is often a challenge,” Ranganathan explains.
Turning to the cloud can help solve many of the data challenges that banks face. This is particularly true of smaller banks that rarely have the resources and expertise necessary to launch big data and analytics projects, says Roji Oommen, managing director, financial services at Savvis, an infrastructure-as-a-service provider. “People want the analytics capabilities, but they don’t want to worry about all of the infrastructure underlying them,” Oommen says.
Savvis is pursuing partnerships with data and analytics providers to offer its data centers to those providers so they can offer their systems through the cloud. “The economics of putting data and analytics in the cloud is really compelling,” Oommen notes. “The infrastructure investments you have to make for data and analytics have to be really big to do it effectively. Otherwise it’s not worth doing it on your own.”
The cloud may enable smaller banks to leverage analytics capabilities that they don’t have the resources or talent to manage on their own, but that lack of data talent still presents risks for banks even if they are outsourcing, says Julien Courbe, PwC’s financial services technology leader.
Without the IT talent who understand data and analytics, a bank may not be fully aware of the regulatory or security risks of leveraging the cloud for those functions, Courbe explains. “Leveraging cloud-based services for data analytics will require banks to enhance their data loss prevention capabilities to protect against vulnerabilities,” he advises. – J.C.