Advice and Information for Finance Professionals

When "Running the Bank" Is A Lot Like Standing Still

Lynne Sampson
Managing Editor

Guest Post by Bill Greene, Global Industry Solution Director, Oracle

In some cases, financial institutions make a cautious case for simply “running the bank.” Considering how much industry regulations, increased competition, customer behavior and distribution channels are disrupting the industry, maybe the best course of action is— well, to stay the course.

On the other hand, if your competitors are spending more of their time “innovating the bank,” how long can any institution follow a wait-and-see strategy before opportunities are out of sight?

The not-so-rapid adoption of the cloud by so many financial institutions can be attributed partly to concerns about compliance and security. Of the respondents to a European Union Agency for Network and Information (ENISA) survey, 25% felt confusing cloud security regulations in the EU were the main obstacle. The EU Data Protection Directive, for example, governs the storage and transmission of personally identifiable data, which complicates security compliance if service providers have multiple data centers in different locations.

Not unlike people who think their money is safer tucked stuffed under a mattress, some banks believe their data is more secure when stored on-premise. Adrian Sanabria, senior analyst at 451 Group, told American Banker he believes that’s unlikely. With few exceptions, he said, cloud providers do a better job of keeping data secure than most banks can do on their own.

Jim Reavis, president of Reavis Consulting Group agrees. "The top-tier cloud providers provide better security than anybody else," he said in the same article. The cloud is being held to a higher standard of security than institutions' own internal IT systems. “When I hear stories of what even large companies are doing in their own internal IT systems, I really cringe,” he added. “I don't hear as many of those horror stories among cloud providers. They have to have good security or they go out of business."

Still, it’s not surprising that some traditional financial institutions are sitting back and waiting for their competitors to test the waters first. The problem with that strategy is that these businesses may be watching the wrong institutions. As many bank executives acknowledge, early cloud adopters, including fintech, social media networks, telecoms companies and retailers, are chipping away at their business.

Retail banks surveyed by Oracle believe that by 2020, private-label banks, fintech startups and alternative payment method providers will be a greater competitive threat to them than other traditional retail banks.

Last year, private investment in fintech companies reached $19 billion, up from $1.8 billion in 2010, according to The New York Times. It cited a report by Citigroup that said the impact of fintechs would push down the number of employees at American banks by nearly 31%, from 2.6 million last year to 1.8 million by 2025. For European banks, the drop would be as much as 37%.

What If You Can’t Catch Up?

To win in a highly disrupted business environment, financial institutions need the agility to innovate and react quickly. To move from running the bank to innovating the bank, they need faster access to information to make decisions about where to invest or develop new products. And they need applications that are updated every six months, as new technologies hit the market—not upgraded on premises every six years.

CFO Guidebook: Best Practices for ERP Cloud MigrationsA majority of surveyed financial institutions do seem to recognize the value in migrating to the cloud. According to the ENISA report, 88% say that migrating to the cloud can reduce total cost of ownership. Just over half—52%—acknowledge that the cloud provides more infrastructure and pricing flexibility. Seventy-one percent pointed to reduced time for provisioning. And 54% expect reduced time to market with cloud services.

Cutting costs is especially important in an industry with tight margins. The current interest rate environment is not helping banks maximize returns on their lending book. As Yahoo Finance reported, banks are struggling with low interest rates that are squeezing margins, and volatile markets are slowing investment banking activity.

By transitioning to the cloud—moving from a CAPEX to an OPEX model—institutions can drive cost out of the business to support strategic initiatives. With increased speed to information, and a laser-like focus on key drivers of the bottom line, banks can better understand what they need to do to succeed.

And with the increased agility that cloud-based solutions support, financial institutions can quickly enhance product and service offerings to differentiate themselves from the competition—and maybe even create some disruption of their own. When Delaware Life was spun off from SunLife, it had no had no technology infrastructure whatsoever. By running its back office in the cloud, the company found the scale and power it needed without a costly, up-front investment.

Other financial services institutions are benefitting from similar efficiencies. When a major U.S. bank tested cloud platforms, it determined it could realize cost saving of as much as 50%, according to MarketResearch.com. A Taiwanese bank is realizing up to a 50% reduction in IT infrastructure costs after moving from a mainframe computer to a private cloud.

For the team in the back office, promoting a migration to the cloud offers extra benefits. When freed from the more mundane accounting tasks related to maintaining the general ledger, finance teams can become strategic partners in the overall success of a company.

As many CFOs are discovering, the efficiencies generated by moving core processes to the cloud allow them to pivot away from those day-to-day tasks of closing the books and producing the reports. By using the cloud to create automated and collaborative environments, finance teams can focus on more forward-looking, strategic projects.

Making the Move

For well-established financial institutions, moving to an agile cloud environment is going to require some patience. Even if their key concerns about the cloud are addressed, most still see the challenge of overcoming their legacy systems as a big barrier.

With that in mind, a go-slow strategy is well-advised. Some of the big-bang approaches I’ve seen fail to deliver expected results. Financial institutions that have dipped their toes into the cloud by implementing solutions for a single line-of-business—such as finance or HR—or to support a specific process like planning and budgeting, have had great success. Lessons learned while proving out initial migrations generally lead to much faster and more effective ramp-up of additional solutions.

Many organizations are discovering that their staff is ready to make the change. The people who have been coming into the workforce for the past several years are well-adapted to new technologies. So their ability to leverage these new tools will accelerate how quickly cloud adoption can benefit an organization.

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