Banks Pushed Toward Cloud Computing by Cost Pressures

U.S. banks have been hesitant to use public cloud services due to security and regulatory concerns, but shrinking profits and pressure to cut information technology spending could soon force them to change their thinking.

The technology consulting firm Gartner has forecasted that, by 2016, poor return on equity will drive more than 60% of banks worldwide to process the majority of their transactions in the cloud. Economic pressure could also force banks to use lower-cost cloud computing services to manage a range of functions, from human resources to customer relationship management to disaster recovery, observers say.

"Financial services is experiencing a fundamental shift in enterprise IT while it suffers from a credit crisis hangover," says Tony Bishop, the chief strategy officer at 451 Research, who built one of the first internal clouds in financial services at Wachovia several years ago.

A secondary reason for switching to the cloud is that the broader economy is shifting towards all things digitally delivered and consumed, over a variety of devices. "This is remaking how enterprise IT must support customers, employees, and partners," Bishop says.

One issue that has concerned banks in using cloud services is "data residency." If a bank uses a public cloud provider that has data centers all over the world, it can be hard for a bank to track where the data is being stored and if it is observing all local rules and regulations. The business continuity requirements of large banks have also slowed cloud adoption, since the banks would have to write new service agreements with new vendors, and that could be time-consuming.

Still, storing data in the cloud can be far less expensive than storing it in-house, and the cost savings could be a powerful incentive for banks to migrate to the cloud.

Some large U.S. banks are facing mandates to cut IT spending by $1 billion to $2 billion, according to Brad Anderson, vice president, cloud and enterprise business at Microsoft. This is a substantial chunk of the budget for these banks, whose annual IT budgets are estimated to be between $7 billion and $10 billion.

Cloud computing is a method of consuming computing resources delivered over the internet, on demand and in a pay-as-you-go model. Public cloud providers include Amazon Elastic Compute Cloud, Google Cloud, Rackspace Public Cloud and Microsoft Azure.

One area where banks have been using public cloud services is in application development and testing, a relatively low-risk activity that doesn't float customer data out over the web. Development and testing lends itself to the cloud model because of its intense, short-term nature: developers need to use high-test servers for a three- to six-month testing period, then turn the whole thing off the minute they're done. Being able to "rent" the servers for the time needed is generally less expensive than buying servers that will sit idle for several months of the year.

Bishop at 451 Research sees banks so far using public clouds for customer relationship management, employee productivity, and human resources applications, as well as for software development.

U.S. investment banks are using cloud platforms for research and development work, points out James Staten, a vice president and principal analyst at Forrester. For instance, they're using the cloud for simulations of trading algorithms and to try new fraud identification algorithms. "We also see use of public clouds for the back-ends of mobile applications and for marketing purposes," he says. In Australia especially, Forrester is seeing the use of public clouds driven by the retail banking side for support of mobile applications and marketing.

Some European banks are considering moving entirely to the cloud, and getting out of the business of running their own data centers. Economic conditions are forcing European banks to make changes to their business models, and use of the public cloud could help them save a lot of money over running their own data centers.

U.S. banks are less gung-ho about cloud computing, but by all accounts they are finding more use cases for the cloud.

One use case is for "spikey" applications in which software use ebbs and flows. One cloud-based provider of risk management software, RiskMetrics, uses Azure to host some of its service, which analyzes vast quantities of numbers to identify potential risks in banks.

"They see incredible spikes at times, where the amount of organizations that want to take advantage of it far exceeds their capability," Anderson says. "They're using Azure as their overdraft." When RiskMetrics sees such a surge, it spins up additional capacity in Azure to make sure it can deliver on the terms of its service level agreements.

Another common use case for public cloud computing in banks is back-up and disaster recovery, Anderson says. The main concern customers have about this is that they want to make sure that data, as it's being transported to the public cloud and while it is in the cloud, is encrypted and only the bank has the keys to unencrypt.

Financial firms can also use the cloud to quickly expand existing services in customer analytics. For example, the insurance company Aviva wanted to offer customers a personalized rate on car insurance based on their driving skills. The company built an app in Azure that can be deployed on Android or iOS phones that captures information about a driver's acceleration, turning, and so forth and uploads that information to Azure. The customer gets a driving score on a scale of one to 100 and a customized rate based on the score. Banks could take a similar approach to customized mobile banking services, using all manner of transaction and location data, observers say.