If you work in the financial services industry, you’re forgiven if you’re suffering from a bit of cloud fatigue. The rise of cloud technology and its implications have been hot topics on Wall Street for years now, and rightly so – the benefits are immense and will inform the digital strategy of countless firms in the years to come.
What’s often overlooked is that for banks and buy-side firms, there are two sides to the cloud conversation. The first surrounds the platforms they develop in house, whether internal or customer-facing. The debate over whether to move these to the cloud gets a lot of attention from the C-suite, and just about every aspect of the decision generates a lot of discussion in professional circles, from cost savings to potential security issues.
This mindset betrays a fundamental misunderstanding of how cloud technology providers operate
It is the other side of the cloud conversation – the one surrounding applications sold to banks and buy-siders by third-party vendors – that often isn’t discussed. Many on the Street are aware of these cloud-based apps and see them as an important part of their firm’s future, but there doesn’t seem to be much urgency to adopt. They like to feel in control of the platforms they’re using, and after all, no one gets fired for saying no, at least according to the proverbial wisdom of Wall Street.
Unfortunately, those with this attitude are viewing the issue through a foggy lens. Instead of the wait-and-see approach popular among executives, it is paramount that banks and buy-side firms suspend their cloud anxiety and work more closely with the fintechs developing these game-changing platforms. Those that don’t act quickly could be missing their best chance to steel themselves for a future that looks radically different from the industry as it exists today.
Let’s go over a typical exchange between an overly cautious bank and a third-party vendor. The vendor offers a powerful cloud-based platform with the ability to uncover insights or streamline workflows, but in order to access these efficiencies, the bank must provide confidential customer data. To avoid putting this data on the cloud, an on-premises installation is requested. To the bank, this appears to be a sufficient compromise: the bank gets the powerful functionalities without having to move its data.
This mindset betrays a fundamental misunderstanding of how cloud technology providers operate. On-premises installations are more expensive than cloud deployments, and that necessitates time and resources from both firms that could be better spent on innovation. These providers stake their business models on the idea that they can pour vast resources into improving their products, and every dollar spent on outdated processes takes away from that value proposition. In other words, for these vendors, the cloud is not just a matter of client preference – it’s woven into their DNA.
And yet, there are banks out there that flat-out refuse to work with vendors who insist on a cloud deployment. While they may feel secure in their current position in the market, institutions with this attitude have everything to lose. Wall Street’s slow rate of cloud adoption is an utter disaster, and if incumbents don’t act swiftly to modernize their technology strategy, newcomers will rush to fill the gap.
Consider big tech – what if Facebook or Google decided they wanted to become a bank or an asset manager? Yes, much is made about the long-term ambitions of these companies, and they have yet to significantly cut into the profits of Wall Street giants, but the momentum around their financial services arms is undeniable – Amazon, in particular, has been very active in this area, with their own payments and lending services in addition to the tools they provide to the old guard.
Big tech is far along in the digital transformation process and deeply immersed in the cloud. There is no chance that they would tolerate the same technological inefficiencies that have been present on Wall Street for so many years. This ability to integrate the latest software, along with their deep pockets and their longstanding presence in the daily lives of consumers, could add up to a nightmare scenario for the established players.
Even without the looming threat posed by Silicon Valley, banks that refuse to change with the times will be displaced by forward-thinking startups sooner or later. Diving headfirst into the cloud enables far more innovation than older means of on-premises installation allow, and this dynamic will compound as the technology providers grow and multiply. Something has to give.
To be clear, it’s not that banks are foolish for being cautious – there are legitimate security and compliance concerns, and due diligence must be done. But that process should not result in them stubbornly throwing up roadblocks. If banks want fintechs to help them modernize, they cannot create unreasonable requirements that compromise the business models of these providers. The cloud is the present and future, and banks are not well served by preventing its use.
As far as we’ve come over the past decade, this is one corner of the cloud conversation that doesn’t receive the attention it warrants. Banks and buy-side firms must act swiftly and consider a wholesale reevaluation of their policies around working with third-party vendors – otherwise, they may lose their last best chance to prepare for a future that will not accommodate the status quo.
