This article first appeared in the Autumn 2016 issue of The Record.
A remarkable shift has occurred in the financial services industry, with institutions shedding their caution about the cloud and embracing its capabilities. “Three years ago, most banks said they would never move to the cloud,” observes Sean Foley, chief technology officer for the financial services industry at Microsoft. “Two years ago, many understood the benefits but felt the timing wasn’t right. But over the last 12 months or so we’ve seen a massive shift in the number of banks adopting cloud.”
That shift is driven in part by the evolving regulatory landscape. “Banks have always wanted the agility, cost savings, security and management capabilities the cloud can deliver, but they were wary of the regulators saying no,” says Foley. “Many regulators see huge benefits to their institutions in moving to cloud, but they were concerned that banks needed to understand cloud and implement it in a responsible way.”
Over the past three years Microsoft has engaged with financial regulators to help resolve those concerns. “We’ve met with financial regulators around the world to understand what they’re looking for from banks,” says Foley. “Some of the largest regulators – such as the Financial Conduct Authority and Prudential Regulation Authority in the UK and the Australian Prudential Regulation Authority – are embracing cloud and issuing guidance to their institutions on how to use it. That has helped banks to feel more comfortable with their ability to use cloud at scale, and it’s led to the sea change we’ve experienced in the last 12 months.”
It’s good news for banks, as the cloud offers significant opportunities for competitive advantage. “Banks are looking to move much more quickly and compete, particularly with fintech start-ups,” says Foley. “They’re looking to the cloud for things like significantly speeding up product development, and a lot of banks are taking advantage of areas like risk modelling to produce better products and be more fine-grained in terms of pricing things like risk. We’re seeing this in investment banking, with banks like Mitsubishi UFJ in London doing work in that area, and in insurance, with large insurers such as MetLife using actuarial modelling solutions in the cloud to create and price new products much more competitively.
“We’re also seeing a huge focus within the large banks on reducing internal IT costs. A lot of the regulatory changes resulting from the financial crisis are taking effect now, and banks are being asked to keep more money on hand in case things go wrong. They’ve had to reduce the size of their operations and many have cut their core projects back as much as they can, so they’re looking at the last remaining area of spend, the data centre. Our work with some banks shows that up to 80% of their applications are movable to public cloud, and a lot of banks are looking to move 40-60% of their internal data centre spend over to public cloud in a three- to five-year horizon. This is happening with the large European banks in particular, but we’re also seeing it happening with some of the large Asian and US banks.”
As well as providing one of the largest clouds on the planet, Microsoft’s work to develop a cloud that is ‘financial services ready’ has resonated with banks and regulators. “We introduced our financial services compliance programme three years ago and since then we’ve seen a huge shift in appetite, with 80% of the globally systemically important financial institutions adopting Microsoft’s cloud in the last 12 months,” says Foley.
A key differentiator is the fact that Microsoft doesn’t simply provide infrastructure as a service. Some of the world’s largest banks are now adopting Microsoft Azure, Office 365 and Dynamics CRM Online as a core part of their internal operations. These are combined with platform-as-a-service capability to deliver cost savings and benefits in terms of cognitive computing and machine learning, allowing banks to create unique products and customer offerings. “Because Microsoft’s approach is much more open than other clouds we can take any kind of software and run it on our cloud today,” says Foley. “That allows us to take on a much wider range of workloads on behalf of banks and, combined with services like Office 365 and CRM Online it allows banks to mix and match how they want to use the cloud.”
As the foremost provider of hybrid cloud, Microsoft also enables banks to move between their own datacentre and the public cloud according to their needs. “The public cloud can be more cost effective and scalable, but sometimes banks want to keep things such as proprietary trading models in-house,” says Foley. “We provide the ability to choose where an application runs, giving banks flexibility as well as the ability to take advantage of cloud scale economics.”
Looking ahead, Foley says that the cloud will continue to build momentum among banks. “We’re going to see more regulators in other geographies, particularly in Europe and the US, looking at their existing guidance to see whether that should be updated for cloud,” he says. “That will accelerate the rate of cloud adoption by banks, and now that a lot of the largest banks have begun to embrace it, we’ll see a trickledown effect. Some of the domestically important banks will adopt cloud directly, and Tier 3 and Tier 4 banks will adopt it both directly and indirectly as third-party service providers such as core banking providers move more of their services to cloud. For any computationally intensive workload, the cloud holds huge opportunities for banks.”
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