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Financial institutions are moving to the cloud as quickly as they can; however, many of them say their ability to unlock value is lagging, according to PwC’s cloud survey. The result isn’t surprising given banking’s costly regulatory and security needs. Early attempts to “go big” with the cloud mainly drove up costs, and the cloud ecosystem fell short of promised gains.
But now, influenced by the digital transformations that accelerated throughout the pandemic, banks of all sizes see themselves operating in the cloud as a way to respond to customer demand, fend off competitors, boost efficiency and enable accelerated growth of the business, a trend noted in our Next in Banking and Capital Markets report.
Applying lessons learned from the past decade, today’s banking leaders are using strategic cloud spending — a modular approach that prioritizes projects with well-defined objectives that advance a bank’s core business goals.
Strategic cloud spending in financial services, while complicated in detail, can be straightforward to put into practice: pick an area to prove the concept, use a digital business model to monetize it and apply the lessons learned to inform your work on the next cloud project.
Examples we’ve seen:
- Customer engagement
- Cross-border payments
- Real-time payments
Customer engagement
A retail bank gained deeper customer engagement by creating an artificial intelligence/machine learning (AI/ML) platform that used behavior patterns to generate personalized messages such as loan offers, overdraft warnings based on past spending and currency exchange-rate promotions using geolocation data.
Cross-border payments
Another bank implemented quicker, cheaper (yet secure) cross-border payments by automating the authentication of payers and payees to meet know-your-customer and anti-money laundering regulations, and it did so within a resilient system that processes and settles global payments efficiently and cost effectively.
Real-time payments
And a regional bank introduced real-time payments for car purchases, and it’s extending that innovation to other automotive-related transactions.
This modular approach to the cloud is a virtuous circle building the skills, employee talent and internal processes that can bring future cloud projects to completion on ever-faster timelines. The result is the building — step-by-step — of a cloud-powered bank.
As always, maximizing cloud ROI requires:
- Clear goals
- A focus on the customer’s needs
- Embracing digital business models
- Reimagining the work of both front-line workers and managers
- A people strategy that identifies the workers with the best skills for a project
While growth drivers are becoming more important to cloud transformations, banks are not taking their eye off of expense reduction. They’re using strategic cloud spending to tear down internal bank silos, speed up decision-making and subject AI/ML output to human oversight as ways to attack profit-eroding inefficiency and to prepare for the future while still providing enhanced customer service.
Perhaps the biggest value gap in the early days of cloud development was treating it as another piece of technology rather than as a revolution that could reorient a bank’s operations. Now, banks can embrace cloud-native architecture for their highest value projects by integrating it into their operations to build a competitive advantage.
Actions the CEO, CFO and CTO should consider taking as they push more aggressively for their institutions to use the cloud.
Three words: Scalable growth advantage
Banks are coming around to the view that the only scalable growth advantage is a more nimble, modern technology system, one that speeds up time to market and helps their bank deliver what clients demand: real-time, customized, frictionless banking services. To achieve that nimble system, executives are using strategic cloud spending to methodically work toward their goals, knowing that it’s unrealistic to quickly move an entire legacy system to the cloud.
The new thinking around cloud investing is an acknowledgement that even if a scalable growth advantage lasts six months to a year before competitors catch up, that can mean a material increase in client acquisitions and improved results.
Credit the pandemic for shifting executives’ vision of how to achieve a cloud transformation. Digital and mobile apps delivered increased customization and more client engagement, opening an opportunity to grow in ways that traditional banking couldn’t match.
One regional bank, for instance, reported in its earnings results that chat sessions are up nearly 300% year on year. Another institution said nearly two-thirds of its loan sales now occur online or on mobile, displacing branches and phone sales. And 61% of the respondents to our latest digital banking consumer survey told us they banked digitally during the prior week, a number that seems sure to grow.
Banking cloud grows up
Helping the strategic cloud spending approach is the rapid maturation of the financial services industry cloud. There’s a growing range of core banking capabilities offered that many banks would find difficult to build on their own. With today’s industry cloud, a bank can rapidly architect and stitch together the data, technology and processes from different cloud service providers to handle tasks such as payment processing, customer relationship management and client onboarding. Here at PwC, we’ve considered how a bank should function from an operational, technical and cost perspective, and we’re investing in the PwC Industry Cloud for Banking to speed modernization, reduce deployment complexity and lower cost.
In the past, banks saw many deficiencies in cloud-based systems for important, regulated tasks. But recent cloud-computing innovations have brought parity, maybe even superiority, in core operations that many banks still run in data centers. As time goes on, the innovations might weaken the argument for sticking with costly, inefficient or rigid legacy systems.
Adapt or perish
The banking industry’s cloud motto for the next few years could very well be “adapt or perish.” Merely adopting the cloud is not enough.
Adapting to the cloud is where banks need to go (read PwC’s five tips for how to wisely approach a cloud transformation). To grow revenue while simultaneously boosting efficiency, many bank leaders are breaking up the silos that prevent the cross-pollination of ideas that can lead to new digital-native products.
Old ways of thinking about where technology spending lands on the balance sheet also has to adapt to the cloud. A bank’s view of itself has to morph into a tech-powered, financial services company. From that perspective, it becomes clear that the cloud is an operating expense, not a capital expense.
Consider the case of an institution working in software as a service. They’re measuring how much they’re using the new tech across the organization to foster revolutionary change, instead of measuring the speed and flexibility that the new tech allows.
Get your head in the cloud
The growing use of strategic cloud spending is an encouraging sign. Those banks that are more fully embracing the cloud are uncovering not only the world of opportunities it makes possible, they’re also figuring out how to use those opportunities to their competitive advantage. The flexibility of the technology means each bank can amplify its unique value proposition, more effectively communicate that value to new customers and blunt the revenue impact that is likely to come from emerging competition and product commoditization.
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