Cloud computing in financial services: a reality check

A rapid shift in attitude towards cloud computing is happening within the financial services industry. A recent Gartner survey (1) found that cloud is the top priority for global FS CIOs, yet the hype surrounding the topic often suggests otherwise. IBM’s Nick Davis cuts through the noise to answer the question – what is really happening with cloud computing in the financial services sector?

What is all the fuss about?In technical terms, a cloud computing platform automatically assembles, connects, configures and reconfigures virtualised technology resources to accomplish business goals.

In business terms, it eliminates the constraints of where physical IT resources are located or what specific technologies they employ. This enables the rapid, low-cost formulation and deployment of new business services and new partnerships.

Although the technology is still immature in many places, cloud is a top priority for organisations that need to continue a long-term focus on efficiency and boost their growth strategy by becoming more flexible and agile, supporting new business models, markets, channels and products.

Speed is of the essence

The financial services industry today is a mixture of both opportunities and challenges, including exponential growth in emerging markets, shrinking operating margins, a tighter regulatory framework, and competition from new market entrants. To tackle this complexity, businesses need to find new and more creative ways to increase their agility, efficiency, cost-effectiveness and responsiveness. As the pace of change grows, financial services companies will need to move ever faster to deploy new products and services.

As an enabler of innovation and a catalyst for change, cloud computing promises to play a significant role in the banks’ efforts to reinvent their business and operating models in the coming years. Indeed, the same Gartner survey says that 39 per cent of those surveyed expect that more than half of all their transactions will be supported via cloud infrastructure and software as a service (SaaS) by 2015.

This tallies with my own experience working on cloud business development in the financial services sector for IBM – uptake is on the rise. I have found many financial services companies are initially utilising cloud computing for test and development – this represents a relatively low-risk workload for organisations, while offering significant potential for rapid ROI. However, a lot of my conversations with individuals often turn quite quickly to questions about security, so I will deal with this issue first.

Cloud computing can solve security issues

Many concerns about cloud are not well-founded. That is not to say that organisations should not plan their cloud implementations carefully, taking into account the compliance, data management and security policies. However, many of the common concerns about cloud apply equally to technologies already in use, and yet do not seem to have stopped anyone from using them. In fact, there are important issues that can be solved by storing data and applications in the cloud.

For example, the growing Bring Your Own Device culture in the workplace can create a real headache for IT teams. In one sense, it is helpful for employees to bring in their tablets and smartphones if they work better (and are happier) on these devices, but crucially, if company data is on a personal device, there are some serious questions to be answered: Is the device secured to a level that complies with company policy or the regulatory environment? Who owns that data? How can compliance be enforced? How secure is data if the device is mislaid or stolen?

A well-implemented cloud solution can solve these problems by holding the data in a much more secure environment (eg a data centre) than a personal device, and allowing access through a secure connection like a VPN. This can kill several birds with one stone. No data is stored on personal devices, ensuring the organisation retains full control over its data while enabling compliance and security policy to be enforced – with the added perk of allowing the CEO to show off his new tablet in meetings! If, on top of this, there is a need for extra security platforms for mobile devices, many of these can be hosted in the cloud too.

By choosing a trusted partner to deliver its cloud services, a business can take steps to be sure that their critical systems and data are protected by the right mix of consultancy, software, hardware, and managed security services.

The real risk of cloud

One of the biggest and yet most understated risks around cloud computing is the risk of being left behind by non-adoption. Cloud models enable competitors to appear almost overnight, without needing heavy capital investment in infrastructure and IT. Moreover, cloud enables business agility – the ability to rapidly change direction in response to market forces, and to re-provision resources quickly from shrinking market sectors or business lines.

Some of the specific benefits of a cloud model that help companies to grab a foothold in a market so rapidly are:

• Self-service IT – hardware, software and applications can be deployed almost immediately from a menu of services
• Automatic provisioning – capacity that scales automatically with demand – an elastic IT platform that can cope with spikes in demand without human intervention or increased administrative costs
• Standardised environment – enabling simultaneous service deployment and upgrades for all users, regardless of location

The recent cloud deployments by NASDAQ and CME (NASDAQ Data-On-Demand and CME DataCloud) are good examples of this. The exchanges have experienced multi-faceted benefits, driving down the cost of managing exponentially increasing levels of market data while reaching new potential customers and generating revenues from that data. Furthermore, levels of automation have increased and the data is managed in a transparent and regulatory compliant manner at less cost.

The case for public, private and hybrid clouds

Taking a template-style approach to cloud deployment is not likely to deliver an IT system that supports the strategic goals of an organisation. Particularly in financial services, it is important to balance the cost and flexibility benefits of a public cloud with the regulatory requirements around data in the industry, and the need to keep critical systems running to avoid the dreaded cost of downtime.

A hybrid model is often deployed within financial services to ensure redundancy and optimal performance. Critical applications and data are run from a private cloud and elasticity and burst capacity are provisioned through a public cloud partner. This model enables the security of a private network for the most sensitive work and information such as trading systems, while also enabling cost-effective solutions for less critical data and application such as end of life data for archiving.

Another model is to develop a private cloud to meet specific business goals and to recoup some of the costs by selling that same service to other businesses with similar needs.

For example, an insurer might develop a private cloud-based case management system to reduce their IT overheads and business agility. This cloud could enable a consistent experience for customers and employees globally, as well as enforcing business processes – ensuring regulatory compliance and transparency. It is very likely that this case management system would work well for another insurer with a focus on a different segment of the insurance market or a business in a completely unrelated sector. Neither business could justify the investment in their own private cloud, but would be interested in purchasing a case management solution that is already tried and tested by an industry peer. This opens up a potential new revenue stream for the originator of the cloud-based system.

A technology of empowerment

In conclusion, it is crucial to weigh the risks of cloud in a logical manner. While it is vital – as with any IT deployment – to be prepared for any potential issues arising from adoption, itis also important to balance possible pitfalls against the lost opportunities and cost of not implementing cloud.

The debate around cloud computing has often focused on security, but to fixate on this alone is perhaps to miss the opportunity to redefine IT in a way that is more agile, more strategic and more effective at delivering quality resources to employees.

The market leaders of the future will be exploiting this technology to its full potential: using it to empower employers, to get closer to their customers, and to rapidly roll out products and service to meet changing market conditions in a way that has not been possible with legacy IT models.

1. Gartner Says Cloud Banking Can Drive ‘Creative Destruction’ in the Banking Industry

Half Of Senior Risk Executives Interviewed At Leading Banks Believe Risk Information Across Enterprise Is Inadequate

London – 28 September 2012

White Paper Reveals About Two Thirds of the Institutions Interviewed Are Currently Reviewing Risk Infrastructure to Enhance the Value of Risk Information Across the Business

Half of senior risk executives interviewed at leading banks believe that capturing and processing risk information across their enterprises is currently inadequate. Additionally, seven in 10 financial institutions sampled* acknowledged that they are currently reviewing their risk infrastructure to better understand risk information, according to a White Paper by IDC Financial Insights sponsored by Sybase, an SAP Company (NYSE: SAP) and industry leader in enterprise and mobile software.

Based on interviews with senior risk executives from tier one and tier two financial institutions, the White Paper examines the role of the risk function in optimising the effectiveness of capital allocation and consumption at all levels of a financial institution.

Rachel Hunt, Head of EMEA IDC Financial Insights commented: “In recent years the banking industry has paid lip service to the importance of the risk function; however, the White Paper shows that now the Chief Risk Officer is being empowered to deliver a more proactive strategy that is focused on value creation rather than simply managing financial risk in arrears. The challenge with playing such a pivotal role is the pressure on risk management performance has intensified.”

“While senior risk executives are required to play a more strategic role and drive capital opitmisation in the post-crisis world, they are in danger of being undermined by a restrictive legacy technology that severely impedes the value of risk information. Forward looking firms will invest in risk data infrastructure to ensure that high quality risk data is consistent and available throughout the organisation,” said Stuart Grant, Financial Services Business Development Manager at Sybase, an SAP Company.

According to the White Paper, eight out of 10 view the risk management role as a strategic partner to the board, whilst seven out of 10 cited its importance in driving strategy across the business. Once a reactive tool, the risk management paradigm is evolving to take on a decidedly more proactive approach that creates value. The front office faces strict internal mandates to take responsibility for the risk it originates. While a few banks are able to refresh this type of information intra-day, real-time updates delivering value to the business are viewed as a distant prospect. Many institutions are still forced to accept trade-offs between timeliness, reliability and completeness of analysis when it comes down to risk, liquidity and capital information.

“In the coming months and years, risk management has the opportunity to cement its recently attained status as the core of a financial institution. However, this will require material investments of time and money to bring the risk information and analysis capability to a level of implementation commensurate with the demands of today’s world,” Grant added.

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Marcelo Blank