Financial services companies are reluctant to use cloud-based services because security and privacy are imperative in this strictly regulated sector. At a minimum, these companies see industry auditors every 18 months. When privacy and security measures are breached, the consequences can be devastating for customers, shareholders, company officials, and employees.
A study by the Cloud Security Alliance confirms this. Sixty-one percent of financial services industry survey respondents said a cloud computing strategy was only formative in their organizations; 39-41 percent said their IT strategy would be a hybrid mix of cloud and in-house computing; and 18 percent said their cloud strategy would largely be confined to using private clouds.
What to watch for when choosing cloud providers
When adopting a cloud strategy, financial services decision makers should avoid the following.
- Cloud providers that use third-party data centers, because the vendor does not have total control over what can happen in the cloud.
- Cloud providers that are unwilling to furnish up-to-date security, compliance, and financial health audits.
- Cloud providers that lack financial services expertise or sensitivity that the IT and governance demands of the financial sector require.
Cloud options that may appeal to financial firms
It is clear that the majority of financial institutions prefer to keep their data and systems in-house. However, even in this environment, there are established and emerging opportunities for cloud providers.
1: Card and mobile payment processing -- Visa, MasterCard, and trusted third parties
Some large banks process their own credit, debit and ATM transactions, but a majority of banks and credit unions select Visa, MasterCard, or a trusted third-party processor with a cooperative agreement with Visa or MasterCard to process their card and mobile transactions. These card and mobile payment processors now operate in the cloud. The processors provide financial institutions with the specialized expertise needed in card processing, and they back this with decades of experience in fraud detection and security.
2: Marketing and customer relationship management
Most banks and credit unions, regardless of size, struggle with marketing. Their marketing staffs are comprised of persons with expertise in developing and launching campaigns and promotions, but they falter when it comes to researching and segmenting markets so they can target products optimally.
These institutions also have little know-how in how to develop finer-grained analytics that can further dissect market segment needs. Tellers and customer-facing representatives in internet chat and phone service centers are no better -- many have little understanding of what individual customers need, or how they can help.
Cloud providers such as OMI provide market research and analytics that enable financial services companies to segment their markets and target their products so they can grow their customer bases and product penetration. Salesforce has emerged as a leading cloud provider for sales and customer relationship management (CRM) that helps front-line employees, because of its ability to combine customer intelligence from all sales and service channels into a 360-degree view of each customer.
3: Core banking
Large financial institutions maintain their own core banking systems, but this isn't always possible for small to medium-size banks and credit unions. For those institutions, the best choice is to find a trusted cloud services provider that understands the financial services space and can provide a turnkey banking system that starts with the teller line, online banking, and electronic billpaying, and extends all the way to the back office.
Well-established cloud services providers in this space are Fiserv and Jack Henry & Associates. Both companies offer a choice of cloud-based core banking systems.
4: Human Resources and talent management
As in-house Human Resources (HR) systems age, more financial services companies are considering cloud-based HR that offers not only core HR software like payroll and benefits, but also emerging HR software like talent management, which enables companies to recruit better, as well as develop employees and manage succession plans. Popular choices for the cloud in this area include Oracle HCM (Human Capital Management) and SAP/SuccessFactors.
5: Infrastructure as a Service
Like companies in other industries, banks and credit unions are concerned about the rising costs of running data centers. Some are opting to move their application development and testing to cloud-based Infrastructure as a Service (IaaS) providers so they can avoid costly hardware and software upgrades. Once applications are tested, they are moved back into the production environment in the bank's own data center. In other cases, banks and credit unions use cloud services to offload risk management processing of large portfolios.
First National Technology Solutions offers IaaS to financial institutions for application development, testing, disaster recovery, failover, and data storage. In the risk management area, Amazon Web Services (AWS) is being used by some large banks to run portfolio credit risk simulations in as little as 20 minutes.
Best practices when adopting cloud
The good news is that the financial services industry is already well on its way to establishing best practices when it comes to working with cloud vendors. Among these best practices are:
- Almost always agreeing to go to the cloud only if the cloud provider is SaaS (i.e., it can offer financial expertise for its products that meet or exceed what the financial institution has internally);
- Entering into trial or 'try and buy' arrangements with cloud vendors before inking a services contract;
- Insisting to test disaster recovery and failover with the vendor at least once a year to ensure the vendor's systems will stay up and running during a crisis; and
- Insisting on a single point of contact account representative or manager from the cloud provider.
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