Since the concept of FinTech gained mainstream popularity in 2014, the financial services industry has been actively developing or acquiring technology solutions to streamline its operations and enhance its customer service offerings. However, as with any investment in technology, system resources (such as RAM or storage space) are required, giving rise to additional hardware and labour overheads. As the industry continues to grapple with ongoing cost headwinds, especially in the wake of mounting regulatory hurdles, many banks are increasingly looking to cloud technology as a more efficient and cost-effective alternative to support their digital transformation programmes.
At its core, cloud technology enables the provision of system resources through the internet. Technological infrastructure is built and maintained by a third-party service provider, with system resources provided to customers on a pay-as-you-go basis. Due to the nature of this sharing economy, the outsourcing of technological infrastructure is generally much cheaper than the onsite development, maintenance, and operation of IT infrastructure.
Recognising the numerous benefits offered by cloud technology, including scalability, reliability, and cost-efficiency, banks have been increasingly adopting cloud-based solutions in areas such as data storage, application development, client servicing, and digitalisation. In fact, we estimate the global banking industry spent USD 8.5 billion on cloud services in 2017 and forecast this number to reach ~USD 32 billion by 2023.
The ability for cloud technology to drive cost savings in the banking industry is far from trivial. We believe that migration to the cloud has the potential to reduce bank technology spend by ~20% over the next five years, underpinned by a considerable reduction in hardware expenditure, as well as spend on in- house labour. With leading global banks allocating an average of 7-9% of their costs on technology, this translates to a ~1.6% reduction in overall costs for most players by 2023.
Whilst we recognise the progress many banks have made in leveraging the cloud for such endeavours, we believe cloud technology has been heavily underutilised in driving internal collaboration.
With the rise of the internet of things (“IoT”), connectivity and collaboration between diverse individuals are widely viewed as critical for sustained growth, especially given the many benefits they can bring to corporations, such as enhanced productivity, greater flexibility, and improved innovation. However, while “teamwork” and “collaboration” are touted as key corporate values by nearly all firms in the banking industry, banks are notorious for operating their businesses in an extremely siloed manner. This is exacerbated by a corporate culture in which employees are encouraged to compete against (and outperform) each other, instead of being incentivised to work together to contribute to a better overall result for the company. As a consequence, collaboration often ends up being more of a marketing strapline than an internal reality.
In addition, we believe cloud-based collaboration applications can meaningfully enhance collaboration efforts within many institutions, enabling employees to work together in a seamless manner by providing them with a host of functionalities, including centralised communication and file sharing, real-time synchronised file-editing capabilities, and project management tools. Beyond this, we see considerable potential for cloud-based collaboration tools to streamline work efforts with external parties, such as lawyers and consultants, on major transformation projects.
Through the adoption and effective utilisation of cloud-based collaboration applications, we believe successful players can achieve an additional 1-2% uplift in revenues (stemming from increased cross- / up-selling and better client servicing) and a further 0.5% reduction in costs (driven by process streamlining and the elimination of duplicative procedures, allowing for considerably faster rollout timelines). Taken together, we believe cloud technology and related collaboration applications have the potential to reduce the cost-to-income ratios of leading global banks from ~85% to ~82% over the next five years.
There are, of course, several key obstacles facing the banking industry when it comes to the adoption of cloud technology, particularly around data security. Regulatory demands in certain jurisdictions with respect to data privacy and security (including data onshoring requirements) have created considerable industry reluctance around the use of public clouds.
This problem is particularly acute in heterogenous regulatory environments like Asia Pacific, making it more challenging to adopt cloud-based solutions while addressing a plethora of non-standardised compliance requirements from multiple local regulators. To combat this, we believe banks and cloud providers will need to work closely together in coming years to lobby regulators into becoming more supportive of the use of public cloud technology, including pushing for greater international regulatory harmonisation. However, this education process will inevitably take some time.
It is also important to note that technology alone will be unable to deliver our profit uplift forecasts.
Cultural change is needed, which should include relevant policies and processes to support collaborative behaviour. In addition to utilising the most suitable collaboration systems and tools, banks need to design and implement appropriate incentive systems, governance structures, and communication strategies, in order to achieve a more fundamental shift in employee mindsets to fully reap the benefits of supporting technology.
Whilst we recognise that a technological overhaul and a substantial change in mindset requires significant time and upfront investment, we believe banking on the cloud is vital for firms looking to not only enhance their digital transformation programmes, but also supercharge their collaboration efforts.
