Cloud adoption in European and Latin American banks | NTT DATA

Tue, 13 December 2022

Cloud adoption in European and Latin American banks

For banks, having a presence on the cloud is no longer just a competitive advantage – it has become an outright necessity.

Analysts and hyperscalers have found that 82% of banks in the EMEA region plan to increase investment in cloud, while an IDC report estimates the banking industry’s overall investment in public cloud to rise by more than 16% per year.

In this blog post, we will look at why banks are moving towards the cloud, some of the main challenges they face and some of the different approaches that banks in Europe and Latin America have adopted to address these challenges.

Why they are moving towards the cloud

Fundamentally, banks are moving to the cloud to stay competitive.

Established, traditional banks will simply not survive if they cannot keep up with more modern challengers. It is important to note that they are not just competing with other banks, but also with cutting-edge fin-techs, and even telecoms or insurance companies. This threat is not going away - according to Celent, “75% of banks believe that the threat from fintechs and challenger banks is higher than it was a year ago”.

Some of the primary benefits that banks seek from cloud computing, of course, are cost reductions and efficiency increases. 69% of UK banks see cost optimisation as a primary business objective of cloud adoption, while Celent estimates that switching to cloud-native core platforms can reduce maintenance costs by 80%. Being on the cloud can reduce costs because computing is handled by the cloud providers, who operate and manage resources on a massive scale and so can make sizeable savings.

There are several other benefits that contribute to the move towards the cloud. Scalability is one – the cloud allows banks’ computing demand to rise or fall without creating any problems.

Innovation is another – the cloud and its ecosystems are a huge site for innovation and give banks access to lots of new market opportunities. For example, what we call “green cloud” is currently an important area of focus for bank executives taking sustainability initiatives seriously.

Agility is yet another benefit - being on the cloud makes new projects much easier to adopt and allows for dynamic expansion and experimentation. A report by Mambu in collaboration with Celent found that cloud migration increase speed to market of new products and services by 85%.

Challenges to cloud adoption

While the cloud offers huge benefits, its adoption also presents obstacles.

The biggest challenges banks face relate to culture and skills. To get the greatest benefits from cloud computing, banks must be willing to update not only their software but their mindset. They will have to provide training and up-skilling for their existing staff and also hire new, cloud-capable talent.

This can be very difficult, as there is fierce competition for talent, and some young cloud professionals have a negative view of banks as outdated institutions. Banks which wish to stay relevant must put serious effort into changing this view and showing that they are modern, dynamic players. It is clear that this is acknowledged as a significant hurdle, with 73% of UK banks reporting that knowledge and experience were some of the top barriers to public cloud adoption and almost 50% seeing culture change in a similar way.

There are other, more technical problems. One is that lots of applications that banks use are not cloud-compatible without a lot of re-engineering. The journey of moving these processes to the cloud can be extremely laborious and costly in terms of both time and resources. Sometimes the business case is just not sufficient, so other options to move from or optimise the mainframe, or even to avoid re-engineering certain applications and ‘tolerating’ them (ie retaining them unchanged) must be considered.

Additionally, banks’ use of the cloud will usually involve various different infrastructures (on-premise and public) and providers. Managing all of these is a challenge that must be addressed.

The move to the cloud will also not be instantaneous but instead will occur over months or even years. During this period, there will by definition be a mixture of legacy and cloud systems whose coexistence must be managed. According to Everest more than 90% of BFS enterprises in the UK still depend on legacy systems to some degree. As well as causing technical problems, this can also mean that cost savings will not be experienced over the short term.

Indeed, until all systems have been made cloud-ready, sometimes banks could even be paying more than they were previously until legacy systems have been transitioned. There are, however, options to minimise costs in the meantime and to obtain quick wins during the journey.

How European and Latin American banks are addressing these challenges

To get a sense of how banks in Europe and Latin America are approaching the challenge of the journey to cloud, it can be useful to look at a few examples of different top-tier banks (which will be kept anonymous):

One of the largest banks in South America: This bank has made a very significant move towards moving its IT applications and infrastructures away from the mainframe and towards the public cloud. Unlike most banks, it is using a single hyperscaler cloud provider.

It is rapidly moving its services and systems to the cloud. By the end of 2022, it aims to have transitioned half of its systems.

A Spanish bank with a large international presence: This bank, with presence in Europe and Latin America, has a clear strategy, moving its services to a private cloud in order to reduce TCO.

One of the UK’s largest banks: This bank has been engaging in a multi-billion, multi-year cloud transformation, using the services of several different hyperscaler providers.

Its approach is a relatively cautious, hybrid one, aiming to move 20% of its applications to private or public cloud platforms and decommission 15% of its legacy applications by 2024, as part of a process to encourage customers towards digital banking and using data to improve and personalise interactions.

Conclusion

As can be seen from the examples above, there is no roadmap or one-size-fits-all approach to cloud adoption. Banks vary widely in terms of their objectives, size, and location, all of which impact their journeys to the cloud.


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