State of play: cloud in financial services
Each month, Philip Benton, Principal Fintech Analyst at Omdia, explores a new topic and assesses the “state of play”, providing an analysis and understanding of the market landscape.
In the past decade, cloud infrastructure has advanced significantly
This month, Philip takes an in-depth look at cloud technology in financial services.
With AI dominating the thoughts of technology executives throughout financial services, it’s easy to forget that until recently, cloud was seen as the most transformational technology seen in the industry for decades.
The impact and evolution of cloud technology in financial services forms this month’s ‘state of play’.
Evolution of the cloud
When I joined Omdia (then Ovum) at the start of 2020, many of my early talks with clients were about a sudden enthusiasm for cloud deployment after Covid forced their hand to accelerate the conversation, with the tech having been in the back of bankers’ minds for years.
There was initial trepidation – in a similar vein to how banks currently feel about AI – around adopting a technology which they didn’t truly understand (or most importantly, couldn’t explain to a regulator). But this has changed significantly with the recognition that the cloud brings more speed, flexibility and ultimately innovation.
In the past decade, cloud infrastructure has advanced significantly and now has the compute power to handle the vast numbers of transactions that a bank processes in real time. Deployment on cloud is now often the preferred implementation method because it enables banks to manage their infrastructure costs more efficiently (than with on-premises deployment) and ensures developers can focus on building value-added services on top of the cloud infrastructure.
On-premises still dominant in FS despite promise of the cloud
Although incumbent banks want to transition to the cloud, a combination of technical debt and regulatory restrictions (in certain regions) mean that globally banks are still heavily reliant on their on-premises infrastructure and on-premises applications, which account for more than 73% of global banks’ source segmentation technology spending in 2024, according to Omdia’s Retail Banking Technology Spending Forecast.
Many existing banking systems, particularly at the back end, are run on antedated technology, but due to its importance, it is challenging to move away from quickly and must be done in a phased approach. Several incumbent banks have chosen to modernise their front-end infrastructure, which is more achievable, to improve the user experience and give the impression of real-time changes, when in fact it isn’t any quicker in the back end.
Banks are fully aware of the need for digital transformation and shifting legacy applications to the cloud in order to remain competitive, but enacting it across the entire banking value chain in a unified manner is not a simple task. Omdia’s 2024 IT Enterprise Insights Survey, for instance, shows that most retail banks have made some inroads into digital transformation, with respondents most likely to have made progress in adopting cloud services, but just 29% state that they have made significant progress.
Many banks have taken a phased approach to digital transformation, often working with multiple product vendors. But there is a growing recognition that this approach brings its own challenges in terms of managing numerous vendors and roadmaps. As such, there is a shift in demand for integrated SaaS banking services, particularly from Tier-2 and Tier-3 institutions.
The times they are SaaS-changin’
Although migrating infrastructure into the cloud is slow due to the complexities involved, there is real momentum in the demand to deploy applications in the cloud. According to Omdia’s Banking Software Contracts Analytics Tool, total SaaS deployments increased significantly in 2023 compared with 2022, with SaaS deployments now accounting for 32% of all contracts compared with 21% in the previous year.
Much of this SaaS activity is being driven by the surging demand for banks to modernise their core banking systems. Many banks remain wary of embarking on transforming their core banking system due to fear of the significant time and investment required before generating a return.
However, many banks are now looking to overcome this obstacle by supporting a “side car” approach, thereby enabling for the new core to run parallel to the existing core by migrating certain products, locations, customers, or lines of business.
This in part is why we are seeing increased activity in the number of deployments alongside the emergence of a wave of new core banking vendors, with the original ‘cloud-first’ vendors Mambu, Thought Machine and 10x facing increasing competition from the likes of Tuum, SaaScada and Engine by Starling.
Embracing cloud-native applications can enable continuous innovation
Modernising the core banking system can be costly, time-consuming, and complex. However, anecdotal evidence suggests that banks are spending 85% on maintaining their existing core banking tech and the remainder on launching new products, which can be flipped once they have fully modernised their core, providing them with enormous scope to innovate.
Externally, banks are faced with a rapidly changing market with developments such as real-time payments, embedded finance, and open banking providing not only an abundance of opportunity, but also threat, which means banks must explore new business models to remain competitive.
Deployment on cloud should be the default, because it enables banks to future-proof their services and manage their infrastructure costs more efficiently than is the case with on-premises deployment. Rehosting, often referred to as “lift and shift”, simply moves an existing monolithic application to a public cloud and in most cases will not provide real cloud benefits.
Scalability is critical when upgrading systems, not just in the ability to handle higher volumes (24/7 instant payments in particular), but also in terms of infrastructure costs, as cloud deployment and SaaS become increasingly important. Nevertheless, to fully utilise the capabilities of the cloud, applications need to be cloud native and to support elasticity (automated scale out and in).
Previously, legacy modernisation projects have been approached on a piecemeal basis, often in a disconnected and nonstrategic way, but technology is increasingly converging into singular, cloud-based platforms. These not only allow for faster and more coordinated implementation, but also provide the foundations on which new products, services, or tools can be added or withdrawn as the wider technology landscape changes.
About the author
Philip Benton is a Principal Fintech Analyst at Omdia and writes analysis on the issues driving technological change in financial services. Prior to Omdia, he led consumer trends research in retail and payments at strategic market research firm Euromonitor.
In this column, Philip discusses the technological implications and consumer expectations of the latest fintech trends.
You can find more of Philip’s views on fintech via LinkedIn or follow him on X @bentonfintech.
