There are still some unresolved regulatory issues regarding data in the cloud; for example, regulation at the point of storage, concentration risk and, ultimately, systemic risk are areas of concern. But the volume and scale of cloud adoption suggests that these issues are being resolved, according to the International Telecommunications Union.
2. Building new platforms – the “greenfield” approach
For many incumbents, one solution has been to create new, smaller platforms that operate on modern, often cloud-based systems and which are designed to serve a specific strategic need – the so-called “greenfield” approach. Greenfield platforms often operate separately from the larger institution, using their own state-of-the-art IT infrastructure and deploying new technology solutions as needed. This keeps investment under control and quarantines risk to some extent. Several have used new digital platforms to expand into different market segments.
In 2016, Goldman Sachs launched Marcus, a digital-only offering that processes transactions in real time, delivers over the cloud and provides an entry into the consumer-lending market. Other major banks have launched similar digital platforms, including JPMorgan (Finn) and ING (Yolt).
“That’s why greenfield is interesting, because you’re trying new technologies but in a controlled, almost ringfenced way,” comments one executive.
3. Partnering with third-parties
Some firms are partnering with technology firms or challenger FinTechs, to launch these platforms.
Bank of Scotland is working with challenger bank Starling to develop a new mobile-only venture, called Bó, that is expected to house several million accounts at its NatWest division. Lloyd’s Banking Group plans to test a new core system built by Thought Machine, a banking technology provider. It plans to transfer data on 500,000 customers to the new core system and perhaps move across all of its business functions over the next few years.
An incremental strategic roadmap may be the best approach
Many participants suggest that rather than approaching this as a massive one-time investment in transforming systems, banks need to identify a set of objectives and prioritize initial investments. Taking a hybrid approach, one in which a combination of these strategies is implemented to collectively shift the burden from the core system, is recommended by many.
However, equally as important as managing new process implementation, is giving careful attention to decommissioning old systems. Both banks and their third-party platform providers must also be committed to making difficult decisions around what to keep versus decommission.
One director warned that some approaches to updating legacy can leave the lingering problem of old systems that continue to run: “You often get a provider who will say they’ll do everything clean and new, but later on you find out that isn’t the case.”
Another issue banks face in implementing change is that legacy systems exist across diverse geographies, so separate parts of the firm may operate very differently or be subject to divergent regulations and requirements – such as limitations on the ability to move and store data.
One director said, “We have defined what decisions need to be taken together at the global level and those that can be taken at the local level. There’s a lot of balance to figuring out global versus local, and it’s something we still need to work on when it comes to digitalization.”