The banking industry has been relatively slow to adopt cloud computing compared with other industries. This comes out of a fear regarding potential cybersecurity failings of cloud, and cloud service providers’ (CSP) compliance with the complex regulatory framework that stringently governs the industry. The ongoing Covid-19 pandemic has further intensified difficulties in banking, and particularly threatens banks’ profitability. A fall in retail spending will drive down fee incomes. Banks also face a reputational risk by not offering free payment holidays and cutting late fees.

Listed below are the key banking challenges in cloud computing, as identified by GlobalData.

Cybersecurity risks

While all industries must safeguard data, it is particularly important in financial services. The industry is targeted heavily by cybercriminals, and the recent spike in Covid-19 related phishing attacks are compounding the problem. Banks must protect their networks and customer or proprietary data from theft, corruption or breach.

New pure digital competition

New players are using software to provide core banking without the need for any human interaction; pioneering new services such as robo-advice; and operating traditional functions for a fraction of the cost. Open banking enables these third parties, who lead in innovation, to compete more directly with traditional financial institutions. It grants third-party financial service providers open access to financial data from banks and other financial institutions.

Regulation

Regulators worldwide are becoming bolder and more interventionist, introducing initiatives such as the General Data Protection Regulation (GDPR), open banking, anti-money laundering (AML), know your customer (KYC), and enhanced customer authentication. The ever-increasing regulatory burden increases the risk of non-compliance. The rapid pace of technology change is mirrored by the rapid evolution of regulation, which ranges from the liability model of data sharing to the sustainability principles written into regulatory guidance. Banks risk reputational damage if they fail to sign up to initiatives such as the UN principles for responsible banking.

Big data

Financial services firms generate incredible amounts of data that is often siloed and underused. Better use of enterprise data can improve product design and promotions, the management of underwriting margin risks and the effective deployment of resources. Incumbent banks, with legacy infrastructure and siloed data are at a disadvantage to smaller firms with infrastructure that supports better use of data.

Falling profitability

Low interest rates and falling fee income have hammered banks’ profitability. Low interest rates have been a permanent feature of financial markets since the banking crisis of 2008, compressing banks’ margins. In addition, competition from new entrants has driven down fees for financial services, or abolished them entirely for certain products. Banks are consequently looking for alternative ways of generating income or cutting costs to drive bottom line growth.

Sustainability

Financial firms are under increasing pressure to reduce their carbon footprint. Furthermore, there have been huge concerns over the governance structures of banks that may lead to financial mismanagement.

This is an edited extract from the Cloud Computing in Banking – Thematic Research report produced by GlobalData Thematic Research.