The financial industry has been implementing technology to support customer needs and meet compliance and regulatory obligations for decades. The recent acceleration of Fintech innovation, however, is elevating technology in banking to another level. To take advantage of the opportunities and manage the risks that a digital economy creates, banks must embrace cloud-enabled business models that provide greater agility at a lower cost.
The Current Business Model
The banking industry makes money with two main instruments – fee income and interest income. Fee income is around one-third of a bank’s income, derived from service fees on accounts, transactions, and insufficient fund charges. The other two-thirds of a bank’s income, interest income, also known as float income, comes from interest on loans. Both of these lines of revenue are being squeezed by competing for fintech products, driving down prices and increasing competition.
The Cloud-Enabled Model
Cloud structured technology goes back to 2010 when a team at the Karlsruhe Institute of Technology outlined it. When a cloud-enabled business model is referred to, it does not mean that it exists in the sky. Businesses in general and banks, in particular, collect large amounts of data during the course of business. This data must be stored, available in real time, and kept safe from unauthorized access. The cloud refers to services and software that run on the internet rather than on your local computer or other devices.
In the last few years, banking has been busily transforming itself into a cloud-based service, with increased virtual currency acceptance, crowdfunding options, and artificial intelligence (AI) incorporation to provide better customer service and other significant services. Considering the heavy competition for customers, cloud-based, as-a-Service, solutions are a logical route to profitability.
From the Bottom Up
Even the cloud environment is based on hardware, which in this case is virtualized for professional use as a basic compute and store environment. This virtual structure is called Infrastructure-as-a-Service (IaaS) and includes security mechanisms, recovery routines, escalation methods, legal compliance, and the actual hardware itself. By migrating their vast amounts of data to a cloud-based infrastructure, banks are saving on costs of owning and maintaining their own IT equipment.
From the Top Down
At the top of the stack is the programming environment, known as Platform-as-a-Service (PaaS). This is where banking services are programmed as well as where they are executed. Services here can include third-party offerings or Software-as-a-Service (SaaS), which are plugged into the PaaS layer. The PaaS environment verifies availability of services, communicates with the various interfaces on the platform and provides a secure environment.
All software services are allowed as plug-ins on the platform using standard interfaces. These could include any commercial services like financing or accounting. There are additional cross-sectional services found for business support such as billing, user-management, and monitoring. Administrative services would also be included for life cycle management and deployment. These services have been described by Andreas Bittner, managing director of Solaris Bank, in this way, “Our services are like Lego bricks; our partners can pick the bricks they require and assemble custom solutions to fit their business needs.”
The Advantages of Banking
As data from the past year comes in, it is clear that IaaS is being embraced, with global sales up 29.5 percent year-over-year and 5 main players in the market, including Amazon, Microsoft, Alibaba, Google, and IBM. Investments in the cloud represent more than 20 percent of companies’ technology expenditures, and the advantages are obvious. Scalability, hardware cost savings, and user-based pricing transform a bank’s IT expenses while being able to offer universal access, greater product offerings, and reliable security ensure the bank is competitive and retain its customer base.
Cloud-enabled business models have disadvantages, too. In areas of the world with little to no internet connection, users could find themselves locked out of their data and the cloud-based services used to access it. Because the data is stored online, there is always a risk of it falling into the wrong hands. While banks are regulated to take security measures to protect their data, nothing is foolproof.
The banking market is in the beginning stages of adopting cloud-enabled business models, and the expectation is that even more business models will emerge as the year progresses. Banks need to be on the cutting edge of innovation, realizing that emerging customer needs and lifestyle demands should be the focus of every service offered. The forecast for cloud-enabled business models is that there will be more and more by 2020, and banks need to be aware of these transformative platforms to keep their competitive edge.