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How banks journey into hybrid cloud and out to the edge profitably

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By Simon Michie, CTO, Pulsant

 

Banks, once viewed as highly conservative, are now increasing their spending on cloud services, recognising they must innovate, reduce costs and become far more agile to compete. Market research company IDC estimates global cloud spending by banks will increase by more than 16% per year up to 2024, hitting $77bn annually.

Some 67% of executives taking part in an Accenture global survey of banks said more than half their mainframe workloads should be in the cloud within five years. This change of approach has come about as senior decision-makers in banks realise that competition from challenger banks and FinTechs dictates that they must move into the cloud to be more dynamic and responsive. But they must also anticipate the next big advance in enterprise infrastructure, which is edge computing, moving processing power closer to the end-user or customer.

 

Banks need the cloud so they can compete

More than ever, banks need to push innovation and incorporate data-hungry artificial intelligence capabilities into their applications. This is how they will provide the slick interfaces, new services and ease-of-use that the challengers offer. Competitiveness is no longer just about attractive loan rates or current account interest – it’s about providing a great experience.

Institutions now need the ability to spin up customer contact centres or websites at short notice in relation to events such as pandemics, sudden interest rate-rises or new opportunities triggered by changes in the law or regulation. It is worth remembering how organisations with very significant on-premises IT infrastructure struggled to adapt to the remote working requirements of the pandemic.

Banks increasingly need to integrate crypto-currencies and cardless payment platforms and accommodate the growth of non-fungible tokens (NFTs). These are capabilities that institutions can only provide or manage effectively through the inherent flexibility and scalability of the cloud.

 

How to go into the cloud effectively?

Yet just as UK financial institutions move tentatively towards cloud-adoption, the Bank of England’s Prudential Regulation Authority has become interested in the resilience of public cloud providers, also cautioning against the dangers of vendor lock-in and over-reliance on individual companies.

The challenge for established banks, therefore, is how to enter the cloud in the most effective and compliant way without becoming over-dependent on AWS, Google and Microsoft Azure and other major vendors. UK and EU data protection and sovereignty laws also make lodging personal information with US hyperscalers problematical and potentially dangerous.

Given these constraints, it is obvious that banks must instead opt for hybrid infrastructure, using the combination of public cloud and on-premises environments. Hybrid cloud allows banks to achieve the balance between flexibility and security they need so they place workloads where they work best or are best protected. For most banks, hybrid is no longer a stopping point on the journey towards full cloud deployment, it is the optimum destination.

 

The journey into hybrid cloud is much simpler

Thanks to partnerships with third-party experts in the field, adoption of hybrid infrastructure is no longer a fraught experience for banks. A jointly drafted cloud purchasing strategy will implement a cloud adoption and transformation framework, operating on the key principles of discover, plan, implement and decommission. Banks can prioritise data and applications for deployment, whether on-premises, in private cloud, colocation data centres or with public cloud providers, including the hyperscalers.

Colocation can be highly attractive, because a bank locates its own IT in a secure and efficient data centre run by specialists. The financial institution makes its own choice of cloud-providers and has no need for time-consuming and costly involvement in physical infrastructure and connectivity infrastructure. More advanced colocation and cloud-providers are compliant with stringent PCI (Payment Card Industry) data standards, enabling secure use of the full range of card payment technologies. They may also comply with the US’s Soc 2 requirements governing the confidentiality, integrity and privacy of customer data.

 

New applications and revenues with greater freedom

The flexibility of a hybrid strategy means banks can advance implementation of newer, revenue-generating cloud-native applications, or integrations with cardless payment platforms, with greater confidence. At the same time, business-critical applications that are not cloud-compatible, or that require unique levels of management and security, can remain on-premises. Banks that want to use applications or computing capabilities specific to individual vendors can do so without fear of lock-in or vendor-mandated changes in technology and operational practices.

The advent of a new generation of management tools designed for hybrid infrastructure also enables banks to keep track of their data and applications and to right-size all their deployments for maximum efficiency. Banks can spin workloads up and down in relation to demand, avoiding the dangers of over-spend without risk of being under-resourced when faced with new demand or business opportunities.

More advanced tools give full visibility and costs of all data and workloads from a single interface to provide complete control. Such tools also have one further major advantage – they are fully enabled for the next big advance – the edge.

 

Moving out to the edge 

Working in combination with 5G connectivity, edge computing removes the disadvantages of location, shifting data and workloads to regional data centres to deliver faster, low latency responses for end-users. This has obvious advantages for financial institutions seeking to offer more responsive mobile apps or payment platforms that can relate to the customer’s location, for example.

But it also has significant potential for high-speed trading and many other use cases involving artificial intelligence, such as facial recognition technology for authentication. In combination with software defined technologies which optimise connectivity for critical applications and uses automated network monitoring to reinforce security, the edge will open up a huge array of revenue possibilities for banks.

All this means banks must now think very hard about a hybrid strategy, especially when they want to grasp the full potential of edge computing. The arrival of a new generation of cloud management platforms has transformed hybrid strategy implementation and management. Banks can enjoy the best of both worlds, gaining the flexibility and innovation of the cloud and the advances in edge computing, while maintaining their most sensitive data and workloads in secure locations. They can maximise their agility and innovate boldly, without sacrificing independence to cloud vendors or risking security or compliance infringements.

 

Banking

Is traditional business banking the best option for SME finance squeezes?

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Airto Vienola, CEO, AREX Markets 

The pressures facing business and personal finances alike have been well documented.

Stories are now starting to emerge about how smaller enterprises around the UK – which make up well over 90% of the companies in the country – are coping with that mounting stress. The picture starting to emerge suggests, not well.

Personal borrowing is bridging gaps in business books

One survey released recently suggested that one in five of the country’s small businesses have taken out personal loans by the business owner to try to cover gaps in their incomes and profit margins. A further 43% said they were considering doing the same. This rush to secure additional funds by any means may be understandable for businesses feeling the pinch, but it’s neither sustainable nor savvy. Many of these enterprises are already burdened with additional debt from the Covid relief scheme, and given rising interest rates, soaring energy costs and rising cost of goods, taking on additional debt is not an attractive prospect. Add to that the fact that rates from traditional business banking providers are proving steep, smaller enterprises could be forgiven for looking to personal means to shore up the balance sheet. A recent study from members of the Federation of Small Businesses found that one in five small businesses are struggling to find business lending rates under 11%. To help these companies to survive, something clearly has to give.

Not all Alt-Fi options are equal

Alternative finance services have been proliferating in recent times, and yet almost half of small business operators have concerns about pursuing this option, despite actively seeking additional funding support. Clarity over terms and conditions is an often-cited reason for this reticence, which is only natural when undertaking proper due diligence on financial lending. This is a wise choice, especially as it has become so easy for business owners to quickly and simply access new services through embedded finance services, just a few clicks away on existing digital accounting and bookkeeping services. Many of these are still not clear about any detailed fine print, lengthy contract terms or potentially high fees, and yet these too can look like accessible and viable options to business owners facing mounting financial issues.So, it can be hard to pick the right provider without a lot of research. Those wary of the long tail of taking on debt should be particularly careful when it comes to business Buy Now Pay Later or BNPL offers, which are currently entering the UK market, though that isn’t to say that other alternative financing services won’t suit their specific needs whilst mitigating fears over risk.

A fresh perspective on an established technique

So, if debt should not be an option, and embedded finance can have downsides, where should SMEs turn if they don’t want to kick the can of cashflow problems just a few months down the road? One area to reevaluate, which has seen a tremendous shift given the fresh thinking from alternative finance is invoice financing or spot factoring. No longer the imbalanced option of last resort it was traditionally perceived to be, the option has become much fairer to the SME, in addition to providing a swifter and more flexible alternative. In years gone by, invoice financing was the purview of the banks, which led to low rates of return for businesses looking to unlock the value in their organisation, and often much better value flowing back instead to the lender taking on the risk. This is no longer the case. Likewise, invoice financing earned a bad reputation among some for tying businesses into lengthy contracts – another area which current services in the market have since addressed. Our service for example allows businesses the flexibility to access cash back on just a single invoice of their choosing – which could be the difference for struggling SMEs between dipping into loss or keeping the lights on.

One answer to the late payments problem?

Perhaps the most important area which services like invoice financing assist is overdue invoices – the bane of the British SME. Barclays claimed earlier this year that over a quarter of SMEs are finding late payments to be on the increase, and this was an already notorious issue for many business owners. Estimates show that SMEs on average have £6500 in unpaid invoices at any given time. Financing these invoices ensures that the cashflow of these strapped SMEs is healthier, gets the money back into the business without the concerns of lengthy payment terms or endless chasing, and certainly in our case, has no impact on the relationship with the other organisation. Our platform acts as a marketplace between SME and likely investors, with extensive insight provided to make sure that those investing in the invoice are matched to the right businesses. We take on the intermediate risk – removing any suggestion or potential concerns around unwanted debt collection, for additional business owner peace of mind.

While the pressures may be mounting on the SMEs around the country, one thing is clear. No business should rush into making long term financial decisions simply as the cashflow is drying up. Any savvy business would be well advised to make sure they understand the implications, short and long term, of any lending solution they look to employ. However, knowing that there are options and the business’ bottom line does not simply have to rely on traditional banking services, should provide business owners with a lot more options at their disposal to help them to face the coming months with greater cash liquidity confidence.

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Banking

BANKING FOR BETTER 

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By Alex Kwiatkowski, Director of Global Financial Services, SAS.

From shifting market dynamics and mounting geopolitical tensions, to skyrocketing cyber threats and a worsening climate crisis, the world faces risk and uncertainty on many fronts.
But how are these and other prevailing trends reshaping the financial services sector?
A volatile landscape  
Describing the past few years as ‘volatile’ could be seen as a slight understatement, akin to saying the Titanic had a minor mishap at sea or that Liz Truss’s economic policy was mildly unorthodox. From the COVID-19 pandemic, Russia’s despicable invasion of Ukraine and the increasingly intense impacts of climate change, the resilience of not only businesses but whole nations has been pushed to breaking point.
In many ways, the banking sector has proven remarkably resilient to such challenges and risks. In the face of prolonged disruption, profitability remained higher than many had anticipated. However, the deeper structural challenges, such as digitalisation, the emergence of fintech disruptors, the brouhaha over crypto, and the growing threats associated with cyber attacks, are continuing to gather force as we head into a new year.
A recent Economist Impact survey, sponsored by SAS, found that while banking leaders are conscious of the imminent risks and those on the horizon, many are generally optimistic about how their organisations could be reshaped over the next decade, and beyond. I believe this optimism is well-founded rather than misguided, although pragmatism is required.

Alex Kwiatkowski

Digital transformation

For some years leading up to the COVID-19 pandemic, banks had been wrestling with exactly when and how to digitally transform. Like so many other industries, the chief legacy of the pandemic was to force rapid and wholesale change on a sector not always eager to embrace new ways of operating.
Traditional banks are now on track to be digitally transformed by the end of this decade, with technologies such as cloud computing and AI becoming industry norms. When considering the next three to five years, 57% agreed that digital transformation is among their top strategic priority. Cybersecurity and data protection (55%) are not far behind.
This focus on digital transformation is understandable, given the opportunities it may bring. Respondents from the Asia-Pacific region were the most excited, with 64% selecting it as among the greatest opportunities for their organisation. This was much higher than their counterparts in North America (52%), Latin America (50%) and Europe (50%). In fact, the tech-savviness among Asian consumers has created an opportunity for banks to leap ahead in delivering innovations compared with other regions.
When asked about the role of advanced data analytics in a successful digital transformation, just under half (48%) of executives selected this as the most important digital capability that their organisation must harness. It was the clear overall favourite, followed by blockchain (35%), AI/machine learning (34%), IoT/5G (33%) and robotic process automation (29%).
However, the survey also revealed a number of hurdles that may prevent the full uptake of data analytics, such as the increased risk of cyber attacks and a reliance on legacy technology systems. In addition, functions and departments working in silos was viewed as a potentially significant barrier, with 48% noting this as a “significant barrier” to change.
Purpose-driven banking
Alongside this goal of digital transformation, a growing consensus has emerged among banking leaders that the wellbeing of customers, communities, employees and the environment ought to be at the forefront of strategy.
Termed ‘purpose-driven banking’, this shift often encompasses ESG-related activities as well as a broader commitment to customer relationships over profits.
Purpose-driven banking has broad support among the industry’s leaders, with 82% of executives agreeing that financial services organisations can pursue profit and a better society at the same time. That sentiment is even more common among C-level executives, with 91% in agreement.
Arguably one of the most interesting results of the survey is the fact that 76% of respondents believe that the banking sector has an obligation to engage with and address societal issues. An even larger portion (81%) said that their bank takes responsibility for the social impacts of its activities.
Interestingly, a clear majority felt that the financial services industry is behind other sectors in terms of progress on ESG commitments. About three-quarters (76%) of C-level respondents said this, compared with 61% of all other executives.
Establishing transparent and measurable ESG goals aligned with corporate strategy is one area where leaders feel behind, with just 38% feeling that their organisation had achieved this. Another important aspect of the purpose-driven mindset is recognising how banks are fundamentally linked to other stakeholders in society. When asked which were the “most important groups for financial services organisations to engage with in order to have the most positive impact”, the technology industry, investors and customers were the top three choices. They were followed by consumers and government or policymakers.
Growing pressure from customers, communities and other external stakeholders are likely to influence the extent to which the banking sector embraces ESG practices, however it’s clear that the banking sector looks set to transform over the next decade. And transform it must.

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