Two years of compressed evolution have shifted the digital transformation of traditional banks to a new level. For many financial institutions, the pandemic sped up their journeys towards more agile, digitalised ways of operating that are perfectly in tune with tech-savvy consumers, who are conducting more transactions online. This shift was highlighted in a recent IBM survey by Censuswide1, which found that more than 40 percent of financial-services professionals in the United Kingdom viewed evolving to APIs (application programming interfaces) and digital-platform-based business models as a priority for modernising within the next five years.
But there’s a problem. To become as agile as they would like, banks need to partner with technology firms, ranging from fintech (financial technology) start-ups to cloud providers, to adopt the required innovations and exploit new exponential technologies. However, for this to happen, the products and services from those providers must be compliant and adhere to the same stringent regulations that banks must meet.
Traditionally, this process could take a long time, even years. In the meantime, banks would be left unable to take advantage of the booming innovation all around them. In the first half of last year, UK fintechs attracted a staggering $24.5 billion in financing, up from $5.9 billion for the whole of 20202, underlining the rich opportunities for collaboration. Traditional banks, therefore, view finding ways to remove barriers to working with technology vendors as a priority—so they can access innovation and get new products and services into the marketplace faster.
Removing bottlenecks while maintaining compliance
This innovation bottleneck is partly what is driving the trend towards solutions that are custom designed to meet the complex security and compliance needs of the financial-services industry. In fact, 88 percent of UK financial-services respondents in IBM’s recent survey affirmed that their organisations had already adopted, or intended to adopt, an industry-specific cloud platform to accelerate their digital transformations. Nearly half of respondents also agreed that adopting a cloud platform with built-in, automated regulatory-compliance controls would have the biggest impact on accelerating innovation in their organisations.
Clearly, many banks are aware that an industry-tailored solution could make the process of onboarding technology providers easier. If they have already been vetted and admitted to a platform that meets the relevant regulatory and security requirements, banks can then onboard vendors through that platform in just days or weeks versus months or years. Industry solutions such as the IBM Cloud for Financial Services are already providing this capability to some of the world’s largest banks, connecting them with a growing ecosystem of more than 125 technology partners and fintechs to accelerate their transactions securely.
Staying ahead of cloud regulation in banking
The main hurdle for banks in adopting cloud technology has always been their concerns about data security and compliance. But now, banking regulators are stepping up their oversight of cloud use in the sector, with the UK’s Prudential Regulation Authority (PRA) planning to release a new discussion paper on the issue later this year. A key concern for the PRA is the potential risk arising when there is a lack of interoperability between the different cloud platforms on which banks are placing data and IT (information technology) applications.
To avoid vendor lock-in and address regulators’ concerns, banks need to include a cloud platform in their hybrid, multi-cloud model that supports seamless interoperability across different providers as well as private and public cloud environments. This is possible with open-source solutions such as Red Hat OpenShift, which uses container technology on the IBM Cloud, allowing each client to create a workload once and move it to any other public or on-the-premises cloud.
Cyber-resilience is also top of mind for regulators as the financial-services sector modernises. In recent years, we have seen more large-scale cyberattacks exploiting vulnerabilities in third and fourth parties and impacting organisations along the supply chain. But imagine if the vendors in a bank’s supply chain adhered to a common set of control standards, which could be evidenced against and monitored in real-time, delivering enterprise-grade security and protection. Such a solution would offer a singular view of security threats, mitigating any weak links in the chain. This would reduce risks for the entire ecosystem and allow all parties to innovate at pace while keeping regulators satisfied.
Looking to the future
During the past 12 to 18 months, banks have had to accelerate their digital migrations; the measures taken to combat the global pandemic, including lockdowns and social distancing, saw to that. These changes are here to stay. The role of the brick-and-concrete High Street branch will evolve to become part of the digital-platform model. In the coming years, the financial-services industry can expect to see the continued acceleration of what’s already happened, and the big banks have acknowledged that: They’ve accepted the value that technology providers bring because it can help them maintain their market shares.
With large sums being invested, the fintech revolution will continue escalating, and banks are clearly embracing the opportunities. At the same time, regulators are going to ramp up their oversights of modern technologies such as cloud and AI (artificial intelligence) in the financial-services sector. Banks will have to find solutions to navigate the increased complexities this surveillance will bring.
For banks to fully grasp the growing array of new opportunities open to them, it will be essential for them to select cloud-service providers that can reassure all parties—including regulators—that interoperability, security and compliance sit front and centre of their offerings. The technologies that can deliver these capabilities are becoming increasingly important as the speed of change accelerates and the hurdles it creates become more challenging to surmount.
1 IBM Newsroom: “IBM UK Survey: Security and Regulatory Compliance Are Top Drivers of Modernisation in Regulated Industries, But Also Top Barriers,” January 26, 2022.
2 City A.M.: “UK fintechs shatter records and attract $24.5bn investment in first half of the year,” Amy O’Brien, August 10, 2021.