Why increasing cost pressures mean banks need to put their ‘head in the cloud’

It is true that banks are having to do more, with less budget. Recent headlines have demonstrated we’re currently operating in an increasing cost pressured environment. The solution for some banks has been cost cuts through staff reductions – but is this always the right answer?

While it’s important to ‘run the lightest ship possible, cutting staff may result in cutting the bone which could be damaging for a bank’s operations in the long term. Rather, to stay within reasonable budget constraints, banks of all different sizes should consider adjustments to their technology strategy.

In-house technology investment is a strategic area where the largest banks may spend more than billion dollars annually. They are willing to invest in technology because they know that this is how client demands are met, how risk is optimized, how market share is won, and ultimately – how profit is made.

What does this mean for other banks who do not have the same type of budget to build their own in-house technology? Even if they pursue the build-inhouse route, systems require constant upgrades to keep up with the market. Those who run out of the budget for continual enhancements will find they can no longer run their businesses and workflows efficiently and profitably on legacy systems. Without the same level of ongoing IT investments, how much more will their in-house technologies fall behind over the next 2-5 years, and how do they keep pace with client demands as well as bank competition?

On the surface it might seem like smaller institutions are in a catch-22 situation, but they’re not. It should come as no surprise that the answer lies in the cloud.

Cloud computing offers a business model with virtually no fixed costs, no CAPEX, and the built-in flexibility to customize according to your business needs. Banks can avoid the initial costs of implementing their own technology stack and eradicate the ongoing costs associated with maintaining, managing and updating their pricing and distribution systems.

Those who find themselves in the position to decide technology spend may worry about the idea of using an out-of-box cloud system. After all, there are always workflows that must be tailored and made bespoke to accommodate both your existing front-end business practices and back-end processes, as well as your future vision for those things.

That’s a fair point, but the good news is that a well-architected cloud technology will provide infinite ways to customize a bespoke system, and do so efficiently – no custom build required. What’s more, the unique architecture of cloud enables a valuable feedback loop, wherein user demand for a new dial or functionality can be quickly actioned and deployed across the entire user base, resulting in a more comprehensive stack and further opportunities to customize through configuration.

In any case, it’s good to remember that customizing features and finish on a car is vastly different from reinventing the wheel (and the engine). Building from scratch opens up the potential for unnecessary complexity and increased exposure to technology and business risks.

The spoils will ultimately go to those who can improve cost efficiencies, manage operations intelligently and quickly expand their reach to optimally engage clients. Embracing a cloud-based system brings the opportunity to maximise profits and potential. Firms must make adjustments to their strategy to make their technology competitive. If they don’t, they risk facing the blunt instrument of across-the-board cost cuts, which often means letting go of talent and experience that may be very difficult to backfill.