Cloud Adoption by Banks Too Slow?

Cloud adoption by banks has trailed other industries, but does JPMorgan’s recent touting of benefits gained from the cloud signal another future breakout for the stock? In his annual letter to shareholders (April 4, 2019), Jamie Dimon, chairman and CEO of JPMorgan Chase said, “On the importance of the cloud and artificial intelligence, we are all in.” The exponential scalability of the cloud, he continues “will be especially relevant as we scale up our artificial intelligence efforts.”

Is Cloud adoption by banks a definitive game changer?

Surely there is more to JPMorgan & Co.’s success than its belief that it is a technology company that happens to provide banking services. In fact, looking for evidence of what you already believe in to prove your theory of success is a sure way to fail.

To be sure, there are many reasons for JPMorgan’s success during and after the financial crises outside of technology—first, and probably foremost, is Dimon’s prescience regarding the danger of the mortgage bubble. As a result, the bank began to unload its subprime mortgage exposure and stop underwriting the riskiest types of mortgage-backed derivatives toward the end of 2006.

Looking at a graph of stock prices for the 15 largest banks in America, there are some commonalities in business models, risk mitigation, and technology investment for those whose stock prices are, or were, higher than their peak prior to the Great Recession.

Market performance financial standouts in addition to JPM include:

• Charles Schwab – Announced in 2013 that its premier trading system, StreetSmart Edge was available over the web for a cloud-based experience. A strong bull market also helped their stock.
• TD Bank – Announced moving their email to the cloud in 2015. With Canadian regulations requiring higher capital reserves and far more conservative practices, TD, along with other major Canadian banks did not require any government support during the financial crises, allowing TD to acquire Commerce Bank in 2008 while major US banks were scrambling.
• PNC Bank – Moved to IBM Operational Decision Manager (ODM) pre 2011. ODM is now available as a collaborative, role-based cloud service. Buying National City Bank at a discount with lower loan losses than projected gave them a big boost.

Of course, there is Capital One who began their move to the cloud in 2013, but is still below its 2008 peak. Aggressive pursuit of subprime business in auto loans and credit card accounts have possibly weighed on the stock.

Bank of America is another unique situation. While they are late to the cloud migration (announcing in late 2017 a partnership with Microsoft 360 and Azure), their acquisition of CountryWide has also been a factor in their recovering stock price. With consistent awards as best bank for liquidity management, and projected completion of its Project Greenfield (a move to host over 80% of its applications to a private cloud), it will be interesting to see results in coming quarters.

Before its customer service scandals, Wells Fargo was already adopting cloud-based infrastructure as a means for more efficient collaboration and letting different parts of the business concentrate on what they do best.

Cloud adoption by banks is probably too early to give clear correlations between it and financial service company valuations. However, four areas within financial services’ KPIs experience best results when applied to cloud technology.

Big Data

Banking is in the forefront of the Big Data Revolution with mountains of data collected (mostly for accounting purposes in the past) and the need to mine it for customer support and sales. Existing legacy bank technology infrastructures are under severe pressure and cloud is proving superior in its capacity to store and process/analyze that data.

Cost Reduction

The industry’s decreasing returns on equity, due to higher capital and larger liquidity requirements, require banks to operate more efficiently. Additionally, growing competition from FinTech startups causes capital and operating margins to shrink.

In the past, efficiency ratio reductions in banks and brokerages meant reduced services and products (eliminating those with lowest margins and heaviest impact on the balance sheet). Now banks can turn to cloud to find significant savings by paying for peak processing needs by the minute instead of over-building the platform—reducing both capital and operational expenses. Additionally, innovation requires no upfront costs on the cloud, allowing less expensive testing of product and service delivery.

Agile Delivery

Agility in products and technology occurs by decoupling monolithic platforms and applications, allowing changes to be made in product type, variation, and customization in real-time with continuous feedback and upgrades. The cloud not only supports this, it encourages (in fact almost requires) it. It also places delivery of web products closer to the customer, improving both latency and customer satisfaction.

Cloud adoption by banks also allows them to do more with the same financial and personnel resources by reallocating resources away from administration of IT infrastructure tasks and instead toward what the business does best. This means more business innovation and speedy delivery of products and services to markets—exactly what FinTechs are doing to compete with traditional banks and brokerages.

Risk Mitigation

In step with the benefits of big data efforts and agile development of products and services, scalability allows banks and brokerages to scan thousands of transactions per second. From a regulatory perspective, this significantly improves their ability to address financial crimes such as money laundering and fraud.

But risk comprises so much more than financial crime prevention and liquidity management, it also addresses traditional technology concerns such as capacity, redundancy, availability, durability, and security. Cloud computing helps lower these risks and does so at lower operational costs.

Conclusion

Cloud computing offers many benefits for banks, and not just from a cost control, data storage, analytics, and scalable processing/computational perspective. Cloud computing offers a significant competitive advantage in redefining customer relationships, transforming operations, improving controls and transparency, and expanding business opportunities while competing with more nimble innovators in the FinTech space.

Cloud adoption by banks could very well be required in order for traditional financial institutions to survive. However, those institutions looking beyond survival and pursuing growth and dominance in their sector should already have a cloud roadmap—or be close to adopting the cloud at some level. At the very least they should consider partnering with one or more cloud agile FinTechs.