For financial institutions (FIs) leveraging the cloud, the earliest adoption was often the high-performance computing grid to support complex modelling. Gone were the days when limited capacity of on-premises grids meant that quants or actuaries had to wait for the compute resources they needed to run their models: across workloads, the cloud allows FIs to immediately scale up compute resources at peak times and scale down when demand dipped, paying only for what they use.
From grids, many FIs expanded to development and test environments. While a finite number of test environments can be a bottleneck for innovation, the cloud enables FIs to quickly stand up the environments they need to test their applications. This reduces cost and allows for a faster time to market. It also enables experimentation. Banks, capital markets firms, and insurers are more quickly introducing new channels, applications for the business, and solutions that span distribution, analytics, core systems of record, financials and all stops in between.
Finextra spoke to Peter Williams, global head of financial services technology; Rob Schlaff, worldwide business and market development for banking; John Kain, worldwide business and market development for capital markets and Tony Jacob, worldwide business and market development for insurance at Amazon Web Services (AWS), about how FIs are building a foundation for their digital transformation strategies by transforming their data centres and creating an innovation capability with the AWS Cloud.
For most institutions, hundreds of businesses and service applications have been layered within their infrastructures over time, requiring significant IT resources to maintain. Cost reduction and business growth continue to be top priorities, and FIs are discovering that the monolithic architectures, siloed data structures and low interoperability of their on-premises core systems no longer meet their needs.
Williams highlights that FIs are now modernising their core systems on the cloud to unlock more value for their business and customers. “FIs are leveraging cloud to speed up processing, eliminate data silos, surface deeper insights, and lower infrastructure and operating costs.”
He continues: “Taking advantage of virtually unlimited data storage and compute power to mine their core data allows FIs to make better trading, investment, and policy underwriting decisions. Analysing patterns across exabytes of data used to require significant investment and time, but cloud services that automate machine learning (ML) algorithms are improving how quickly organisations can innovate for their customers.”
If reliable security protection, database replication, network hardening and messaging infrastructure are made available, FIs can reconsider where to focus their time and resources. Further, Williams predicts that when FIs realise that they no longer need to invest resources in “undifferentiated plumbing,” there will be a significant move from a build approach to a buy approach.
This, as well as software providers taking over infrastructure management that was previously managed by customers in a data centre, has led to an understanding in the financial services industry that software-as-a-service (SaaS), or cloud computing, is the future. Today, FIs are “re-architecting their platforms as a SaaS” with application programming interfaces (APIs), ensuring that services work when new versions become available, according to Williams.
The banking view
Banks have adopted new digital channels and leveraged the prevalence of data to ensure that customers have frictionless, smart and safe ways of purchasing products and services. More recently, banks have increased efforts to deliver a more personalised experience, addressing common feedback from customers who feel their banks know little about them.
Schlaff explains that this happens because “traditional core banking systems are limited by their capability to provide real-time analytics and results. This causes banks to group different customers together by common denominators such as age or location, which are too universal to satisfy today’s customers who expect immediate and customised service.”
When migrating to the cloud, banks are able to access capacity on-demand to run real-time analytics to improve customer experience. “For instance, recognising transaction patterns and anomalies faster enables banks to offer more personalised communications and more timely offers to customers,” Schlaff states.
The capital markets view
Capital markets firms have changed their business model to be more customer-centric, delivering new products and services that enable customers to better manage their money, respond more quickly to market fluctuations and produce higher returns. Kain says that the cloud has helped drive a reduction in fees and an increase in the sophistication in the tools available to retail investors.
Kain states: “For instance, Robinhood’s commission-free model and Betterment’s auto portfolio rebalancing and tax loss harvesting represent offerings that have become broadly adopted across the industry. From an institutional perspective, firms are taking advantage of the years of data about their customer interactions to differentiate their services.”
Large capital investment firms are often the result of multiple acquisitions, where each acquisition ran a variety of different systems and, occasionally, different versions of the same system. Moreover, rather than combining these core systems into one cohesive platform for the company, these businesses continue running unintegrated legacy solutions.
Kain explores how at the organisational level, this sprawling legacy infrastructure has prevented firms from having a holistic view of their customers, because the data from each business is stored in siloes. “For example, helping a customer more effectively hedge a risk or find a new investment opportunity requires a view of the customer’s entire portfolio and history of risk appetite. Providing effective personalised investment advice is not possible without breaking down data siloes.”
Bringing data from each team’s core system into a single data lake in the cloud would benefit capital markets firms by giving them access to cohesive analytics and in turn, a richer, fuller view of their customers. Once the data is in the cloud, it is much easier and faster to leverage advanced analytics, including artificial intelligence (AI) and ML.
The insurance view
Insurers also are modernising their core systems with the cloud, and expanding their work from the core systems into digital customer experiences and advanced analytics, Jacob said.
“Early on, moving the core systems to the cloud was more about retiring technical debt,” Jacob explained. “Too much of an insurer’s IT budget was relegated to supporting the legacy systems. By moving to the cloud, insurers were able to reallocate IT budget from running the business to transforming and growing the business.”
Now, more of the interest in the cloud centers on data analytics and on digital customer experiences. And, the two topics are very interrelated, Jacob said. “Insurers today tell AWS they want to put in place more conversational and more digital channels – to not only improve the customer experience, but to also generate more signals on their policyholders that they can use to support greater customer intimacy,” Jacob said.
For example, an Alexa skill running on a smart speaker can be used to kick off first notice of loss, help a policyholder find his or her agent, check on the vitals of a second home through the feeds from the various home automation devices or provide the insured with the balance on the health savings account. “Imagine the improved customer experience and the more interesting interactions that could result from a voice channel like that, with those interactions being captured and analyzed for insights,” he added.
Where the digital channels and core systems in the cloud come together is in data analytics, Jacob explained. By moving the core system to the cloud, that historical and structured data is that much closer to being replicated into a cloud-based data lake. The data from the channel interactions can be added to the lake, enriching the legacy data, and the combined data can be analysed with AI/ML services. The resulting analyses could lead to improved customer insights to drive next-best action or offer, be used to improve underwriting assumptions or improve understanding of the claims environment.
“It’s all very interrelated. Moving core systems into the cloud helps with cost efficiencies and business agility,” Jacob said. And it also creates the opportunity to better leverage all of that historical data on those core systems.
“When insurers complement that data with new signals from more conversational, more frequent channel interactions, and mine that data with AI/ML, they’ll identify ways to better understand the policyholder and deliver better digital customer experiences,” Jacob said. “That will pay dividends in so many areas – improved underwriting, reduced churn, improved claims experiences, lowered loss ratios – you name it.”
The cloud is the future
What’s exciting about the cloud is the ability to simultaneously enable multiple customers while at the same time, reduce operating costs and open up access to innovation for FIs at a much higher velocity and at a lower cost.
AWS customers have access to its global community of partners, the AWS Partner Network (APN). Technology Partners like Guidewire, Murex, and Temenos help accelerate core systems modernisation for insurance carriers, capital markets firms, and banks, respectively. Partners who achieve AWS Financial Services Competency have deep industry expertise and solutions that align with AWS best practices. Their AWS-certified staff help FIs migrate with confidence and leverage the benefits that AWS has to offer.