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Do banks like public clouds?

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Do banks like public clouds?

Xavier Bellouard, Managing Director, ActiveViam

In the past, banks have not been eager to adopt public clouds, with security issues topping the list of potential risks to the biggest financial institutions in the world.

However, things are now moving forward, with the European Banking Authority issuing guidelines on how to outsource and supervise public cloud environments effectively.[1]

At ActiveViam, we wanted to know how interested banks now were in public clouds, commissioning a report titled “Are Banks Really Ready for Cloud?”.Within this report, we explore four key areas:

  • Budgets and the number of public cloud projects going on
  • The sticking points preventing public cloud migrations – what is the main obstacle?
  • Which use cases should be moved to public clouds
  • If jobs are at risk as a result of public clouds

In speaking to some of the world’s biggest banks and their consultants about these topics, we now know the state of play for public clouds in banks.

Here are some findings.

Public cloud budgets are on the rise

Xavier Bellouard

Xavier Bellouard

Banks are indeed ramping up their use of public clouds in 2018. Interestingly, budgets are increasing by up to 70% in the next two years to cope with the initial spin-up fees. Up until now, many banks have not catered for public cloud usage within IT budgets, meaning the demand is initially high for hardware rental, as certain public cloud projects get underway.

The pace at which public cloud projects are going on varies across the bigger and mid-size banks. Each bank is doing something different. On the whole, respondents believe IT budgets for public cloud projects will rise by 6 to 10% in the next two years.

 GDPR and general compliance will cause a slowdown in public cloud migrations

The risks posed by data leaks and general compliance challenges, including complying with the General Data Protection Regulation (GDPR) are highlighted as the main things working against public cloud projects, with over half of interviewees stating compliance.

But the GDPR does offer some solace. If there is a data breach and unencrypted PII should leak under the GDPR, local data protection regulators need to determine where the fault lies: at the bank, the vendor, or the vendor’s subcontractors. With the GDPR coming into force, there is just as much penalty emphasis on the vendor (the “data processor”), as there is on the “data controller” (the bank). This has not been the case previously: the bank would be fully liable. Because of this change to how data privacy regulations work in Europe, there are now equal incentives for banks and their cloud providers to prevent data breaches.

All of this makes using public clouds more appealing.

Risk use cases are a popular public cloud guinea pig

Recently, the European Banking Authority (EBA) released Recommendations to banks for supervising outsourced cloud projects, including guidance on data processing and auditing.[2] The one issue banks are still struggling to determine, despite the guidelines, is which use cases are suitable for public cloud. In our survey, 64% of respondents believe we will see more risk-related use cases migrated to public cloud from the banks, such as Market Risk and Counterparty Risk.

Conversely, 40% respondents believe there is no use case just suitable for private clouds, which opens up more opportunities for use cases involving Personally Identifiable Information (PII) and sensitive company information.

 Public clouds do not mean job losses, just a skill adjustment

If more public clouds projects are in play, banks need less people in the traditional installer roles. These individuals are likely to be swallowed up by the cloud vendors to help manage the big customer accounts if they don’t adapt their skills to the changing climate. Instead, banks need more coders, information security specialists, and individuals with service management backgrounds.

Over the next few years, you will see more ‘baby steps’ while banks get to grips with their compliance challenges. In the interim,there will be more use cases in public clouds that do not involve certain data types. These use cases will be prioritised as the perfect ‘guinea pigs’ in the next two years, until banks are ready to embrace public clouds fully.

[1]https://www.eba.europa.eu/documents/10180/1712868/Final+draft+Recommendations+on+Cloud+Outsourcing+%28EBA-Rec-2017-03%29.pdf

[2]https://www.eba.europa.eu/documents/10180/1712868/Final+draft+Recommendations+on+Cloud+Outsourcing+%28EBA-Rec-2017-03%29.pdf

Banking

A quarter of banking customers noted an improvement in customer service over lockdown, research shows

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A quarter of banking customers noted an improvement in customer service over lockdown, research shows 1

SAS research reveals that banks offered an improved customer experience during lockdown

A quarter (27%) of banking customers noted an improvement in their customer experience over lockdown, according to research conducted by SAS, the leader in analytics.

This represents some good news for banks in an extremely challenging time, with 59% of customers also saying they’d pay more to buy or use products and services from any company that provided them with a good customer experience over lockdown.

The improvement in customer experience also coincides with a rise in the number of digital customers. Since the pandemic started, the number of banking customers using a digital service or app has grown by 11%, adding to an existing 58% who were already digital customers. Over half (53%) of new users plan to continue using these digital services permanently moving forward.

Brian Holden, Director, Financial Services at SAS UK & Ireland, said:

“It’s notable that in times of need customers value being able to communicate with their bank and place an even higher value on good customer service. A rise in the number of digital customers means banks can now reach a wider audience online, leveraging AI and analytics to offer a more personalised experience.

“There is work to be done, though. Even greater personalisation is needed if banks are to win over the 12% of customers who felt banking services deteriorated over lockdown. And this personalisation will need to get right down to a segment of one to properly reflect the unique circumstances some individuals now find themselves in due to the pandemic.”

While the number of digital users grew over lockdown, there is still a quarter (24%) of the banking customer base that have chosen not to make the switch to digital services.

Meanwhile, failure to offer a consistently satisfactory customer experience could prove costly for banks, with a third (33%) of customers claiming that they would ditch a company after just one poor experience. This number jumps to 90% for between one and five poor examples of customer service, so this just underlines how much retail banks can win or lose in these difficult times.

For more insight into how other industries across EMEA performed during lockdown, download the full report: Experience 2030: Has COVID-19 created a new kind of customer? 

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Banking

Swedish Bank Stress Tests in Line with Recent Rating Actions

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Swedish Bank Stress Tests in Line with Recent Rating Actions 2

The Swedish Financial Supervisory Authority’s (FSA) latest stress test results show major Swedish banks’ robust ability to absorb credit losses. The results support Fitch Ratings’ view that short-term risks have abated in recent months, and are in line with Fitch’s assessment of major Swedish banks’ capitalisation at ‘aa-‘, which was a factor when Fitch removed the ratings of Handelsbanken, Nordea (not covered by the FSA’s stress test) and SEB from Rating Watch Negative in September.

The FSA estimated about SEK130 billion of credit losses over 2020-2022 for the three largest banks (Swedbank, Handelsbanken and SEB) under its stress test. This represents about 220bp of their loans, or about 70bp annually. However, the banks’ pre-impairment profitability in the stress test could absorb credit losses of up to about 110bp of loans annually. Fitch’s baseline expectation is for credit losses below 20bp of loans in 2020 and 8bp-12bp in 2021.

Capital remained strong under the stress test. The average common equity Tier 1 (CET1) ratio fell by only 2.8pp (1.9pp if banks did not pay dividends) from 17.6% at end-June 2020. The capital decline was not driven by credit losses, which could be absorbed by pre-impairment profitability, but by risk-weighted asset inflation.

The three banks’ 3Q20 results showed that capital has been resilient despite the coronavirus crisis. The banks had a CET1 capital surplus over regulatory minimums, including buffers, of almost SEK100 billion (excluding about SEK33 billion earmarked for dividends). SEB had a CET1 ratio of 19.4% at end-September, Handelsbanken’s was 17.8% and Swedbank’s 16.8%.

The SEK130 billion credit losses under the latest stress test are lower than under the FSA’s spring 2020 stress test (SEK145 billion), which also covered a shorter period of two years. However, they are still larger than the actual losses incurred by the three banks during the 2008-2010 crisis. This is despite tightened underwriting standards by the three banks in recent years, including, in the case of SEB and Swedbank, in the Baltics, the source of most of their loan impairment charges in the previous crisis.

In its baseline economic forecasts, the FSA assumes a harsher shock to Sweden’s GDP in 2020 and 2021 (-6.9% and 1%, respectively) than Fitch’s baseline (-4% and 3.4%), although it assumes a similar recovery by end-2022. It also assumes real estate price corrections, which appears particularly conservative in light of a 11% housing property price increase over January to November 2020.

The ratings of Handelsbanken (AA), Nordea (AA-) and SEB (AA-) are on Negative Outlook due to medium-term risks to our baseline scenario. The rating of Swedbank (A+) is on Stable Outlook, reflecting significant headroom at the current rating level following a one-notch downgrade in April due to shortcomings in anti-money laundering risk controls.

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Banking

Future success for banks will be driven by balancing physical and digital services

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Future success for banks will be driven by balancing physical and digital services 3

Digital acceleration due to COVID-19 has not eliminated the need for bank branches

Faster service (23%), smaller queues (26%) and longer opening hours (31%) are among customers’ biggest asks of their bank branch, new research from Diebold Nixdorf today reveals. But with 41% consumers saying they would be comfortable to engage with all banking services via an app, it is vital that banks respond to the full spectrum of customer needs – balancing and evolving their offerings on multiple fronts.

A third (35%) of customers say they will always want access to physical, in-branch banking services in some capacity and one in ten (10%) consumers will never bank predominantly online in the future. This demonstrates that there remains an important role for the services a branch provides. This role, however, continues to shift away from purely transactional banking:

  • A quarter (26%) value face-to-face advice when it comes to their banking needs

  • One in five (18%) seek advice on different products

  • 17% want to speak to the staff or other customers.

Matt Phillips, Diebold Nixdorf vice president, head of financial services UK & Ireland, said: “The majority of banks have spent the last decade focusing on their digital strategies and investing in improving – or establishing – their online customer experience. However, the data shows that there is still an essential role for physical branches. Banks now increasingly face the challenge of continuing to provide customers with access to a range of physical and as well as digital services, giving them the flexibility to choose the best service for them at any given moment in time.”

When looking beyond the impact of COVID-19, planned branch visits by customers are expected to rebound to 28%, following a dip to 11% during lockdown. And when asked about the new services they’d like to see inside their bank, sixteen percent of respondents said more self-service machines would improve their in-branch experience.

Matt Phillips continues: “In a world that is fast evolving and where the future is digital, there’s no doubt that high street banks must, and are, responding to the needs of highly digital customers. But not every customer requirement is digital. There is still a strong need for physical bank branches and the interaction and services they offer, and striking this balance between physical and digital is where the industry must come together to provide solutions. For example, building a strong, leave-behind strategy is something we’re seeing across the board when banks have to close branches, ensuring customers have access to self-service machines to complete all their transactional needs.”

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Editorial & Advertiser disclosureOur website provides you with information, news, press releases, Opinion and advertorials on various financial products and services. This is not to be considered as financial advice and should be considered only for information purposes. We cannot guarantee the accuracy or applicability of any information provided with respect to your individual or personal circumstances. Please seek Professional advice from a qualified professional before making any financial decisions. We link to various third party websites, affiliate sales networks, and may link to our advertising partners websites. Though we are tied up with various advertising and affiliate networks, this does not affect our analysis or opinion. When you view or click on certain links available on our articles, our partners may compensate us for displaying the content to you, or make a purchase or fill a form. This will not incur any additional charges to you. To make things simpler for you to identity or distinguish sponsored articles or links, you may consider all articles or links hosted on our site as a partner endorsed link.

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