FINTECH

Banks Stumble Their Way To

Their Cloud-Based Future

Ron Shevlin Senior Contributor

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Observations from the Fintech Snark Tank

Sep 27, 2022, 11:00am EDT 0

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Banks' cloud migration efforts could use a lot of help. GETTY

Observations From The Fintech Snark

Tank

In a January 2022 article titled Banks Tiptoe Toward Their

Cloud-Based Future, the New York Times wrote:

“The banking industry has been mostly slow to adopt cloud

computing. While Wall Street leaders have long acknowledged
the potential of cloud computing to cut costs, they have only
allowed their firms to take halting steps. Some firms are held
back by old computer systems that are difficult to revamp or
retire, making the transition even more tricky.”

Adoption isn’t the issue and banks aren’t “tiptoeing” anywhere.

According to Cornerstone Advisors’ 2022 What’s Going On in

Banking study, two-thirds of US banks and credit unions already
have—or expect to have by the end of 2022—apps running in the
cloud.

The challenge is transitioning to the cloud and replacing systems

and applications that could increase efficiency and effectiveness—
and maybe even provide competitive advantage—by being in the
cloud.

Nine in 10 financial institutions have a digital transformation

initiative in place, and 80% of them believe they’re not even
halfway done with transformation efforts. How rapidly they can
migrate to the cloud determines how fast—and effectively—they
can complete their digital transformation.

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In the midst of this transformation, banks get two

things wrong about cloud migration: 1) how much it
really costs, and 2) how to manage it.

Banks Underestimate the Cost of Cloud

Migration

A team of Dutch university professors assessed the costs of cloud

migration at 10 “international corporate” banks. The researchers
identified nine cost categories associated with cloud migrations:

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Cloud migration cost categories SOURCE: KAYA, VAN DEN BERG, WIERINGA, AND MAKKES

In five of the categories—dependencies, legislation, departmental

support, re-architecting, and external contractors—at least half of
the banks experienced cost overruns (versus original estimates)
for their cloud migration efforts.
Cloud migration cost overruns SOURCE: KAYA, VEN DEN BERG, WIERINGA, MAKKES

Application dependencies were the most common category of

budget overruns. One banker commented:

“Public cloud initially starts on-premise and all your connections

and dependencies are on-premise and to decompose them for the
purpose of migration is more complicated than expected.”

Another said:

“We had to decompose some applications due to dependencies.

Cloud adoption in practice is much slower than expected due
these kind of complexities.”

Although the study didn’t quantify the overrun of cloud migration

costs, the qualitative conclusions clearly point to a system
underestimation of cloud expenses, driven by a few cloud
migration cost categories.

Banks Mismanage Cloud Migration

Interestingly, only three of the 10 banks included in the Dutch

study said they had cost overruns for their internal core
migration team. Of the other seven, however, three had budget
overruns on external resources.

One bank exec commented:

“The level of experience within the industry is very low regarding

cloud computing, the chance of hitting unexpected costs is high,
because we are experiencing it for the first time”.

Another added:
“When we started we thought we would need a certain amount of
resources. However, we miscalculated because we were too
positive. We have a knowledge gap and cloud is the main reason
for this.”

And the researchers themselves remarked:

“Overspending on external contractors is an indication how the

process of migration is actually progressing. It displays which
areas lack the required knowledge to manage the cloud migration
internally.”

One banker speculated the bank’s staff would leave if cloud

migration was too slow:

“Our bank worked for many years with external contractors, they
all left and the current internal employees are recently hired. We
have very limited knowledge of the on-premise IT infrastructure
and this is a continuous struggle for us.”

Cloud-Based Digital Transformation

According to Cornerstone’s research, nine in 10 financial
institutions have a digital transformation initiative underway,
and 80% of them believe they’re not even halfway done with their
transformation efforts.

There’s a connection here between cloud migration and digital

transformation progress. The slower the migration to the cloud,
the slower the digital transformation.

Like it or not, for many banks, the key to accelerating digital

transformation—and cloud migration—is more effective vendor
participation.

When discussing partnerships, bank executives cite a lack of

coordination and transparency of third party vendors as a
concern.
According to another report from Cornerstone Advisors,
commissioned by Amdocs, titled Leveraging the Cloud to
Accelerate Digital Transformation:

“As banks integrate more and more systems into their core in
order to modernize, it means more partners to manage. Having a
dedicated vendor manager is mission critical to manage all of the
relationships as well as designating someone within the financial
institution to sit in the captain’s chair to drive the initiative.”

In addition to better management of external resources,

Cornerstone advises financial institutions to transform the IT
“talent stack:”

“The talent shortage will continue to slow down cloud

implementation. This forces banks to look for talent more
aggressively in key areas including specific cloud platform
configuration (AWS, Azure, Google), server virtualization and
app containerization, API integration, DevOps, cloud security
and orchestration, and disciplined change management.”

Stumbling Is Better Than Standing Still

Banks may be struggling with their cloud migration efforts, but
that’s preferable to where the industry was just a few years ago.

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Ron Shevlin Follow

Ron Shevlin is the Chief Research Officer at Cornerstone Advisors, where

he publishes commissioned research reports on banking and... Read More

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