Click to learn more about author Sudipta Kumar Ghosh.
On-demand services that include shopping and entertainment, booking transportation and travel, and instantaneously paying back your friend for that dinner from your phone are proliferating in a high-tech world. As such, it’s a wonder that most traditional banking and financial institutions appear to be as antiquated as a customer who still needs access to a brick-and-mortar bank for most of their critical financial needs.
Traditional brick-and-mortar banks, unions, and other financial companies – also known as legacy institutions – have been slow to transition to digital and cloud technology. On the other hand, fintechs (financial technology organizations) are the disrupters of the financial industry. They have moved full speed ahead to fill the void and syphon business away from these conventional institutions that haven’t quite embraced the ever-growing, instant-gratification reality that customers have come to expect. Need to pay in store? Customers can do it using their phone, thanks to Apple Pay. Need to pay a friend? Whip out the phone and choose Venmo – a peer-to-peer money transfer app.
Gaining a Competitive Edge
Digital technologies allow companies to place the needs of their customers first – a fintech edge that translates to higher profits and a whole new world of opportunity. Loyalty to a neighborhood bank evaporates when consumers find that new, online banking services are not only cheaper but don’t require a car trip.
Gaining a competitive edge is at the heart of all business growth. Take Netflix, for example. The streaming giant moved all of its databases to the cloud over the past few years and as a result has the ability to produce more shows, attract more customers, and easily handle any technical issues that naturally develop with lightning speed growth.
Legacy institutions have a choice: Either get on board and offer more diverse mobile business and personal banking options or relinquish profits to fintechs, thereby becoming as antiquated as a phonebooth.
Why Are Banks So Slow to Embrace Cloud Tech?
Legacy financial institutions are at a turning point. In this world where fintechs are investing heavily in digital and cloud technologies, traditional financial companies are still lagging behind with digital offerings. One of the main reasons for this is banks are built on complex mainframe technology and are hosted on outdated infrastructure owned by the financial services. These platforms and infrastructures cannot support the latest digital products, services, and applications that the bank needs to offer to compete with the fintechs.
The other challenge banks face is hiring the right talent. After all, the real heroes are the people who drive the transformation. To embark on a cloud transformation, the bank must invest and retrain top, existing talent and hire a new league of employees – men and women who are tech-savvy in digital and cloud technologies and able to transform an industry that has been dependent on on-premise services and protocols since the dawn of banking.
Fintechs now compete with traditional businesses in the everyday delivery of financial services. Mobile banking and payments, digital lending and credit and insurance services, trading, and more can now be completed through a phone app. Banks that do not embrace cloud technology will continue to lose customers to the fintechs.
Banks, however, are waking up to this reality. In a 2020 report on the outlook of the next decade in banking, Cornerstone Advisors found that three-quarters of credit unions and two-thirds of bank executives said “fintech partnerships, collaboration or investments will be very or somewhat important to them in 2020.” For credit unions, the percentage of executives that recognize the importance of technological change grew by 30 percent in 2020.
Change isn’t easy, and it sure isn’t cheap. Traditional banks have built complex platforms that reside on on-premise data servers. Costs of moving to the cloud vary greatly depending on the size of the legacy institution. With so few financial companies attempting to move to the cloud, the necessary transformation has been excruciatingly slow.
Pros and Cons
Banks have plenty of reasons to follow fintechs’ model. Fintechs that are on cloud technology report improved customer experience, vast market growth, and better talent retention, which in the end allows financial groups to work on the latest and greatest technology.
On the flip side, if legacy institutions don’t fully invest in all of the components required to meet the needs of their 21st-century clientele, a lot of time and money could potentially be wasted. A lift and shift of technology platforms to the cloud will not solve the problems of legacy financial institutions. What really matters is the customer experience, which by all accounts must be the central force that drives legacy institutions’ cloud transformation strategies. If traditional financial groups are not customer-centric, their base could wither and the loss of customers will lead to the same disappointing results: lower market share and closures.
Now is the time for legacy institutions to embrace cloud technology and compete with fintechs to get their fair share of customer loyalty while developing new streams of business. Customers expect ease in every conceivable transaction. Cloud technology is not the wave of the future. It’s here now and it’s here to stay. After all, moving business transactions to the cloud saves money, is environmentally sound, has proven to boost revenue, and will cement loyalty for existing customers while attracting new, savvy investors.