After a tumultuous period of several years, the financial industry has slowly rebounded from a global crisis and is fighting to win back both the business and trust of their customers. It's expected to be a long road, particularly given research that shows how little confidence consumers have in financial institutions.
Part of the problem with regaining the general public’s confidence is that financial service providers are generally seen as preferring the status quo, particularly when it comes to the processes and technology they deploy. This perception largely isn’t without merit.
But, the problem with legacy technology is that it’s no longer sufficient to meet the demands of today's financial landscape. New global regulatory requirements, including the U.S. Dodd-Frank Act, have mandated increased transparency in the over-the-counter (OTC) derivatives market. For financial institutions, this means tracking higher volumes of data, and recording every transaction in real-time. These requirements can create strain on in-house, legacy IT, which could lead to severe downtime and latency.
In other industries, the natural response would be to migrate to a virtualized IT environment. But that largely hasn’t been the case for financial services providers. When it comes to adoption of new cloud services, the finance vertical trails behind all other industries, with the exception of retail. These figures play out further in other indicators, including that the financial industry has the highest percentage of firms that have been using the cloud for less than one year and it is also among the verticals that rely most on legacy IT. So, why the delay?
Much of it has to do with regulatory strain that has been created by the Sarbanes-Oxley Act (SOX) and Financial Industry Regulatory Authority (FINRA), which establish the parameters for electronic record storage and retention, and set and enforce security guidelines for how institutions manage clients’ personal information. Because of these requirements, firms must exercise an abundance of caution when it comes to data management and privacy, as well as system security and risk management. Given these regulations, firms have been hesitant to hand over control of their data to what they perceive to be unproven cloud technology.
The irony is that cloud is the perfect solution for financial services companies to address non-trading systems’ latency and downtime. What’s more, established third-party vendors already have the infrastructure in place to support real-time data management. Yet, despite the benefits of outsourcing to a public cloud, firms fear that the integrity of the data could be compromised, or that they could violate data security and privacy regulations, if information is stored outside of their own private cloud. So they continue to use their legacy IT.
Despite these concerns, some firms have done the math and think that the probable benefits of migrating information off-site, to Web-based platforms, outweighs the risk. Adoption has reached high enough levels that, in 2012, the Federal Financial Institutions Examination Council (FFIEC) published guidance for financial institutions deploying in the cloud.
What’s more, as The Economist predicted last year, “The cost advantages of cloud computing mean that banking services are likely to move inexorably into the ether.” Another factor that will further advance the cloud in the finance vertical, as explained by Aité Group analyst David Albertazzi to Forbes, is that “new solutions are much better, in terms of technology… and, therefore, they are being viewed as less risky.” It’s clear that conditions for the use of cloud in finance are at least becoming more favorable.
If financial firms feel similarly that cloud technology has improved to become less risky and more cost-effective, they may find a hybrid IT approach – one that meshes public and private cloud services with legacy IT – to be most palatable. Within this environment, financial firms are able to largely move away from inefficient, out-of-date IT, in favor of a community of service providers that offer secure, scalable and flexible connectivity. In this architecture, a firm could choose to leave its most sensitive data in-house, while it migrates non-core information to public clouds.
To actualize this approach, financial firms are collocating within connectivity-rich carrier-neutral data centers, which host not only connectivity providers, but also industry-specific communities of interest. In the case of the finance vertical, these hubs are home to brokers, securities firms, mutual fund providers, HFT firms, commercial and investment banks, and more. A financial institution’s close proximity to its peers allows it to form close business relationships that ultimately benefit customers.
Carrier-neutral data centers also act as infrastructure hubs for financial firms, providing them with access to the newest technologies they need to compete in today’s hypercompetitive markets, without losing security or performance. The importance of new IT infrastructure cannot be overstated, given the unprecedented size of firms’ data footprints today, coupled with the immediacy with which they must execute financial transactions. To further benefit financial institutions, some innovative data center providers even connect customers to multiple cloud providers – public and private – through a single private connection, which boosts performance and security.
For an industry whose collective view of the cloud is still evolving, yet is still beholden to regulations and other factors that encourage the status quo, a progressive, hybrid approach helps financial firms follow in the footsteps of enterprises in other industries, many of which have already realized the full potential of the cloud.
Edited by Dominick Sorrentino