Discussion around cloud-based financial services has been around a long time, but executives at Google and Huawei, two providers of cloud services, say there is still reticence among bank leadership to migrate their legacy systems.
Some areas are rapidly moving to virtual servers – such as data storage. But moving the banking core, where transactions and business rules are stored, generally requires more complex processes.
While cloud migration may appear to be a technical question, advocates say these decisions have a direct impact on customer service, slowing down the development of attractive digital platforms and making banks less agile in their competition against fintechs and big fintechs.
“There are not so many technological limits. What there is, is limits in the way of thinking”, Julio Velázquez, general director of Google Cloud Mexico, tells iupana.
“Developing a computer system 30 years ago was not the same as doing it today. It is not an easy or immediate process […] through advanced tools, we help clients understand their legacy systems, those that they developed over many years: which ones are ready and have a more positive outlook, in order to migrate them,” he says.
Cloud-based operations can be used for data storage and operational processing, improving information security and enabling real-time data analysis – all tools that help in personalization and development of new products.
However, even today, a significant portion of the region’s banks rely on legacy technology, with less flexibility to identify patterns.
Few banks taking the plunge
The traditional banking core was not designed for immediate analysis, such as information on social networks or online consumption habits, said Alfonso Jiménez, director of strategy and marketing for Huawei Cloud in Latin America. “That’s where the cloud becomes an enabler to implement solutions,” he says.
“To achieve an efficient digital transformation, we have to start with people and processes,” adds Jiménez.
Infocorp, a financial technology provider, forecasts that by 2024 at least 40% of banks will have started migrating to the cloud. And although at first, this technology was seen as a means to reduce costs, by making server maintenance more flexible, now it is also perceived as a source of new income because it allows for banks to diversify their product offering.
Still, relatively few banks are still taking the plunge. Spain’s Santander announced last May that it was one of the first global entities to transition 80% of its banking core to the cloud, while Peru’s Interbank said in November that it had achieved a migration of close to 30% of its operations to the Amazon Web Services (AWS) cloud.
“Banks in general understand the digital or fintech opportunity. And you’ve seen a lot of investment and time and attention, within the banking sector, to make progress within their own their own offerings,” Mike Packer, a partner at QED Investor focused on VC investments in Latin America, tells iupana.
The firm is forecasting fintech industry revenue to grow six-fold through 2030, from $245 billion to about $1.5 trillion, according to a survey conducted with the Boston Consulting Group (BCG). In LatAm, the study also expects a significant evolution, despite the more complex economic conditions and the capital drought: it forecasts a compound annual growth rate of 29% (CAGR) in the next seven years, led by ecosystems. from Mexico and Brazil.
“Banks have to take fintech seriously,” Packer adds. “And if banks are going to continue to compete, they have to compete for customers where they are, where their preferences are.”
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The value of data in the cloud
Migrating to the cloud can take as long as three years, although the process varies according to each area of the bank. Generally, banks and fintechs begin with using the cloud for data storage.
“Data is the new oil,” says Google’s Velázquez. “It has an impressive capacity to make us understand, through advanced analytics, what is happening with my clients; what are they looking for and how to be much more assertive in the offer.
“Companies and organizations that can develop this ability and adopt technologies and products are going to be able to differentiate themselves,” he adds.
Some areas of banks can make the transition to the cloud more quickly, through a process known as “lift and shift”, which consists of making copies of the information (applications, software, rules) and transferring it to the cloud, without optimization, with the aim of seeking efficiencies in cost and operations, says Velázquez.
At the same time, more sensitive areas within legacy technology need more time to migrate. In particular, the banking core: “which is the neural system where accounts, customers, checks, credit reside. What we are doing gradually is modernizing them with the idea of seeking efficiencies,” says Velázquez.
However, storing data and processing data are different things. Organizations, especially banks, are often faced with massive “dirty data” lakes that make it challenging to identify them and create relevant metrics.
If something is not right from the start and it is digitized, the result will be more efficient, but of low quality, sums up Jiménez from Huawei: “garbage in, garbage out”.
Micro latency is key
The volume of operations in the financial industry requires fast response times. And when it comes to real-time trading and immediate payouts, response latency becomes important.
Interviewees say that this search for speed has driven their decision to build data centers in various parts of Latin America. “Micro latency becomes one of the main players,” says Jiménez of Huawei, a company that has facilities in Mexico, Brazil and Chile.
“In banking services, an average microlatency of less than 100 milliseconds is essential to serve these millions of users with thousands of transactions per second.” For example, the executive explains that before the pandemic, banks with servers operating outside of Mexican territory had a latency between 160 and 280 milliseconds. “That’s centuries in the financial industry and it opens up risks.”
This local focus also allows them to comply with Mexican regulations, which require financial institutions to store a copy of their data in the country.
Google has also begun to build facilities in the Mexican city of Querétaro. “To be able to meet the needs not only of banking, but also of telcos or industry 4.0,” says Velázquez.
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