How New Digital Banks Are Taking Advantage of the Cloud to Win Markets

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The last decade saw cloud ecosystems become fully mature hosting and computing solutions for banks and other financial institutions (FIs). Being able to host entire core banking system on offsite servers did more than increase the capabilities of traditional banks, it also gave rise to neobanks, a disruptive force in modern retail banking.

Neobanks are fairly recent fintech challengers to the supremacy of longstanding players in the banking industry. These all-digital banks are characterized by an almost complete absence of brick-and-mortar locations as well as low or free service fees. These advantages would not have been possible without the maturation of cloud infrastructure.

Many traditional banks have started to respond by leveraging their size and adopting the market-winning strategies and technologies employed by neobanks. Here are just some of the ways these new digital banks and other forward-thinking FIs are taking advantage of cloud-based technologies to win over clients:

1.) Effortless Scaling

Scaling capacity according to demand is a serious challenge for traditional FIs committed to maintaining onsite IT infrastructure. An increase in demand will necessarily result in a serious increase in overheads due to server equipment acquisition and maintenance costs. Additional specialized hires will also often be needed to facilitate installation and maintenance. Of course, this all assumes that the FI predicted the demand increase accurately, which is not always the case.

Cloud-based IT infrastructure makes it incredibly simple for FIs to scale their operations up or down, depending on current needs and market conditions. Any extra demand will be automatically accommodated by most modern cloud systems according to the service level agreements between the bank and technology provider. This allows digital banks to assure customers of great service at a lower cost, regardless of the demands on the system, and without having to worry about new hires or onsite server maintenance.

2.) Personalized Offerings

Better cloud and mobile infrastructure have made it possible for digital banks to offer a wider set of self-customization and personalization options than was possible through the traditional banking experience. Rather than go through a client service representative, digital bank clients can simply use their web or mobile app to facilitate all kinds of personalizations themselves.

This is advantageous in two ways. First, self-personalization allows digital banks to dramatically scale back their manpower requirements. Second, it permits clients to build an extremely customized banking experience for themselves that they may not be able to get through a traditional bank. Thus, self-customized services are giving digital banks a significant edge in both cost efficiency and customer journeys.

3.) Heightened Business Agility

With few or no physical locations, cloud-powered digital banks are much freer than traditional FIs to enter new geographic areas and pivot to new opportunities in the financial market. They are typically freer to act according to current market conditions without being burdened by such concerns as building permits, staff training, and other entry costs.

These business agility advantages are even more pronounced with current-generation core banking solutions. Newer solutions feature highly advanced artificial intelligence (AI) and machine learning (ML) capabilities that seamlessly automate data transfers across the whole enterprise. This gives better data visibility and allows digital banks to act quickly on market movements within the day if necessary, reducing their risks and increasing the capability to act on new opportunities.

4.) Wide-Reaching Cost Optimization

AI and ML on new cloud-based systems effectively give digital banks the processing capability of traditional banks that are many times their size with just a fraction of the employees. Labor requirements for client service, IT, compliance, technical support, cybersecurity, and facilities can be significantly reduced compared to what was required with legacy core banking systems.

This effectively brings down losses due to human errors, negative client experiences, cybercrime, regulatory noncompliance, and other human-related factors. This all effectively increases the revenue of digital banks without them needing to raise service fees. These technology-enabled cost-savings have provided digital banks with an effective price advantage over traditional banks with higher overheads.

Is It Time for Banks to Move to the Cloud?

Cloud-based core banking systems have indeed come into their own, not just as a viable option for traditional banks but also as the only way for them to enjoy better competitiveness in increasingly competitive financial markets.

Over the years, cloud infrastructure options for financial institutions have become quite similar, at least on paper. The reality is that adopting a cloud-based core banking system won’t be enough to make traditional banks competitive against neobanks and other fintechs. They need to choose a system that’s not only a good match for their goals but offers sufficient training and technical support as well.

Choosing the right vendors and tech partners may delay the transition to a fully cloud-based system, but it’s usually worth the time. By weighing cloud-based IT options carefully, traditional FIs can greatly improve the odds that their migration to the cloud will be successful.

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