The COVID-19 pandemic has been grim and the impact on our lives – including our financial lives – profound. But when the storm has passed, banks could reflect on this moment to crystalise strategies that create more resilient systems, says Ciaran Chu, Head of Public Cloud for ACI Worldwide
There’s no denying it, coronavirus has dramatically changed the way we shop – maybe forever. As entire populations isolate, people and businesses are relying on digital payments to keep things moving. From supermarket deliveries to dog walking services, hard cash is no longer king.
According to electronic payment and banking solutions giant ACI Worldwide, the retail sector saw a dramatic, 74 per cent e-boost in March, compared to the same month last year. Online gaming, enjoyed a surreal surge of 97 per cent. But not everyone is kicking back with FIFA 20 or parked on the sofa with Grand Theft Auto. There’s also been 97 per cent spending growth on home products and furnishings, and a 163 per cent rise in online purchases of garden essentials. It seems that, whether your self-isolation project is renovating your home or binge watching the whole of Netflix, digital payments are the way to go and that’s putting stress on digital infrastructure and frontline services.
It’s not all about consumer spending, of course. As supply chains become stretched, cashflow and processing business-to-business (B2B) payments – including cross-border – faster, is also of concern to many. Meanwhile, businesses are relying on banks to quickly scale up and disburse government-backed funds to keep them afloat. Figures from UK Finance show UK banks nearly doubled the number of business loans for those impacted by coronavirus in a week, but it’s not nearly enough. By mid April, a meagre 21 per cent of the 28,460 applications made since the government-backed loans were announced almost a month earlier had been approved. Nor were the 300,000- plus businesses that had made inquiries getting the information they needed in time. In April, Wells Fargo, one of America’s biggest banks, encouraged customers to look elsewhere for state-sponsored help – it simply couldn’t handle the weight of inquiries.
Such lumbering paces can trigger catastrophic results. In the UK, the number of firms going bust surged by 50 per cent over four weeks, according to the London Gazette.
The pressure to quickly processloans and transactions has never been fiercer, so what can cause a hold-up? For the experts, two words spring to mind: controls and capacity. And ACI Worldwide’s Ciaran Chu says an effective way of addressing both lies in the public Cloud.
Many Tier 1 banks, caught up in legacy controls and processes, with often antiquated systems, have become overwhelmed in times of stress. In the aftermath of the 2008 Financial Crisis, there are also more rules to follow than ever before, with hefty fines for non-compliance.
Cloud-first fintechs, on the other hand, are liberated from legacy to focus on agility, navigating market trends and – fundamentally – focussing on their customers, according to 2017 Deloitte research. But they don’t (yet) service the majority of customers in either business or retail banking.
Like a bucket of ice-cold water in the face, the COVID-19 pandemic has thrown traditional banking systems into shock. Lengthy approvals and long-winded checklists are not cutting it as they cling to established, internal systems. But could this be the opportunity of a lifetime for banks to loosen their bodices and adopt a more responsive, Cloud-based approach?
“The pandemic has been an eye-opener for banks. While all are at different stages of their tech journey, this will accelerate it. Many are already feeling the need to do things differently, and not for the short term,” says Chu, head of public Cloud at ACI Worldwide, the provider to more than 1,000 financial institutions and intermediaries, as well as thousands of global merchants that execute (even in normal circumstances) $14trillion a day in payments and securities.
According to some analysts, in 2019 more than 30 per cent of banks worldwide were saying half of their expenditure over the next two years would be committed to new, Cloud-based applications. And ACI Worldwide is certainly seeing the pandemic urgently focus clients’ minds on business continuity, capacity and flexibility offered by the public Cloud. Companies across the spectrum are accelerating or modifying plans to adopt remote-hosted systems to ensure future operational resilience (which, even pre-pandemic, was top of regulators’ concerns for 2020).
“Many companies will be asking whether their operational risk control process is up to scratch, and if it can be made more effective,” says Chu.
Previous internal objections to Cloud adoption are likely to be removed, especially perceived concerns around compliance. In that conversation, some empty cans probably need to be kicked down the road; Cloud hosting can in many ways be seen as more secure than legacy on-premise systems, not less – although it’s true that more uniformity between regulators’ attitudes and approaches is needed.
There’s no denying, though, that the pandemic has highlighted the limitations of the status quo. For example, in the UK, rigid controls around communication and confidentiality mean most banks’ customer call centres cannot operate from home; a major roadblock, amidst social distancing rules.
“A lot of processes and controls banks thought they might never have to use, they’re now having to,” says Chu. “For instance, anyone with an offshore team is now struggling with the fact they can’t access networks, because they haven’t got the proper VPNs and other measures in place. It makes them ask, ‘is our control process actually fit for purpose when we need to react in a truly urgent situation?’.”
So, what could current, on-the-hoof changes mean for customers long term?
Chu cites an example of how a more flexible, Cloud-based and digitally informed approach could have a massive impact at street level – literally.
“When I go for a run or walk, every Monday, I notice people queueing round the block for cash machines. The second or third time I saw them, I realised it must be a government credit payment coming into their accounts that brought them all there, at a specific time on a specific day. As a consequence of the pandemic, we’ll see banks improve their controls to disburse money more effectively, so that people don’t have to queue up to check if it’s arrived,” he says.
“Think about the Revolut model, for example. There is no reason why, if a lot of people have smartphones, you can’t issue them with prepaid cards or prepaid accounts, digitally. It’s about saying ‘what problems do we really need to solve for our customers?’. This goes back to data, leveraging insight analytics, machine learning and artificial intelligence (AI) to segment data better and figure out ‘who’s in most need of X, Y, and Z? I can see this subset of customers are probably going to be worst affected. Therefore, we need to react like this’. It’s about going above and beyond what a bank would traditionally do.
“Cloud gives you, at its simplest, a clearer focus on your customers, so that you can be more scientific in how you target them and win business. Secondly, it ensures organisations give themselves time to think about customers, as opposed to all the other distractions they have in running their infrastructure. For me, the biggest benefit of the Cloud is that it allows you to get closer to customers and focus on what matters.”
Linked to control is the battle for virtual space. For years, data storage and compliance headaches have gone hand-in-hand. Issues around confidentiality, security and confusing, abstract concepts about Cloud technology meant that, for many, the subject got sidelined. It’s easy to see why: you want your compliance department to be cautious; it’s also often overloaded with pressing frontline work and time-sensitive audits. So, while investing in virtual storage is a compelling time and money saver for financial institutions long term, it hasn’t been priority number one – until perhaps now.
Managers – including those in organisations maintaining private Cloud infrastructure that might find they can’t build data centres fast enough – need to be looking skywards, says Chu. Because the likelihood is that demand for public Cloud access will ramp up when the world is out of crisis mode, especially if, as seems likely, recent digital transaction volumes continue to remain high.
“I can see there is going to be a really big issue, coming out of this, which is cashflow,” adds Chu. And not just cash flow, but data flow.
The Cloud has enabled challengers such as Nubank in Brazil to scale out and up at rocket speeds. Dwarfing Revolut’s 10 million customers, this mega-fintech boasts a colossal 20-plus million customers in Brazil alone, serviced by just 2,400 employees. It had the advantage of writing its core banking system to be Cloud-enabled from the get-go; the ongoing rollout of public Cloud for others who are not Cloud-natives has highlighted some valuable lessons for ACI around adoption, says Chu.
“Banks and financial intermediaries are looking to improve their time to market, and leverage the Cloud to do that. But what they don’t want to do is take two steps forward by offloading some of the compliance and operational controls, and then find that they have to do a load more application monitoring and other technical pieces as a result of that.
“There is a market opportunity here for a full managed service. The advantage with that is that you, as a bank, can focus on your customer, your product setup and the operations that define your customer experience. Let somebody like ACI, which is an expert in technology, pick up the management of the technical infrastructure while you can get on with being the bank.
“A lot of, if not all, the banks, are in a kind of heightened change phase because of the pandemic,” says Chu. “We’re expecting more and more of them to look to ensure they have more effective backup solutions, because if they’re seeing more transactions, and they don’t have the capacity to monitor them, there’s more chance of the system failing to work or needing patching. The best way to avoid that is to have a Cloud solution ready to rock. It doesn’t burn effort and resource and they have what we call a ‘sleep-at-nightability’ if we’re handling it for them.”
Under its managed solution, ACI Worldwide invests on the client’s behalf in reserved instances, the data providers’ way of forward-selling capacity as insurance against the kinds of data volume spikes seen in recent months as everyone hits their phone or tablet.
“Reserved instance is so important because if there is a spike, all of a sudden, everyone is trying to push functions into the Cloud and you’re all trying to grab the same computing at the same time, leading to a slow response. Our reserve instances ensure we can scale up solutions in the Cloud quickly,” explains Chu.
A partnership approach
In December, ACI Worldwide announced its collaboration with Microsoft to use public Cloud infrastructure to store data from banks, fintechs and other financial companies. ACI will license its Universal Payments technology to customers for implementation using Microsoft’s Azure Cloud computing service. ACI’s on-premise customers will benefit from enhanced security and lower long-term capital expenditure, by adopting a scalable Cloud-based infrastructure.
“Clients want ACI to make the journey to the Cloud easy for them, and our partnership with Microsoft is key,” Chu said at the time.
In fact, partnerships of all kinds have helped ACI Worldwide respond to changing client needs.
“Our partners have been crucial to our Cloud-optimised journey,” says Chu. “The acquirers that we’ve put live, for instance, have all required colocation capabilities, so partnering with Equinix has been a massive help in addressing any questions clients may have about latency. Our new partnership with MYHSM is an interesting addition to our offer, which reduces the capex and management cost associated with a hardware security module (HSM). Being able to say we can give a client HSM on demand, as well as colocation services, and manage all of that for them, means ACI can better serve our customers in evolving their solutions and build trust.”
What does the future hold?
Banks, like the rest of us, are reaching for new ways of working in response to the biggest global health emergency for decades. And fewer security risks, faster software enhancements, increased agility, better response times and improved speed to market are just some of the benefits of adopting a public Cloud approach, says Chu. He believes there is a light at the end of the tunnel for those that make that move.
“We support a number of systemically important institutions across the world, and many have put in change freezes,” says Chu. “So, right now we’re really focussed on supporting them during the pandemic, but we’re also taking the time to go through future roadmaps with clients, lean in to them to understand how we can help accelerate their plans when this is over.”
While coronavirus has created a bunch of new challenges, it has also highlighted problems that have long needed fixing. In supporting efforts to save businesses and individuals from financial ruin, banks have discovered their limitations. Perhaps there is a silver lining. Years from now, when the storm has passed, the system could look very different. We may even find that a massive migration to Cloud technology ensured the vitality and stability of our financial institutions, thus ensuring they could deal with crises not yet imagined.