DIGITAL BANKS AND THE POWER OF THE CLOUD TRACKER® JUNE 2020

How N26 Is Using The Cloud Pacific National Bank to use How the COVID-19 pandemic To Fulfill Mobile-First cloud platform to support is advancing FIs’ cloud Customers’ Expectations its digital-only bank migration plans

Page 8 Page 13 Page 20 FEATURE STORY NEWS AND TRENDS DEEP DIVE TABLE OF CONTENTS

03 WHAT’S INSIDE Recent cloud and digital banking developments, including how CaixaBank is using cloud technologies to enhance customers’ experiences and why Italian banking group Intesa Sanpaolo is creating cloud-based data centers in Turin

08 FEATURE STORY An interview with Lindsey Grossman, director of product at challenger bank N26, on how the FI uses cloud banking to address mobile- first customers’ shifting expectations

13 NEWS AND TRENDS Recent cloud banking headlines, including reports from Ant Financial that many Chinese banks have begun utilizing its cloud platform solutions and a look at how Utah-based Continental Bank is leveraging the cloud to scale its digital banking services for more businesses

20 DEEP DIVE A detailed analysis of the factors preventing legacy FIs from migrating to the cloud and ACKNOWLEDGMENT how the COVID-19 pandemic is forcing them The Digital Banks And The Power Of The to upgrade their core banking innovation ® Cloud Tracker was done in collaboration strategies with NuoDB, and PYMNTS is grateful for the company’s support and insight. PYMNTS.com retains full editorial control over the following findings, methodology and data analysis. 24 ABOUT Information on PYMNTS.com and NuoDB WHAT’S INSIDE

he financial industry is continuing to take stock of pandemic-related economic turbulence. Some of the United States’ top financial institutions (FIs)experienced plummeting profits in Q1 2020, for example, and bank customers are still con- fronting their own economic worries. This means it is imperative for banks to Tprovide speedy, seamless services to budget-conscious consumers who are focused on keeping their own expenses as low as possible.

FIs are considering numerous new tech- are beginning to do so. Banks are spending nologies to add speed to their operations approximately 15 percent of their yearly without compromising clients’ and custo- operating budgets on technology upgrades, mers’ personal data, including automated according to one study, and there has tools, artificial intelligence (AI) and cloud been an increase in partnerships between technologies. Migrating to the cloud could third-party cloud technology providers and enable these entities to process larger global FIs eager to enhance their online volumes of data faster, especially if they platforms. Many of these legacy banks are also leverage AI solutions, which can ana- also planning to integrate AI tools, but their lyze and categorize information far quicker reliance on outdated infrastructure could than human employees. A recent study be hindering their cloud migration plans. revealed that the share of financial execu- These FIs will have to overcome such fric- tives who believe implementing such tech- tions to keep pace with competitors. nologies will be crucial to global banking’s future has risen to 66 percent, whereas 42 AROUND THE CLOUD BANKING percent said the same in 2019. WORLD

Migrating to cloud- and AI-based solutions Spanish FI CaixaBank announced that it could help FIs handle growing calls for will strengthen its existing technology pro- faster banking tools during the COVID-19 vider partnerships to craft products that pandemic, and recent trends show they appeal to digital-first consumers. It will

© 2020 PYMNTS.com All Rights Reserved June 2020 | 3 What’s Inside

work with technology provider IBM to roll out products that provide nuanced insights into consumers’ financial needs, extending a collaboration that began in 2011. The new solutions include cloud-based servers that can more quickly finalize payments and transactions while also delivering faster and more personalized answers to consumers’ banking questions. The initiative will pair the bank’s automated and AI-based tools with IBM’s cloud technologies.

Italian banking group Intesa Sanpaolo is also looking to launch several initiatives by integrating AI with the cloud, and it is turning to Google Cloud and telecommuni- cations firm TIM to build out these capabil- ities. Intesa Sanpaolo will utilize Google’s servers and technologies and TIM’s data centers in Turin and Milan to create dedi- cated Cloud Regions in the cities, according to a recent press release. The companies will use these two Cloud Region facilities to study potential innovations with AI and automated tools, allowing startups and other firms to experiment with these tech- nologies to determine how they can best be used with the cloud.

Legacy FIs are still facing challenges sur- rounding innovating their digital platforms at speed, however. One recent study found that 43 percent of these banks see their

© 2020 PYMNTS.com All Rights Reserved June 2020 | 4 EXECUTIVEDigital Banks And The Power Of The Cloud Tracker® INSIGHT

outdated core banking infrastructures and How can combining AI with a cloud- the costs of migrating to the cloud as major based infrastructure better help obstacles to innovation. It also revealed banks address the challenges that that more than 40 percent of FIs spend come with increased data and digital transaction volumes? between 10 percent and 30 percent of their yearly IT budgets on issues stemming from AI is poised to make a profound impact on legacy operations. This represents a signif- the banking sector. From global customer icant amount of spend, yet many FIs are acquisition efforts to real-time personaliza- tion of the user experience to infrastructure suffering from a lack of available talent — technology management, the opportunities including skilled engineers and developers are endless. As it specifically relates to [the] — to help them maximize these capabili- latter, AI fused with cloud-based infrastruc- ture offers banks the opportunity to differen- ties. Third-party cloud technology provid- tiate their organizations by: ers could be one way to bridge this talent • Reducing total cost of ownership: gap. As AI learns the patterns of the day-to-day operations, it will be able to automatically For more on these stories and other cloud adjust resource utilization and services on banking headlines, check out the Tracker’s real-time cost assessments balanced with News and Trends section (p. 13). processing efficiency. • Increasing global reach: HOW N26 IS USING CLOUD CORE As banks use their digital presences to think globally, AI will be able to recognize trends BANKING FOR NIMBLE MOBILE happening around the globe and make key INNOVATION technology decisions based on an optimized experience for new customers in a given Fifty-five percent of consumersreport region at the lowest cost to acquire. that they prefer mobile banking now that • [Enhancing] security capabilities: the COVID-19 pandemic has shuttered Leveraging AI and cloud-based technology, brick-and-mortar branches, up from the banks will be able to better identify personal 47 percent who said the same before the information, secure it in the optimal environ- ment and, when necessary, protect them- crisis. These consumers are not looking to selves against attacks with greater speed and replicate their brick-and-mortar branch effectiveness. experiences on screen, however, and are While the utilization of AI alongside cloud- instead seeking seamless access to per- based infrastructure may be limited today, sonalized online services. Banks utilizing the impact of rising data costs coupled with the increasing ease of moving between cloud providers will be a catalyst for adoption.

ARIFF KASSAM, chief technology officer atNuoDB

© 2020 PYMNTS.com All Rights Reserved June 2020 | 5 What’s Inside

legacy infrastructure may struggle to ful- DEEP DIVE: fill customers’ expectations as these FIs’ WHY THE COVID-19 PANDEMIC systems strain to handle expanding digi- IS PUSHING LEGACY FIs’ CLOUD tal transaction volumes and offer more MIGRATIONS FORWARD tailored customer service. This contrasts The COVID-19 pandemic has caused a with cloud-based banking, which allows rapid increase in the number of consumers banks to preserve customers’ digital using online banking tools worldwide. Con- account access and create new features. sumers require seamless access to their In this month’s Feature Story (p. 8), Lind- bank accounts to pay their bills or make sey Grossman, director of product at chal- daily transactions, but legacy FIs’ outdated lenger bank N26, explains how the FI’s core banking infrastructures are preventing cloud-based infrastructure helps it meet them from adequately supporting these mobile-first customers’ needs. functions. Many banks are thus examining new ways to shore up how they process transactions on their networks, and some could find that migrating to cloud-based platforms allows them to more easily han- dle growing volumes of data. This month’s Deep Dive (p. 20) examines the traditional barriers that have kept legacy FIs from migrating to the cloud and details how the COVID-19 pandemic may be accelerating their plans to do so.

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66% 15% 43% Portion of FI executives Share of FIs’ typical Portion of legacy FIs who believe emerging yearly operating costs that see outdated IT technologies will be that go toward infrastructures and critical to the future technology-related the costs involved in cloud of banking expenses integration as significant innovation barriers

55% 5 YEARS Share of legacy FIs Length of time it can that still lack digital take FIs to fully complete maturity in their core core banking banking systems infrastructure switches

© 2020 PYMNTS.com All Rights Reserved June 2020 | 7 HOW N26 IS USING THE CLOUD TO FULFILL MOBILE-FIRST CUSTOMERS’ EXPECTATIONS

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CONSUMERS ARE LEANING HEAVILY ON DIGITAL BANKING TOOLS DURING THE COVID-19 PANDEMIC, and studies suggest that they will continue to do so in its wake. Fifty-seven percent of con- sumers now prefer internet banking solutions, compared to the 49 percent who said the same prior to the pandemic. Mobile banking saw a similar spike, with the share of consumers preferring it shifting from 47 percent before the pandemic to 55 percent.

The bump in digital banking popularity means FIs offering such services must keep them fast and seamless to avoid los- There is ing customers to other providers that can “ support their needs. Accommodating rising nothing more digital transaction volumes can be difficult for banks that are still using legacy core frustrating banking infrastructures, but cloud-based models could provide the seamlessness than trying mobile-minded customers seek while avoiding the service hiccups outdated sys- to complete tems experience, Lindsey Grossman, direc- tor of product for challenger bank N26, payments or said in a recent interview with PYMNTS. The Germany-based digital bank launched trying to buy its services in the U.S. eight months ago and runs on a cloud-based platform sup- something, ported by (AWS).

“Banking in the cloud provides a number of and if things benefits,” Grossman said. “Number one, it allows us to provide the best service to our time out, customers by scaling in a flexible manner so that we can react almost instantly to you just lose traffic changes and maintain high availabil- ity. There is nothing more frustrating than credibility. trying to complete payments or trying to ”

© 2020 PYMNTS.com All Rights Reserved June 2020 | 9 Feature Story

buy something, and if things time out, you just lose credibility. We wanted to make [The sure that we never compromised on that “ from the start, and that is why we built our cloud has] architecture in the way that we did.” allowed us Running on the cloud also enables FIs to craft innovative services tailored to cus- tomers’ needs, she said, as banks can use to really the technology to test and scale solu- tions without straining their networks. This be nimble adaptability is key, because the pandemic is accelerating consumers’ migration to [and] really online and mobile banking products.

allowed us MOBILE CUSTOMERS NEED to make MOBILE INFRASTRUCTURE Meeting customers’ online expectations is a sure we are familiar challenge for N26, which launched its digital-only banking service in 2015. Pro- also secure, viding features to a customer base that is turning to mobile channels is one of the main reasons N26 used the cloud to build because that out its banking architecture, Grossman explained. The bank has operated solely is table stakes via the cloud since its launch, meaning it has never had to tap into legacy infra- to managing structure to implement emerging tools or people’s customer-facing features. “At N26, we have built many of our core money. banking systems from the ground up, on ” top of a modern, cloud-native technology stack,” Grossman said. “Instead of having computer hardware and software sitting physically in-house, like in a server room

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or data center, [the cloud has] allowed us to really be nimble [and] really allowed us to make sure we are also secure, because that is table stakes to managing people’s money.”

Cloud-based approaches allow banks to keep pace with recent mobile banking shifts, she continued, and their flexibility also allows FIs to create and test features geared toward mobile-first customers. N26’s Spaces feature allows customers to set up personalized subaccounts and work toward their savings goals, for example. She said it also developed a feature called Perks, which offers cash back rewards for debit spending, and created a “discreet mode,” which allows users to wave their hands over their phone screens to hide quences during the COVID-19 pandemic. their personal details when checking their It is important that FIs seeing increases in accounts in public. online and mobile customer volumes cre-

“[Cloud-based banking] also means we can ate seamless customer experiences and develop and deploy new features faster ensure their infrastructures can support and … scale quickly as we expand into new them at speed. geographies,” Grossman said. “For exam- ple, if you have the right cloud architecture SCALING UP IN A POST-COVID-19 … you can run experiments … in a way that WORLD helps you innovate to make sure [that] you FIs have been integrating digital innova- are learning from customer feedback and tions into their legacy core banking sys- you are shipping the [features] that really tems for years, but the COVID-19 pandemic matter to customers.” is illuminating weak spots in this approach. Rising online transaction volumes have Banks have always prioritized meeting overwhelmed some legacy banks’ sys- customers where they are and giving them tems, for example, preventing them from features they want, and failing to meet adapting as quickly as others. their expectations carries greater conse-

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with traditional FIs tied to in-house bank- ing servers. FIs can ascertain where weak points exist and fix them by examining how their legacy systems are falling short, but only if they reassess how they are using available data. Having an innovative plat- form capable of automatically parsing this data can help FIs establish which features today’s customers want.

“[The innovation process] really all starts with observing customers, talking to cus- tomers [and] also running experiments,” Grossman said. “You should always ask customers what they want, [and] that means [conducting] surveys, that means focus groups. But [this is especially true] when it comes to money. I might tell you what I think I will do with my own money

… but then my behavior might be a little “If you have a lot of volume running through bit different as a customer, and so I think your systems — be that transaction vol- that is where the value of experimentation ume, be that [the number of] customers comes in.” signing up in a day — you need to make sure you have built a technical architecture Experimentation is critical to establishing that can maintain and support and scale what customers want, but FIs must work with that load,” Grossman noted. “But if fast to understand and satisfy customers’ you have legacy old-school systems, it is immediate needs. Catering to consumers’ hard to dynamically scale your systems.” expanding mobile banking preferences requires FIs to adopt fluid infrastructures The ability to scale core banking infrastruc- that can keep pace with their digital-first tures to accommodate increased traffic or competitors. Banks that still rely on leg- support upgraded digital banking tools is acy architecture may be at a distinct dis- one of the main benefits cloud-based plat- advantage in this environment unless they forms offer, and cloud-native challenger quickly update their core systems. banks are using this scalability to compete

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CLOUD MIGRATION DEVELOPMENTS

IBM SIGNS CLOUD MODERNIZATION DEAL WITH CANADIAN CUs

FIs of all types, including credit unions (CUs), are considering moving their core banking operations to the cloud to sup- port faster payments. Many are finding that third-party partners can provide them with flexible cloud solutions that do not require them to promote in-house approaches. Technology solutions and software pro- vider IBM recently finalized a “moderniza- tion” agreement with 75 Canadian CUs in which the former will build out a private cloud server to host some of the credit unions’ core banking solutions. Each prov- ince’s Credit Union Central, which serves as the central banking facility for smaller CUs, will help administer the service, including a payments-as-a-service platform — the Prairie Payments Joint Venture (PPJV) — to help CUs innovate their payment solutions’ speed and security.

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CAIXABANK ENHANCES IBM PARTNERSHIP FOR INCREASED CLOUD INNOVATION

Spanish FI CaixaBank is also turning to IBM’s cloud solutions to further its digital banking innovation initiatives. The pair have collaborated since 2011, and the former now plans to utilize the latter’s technol- ENENTO GROUP TAPS CLOUD ogy to strengthen the hybrid cloud model PROVIDER FOR ITS OPEN BANKING through which it serves online customers. PLANS The move will allow the FI to integrate its Finland-based FinTech Enento Group, for- automated tools and AI capabilities with merly known as Asiakastieto Group, is yet the cloud to support banking customers, another financial entity turning to cloud accelerating their transactions, providing technologies to help it achieve its stra- them with more personalized answers to tegic long-term banking goals. The group complex questions about lending and daily will work with a third-party cloud services financial tasks as well as helping them provider to support its online banking plat- finalize payments. form, according to a press release, and it CaixaBank will also rely on IBM’s AI and aims to use cloud-based and automated cloud technologies to further develop solu- tools to create more personalized solu- tions aimed at better meeting digital-first tions for customers under open banking. consumers’ needs, Gonzalo Gortázar, the Europe’s open banking initiatives require bank’s CEO, explained in a recent interview. FIs to share sensitive data with FinTechs, The FI currently has about 15.5 million cus- which enables the latter to create products tomers, many of whom now expect bank- that enhance customer insights. Enento is ing providers to offer them more complex leveraging the collaboration to offer prod- financial tools. The extended partnership ucts that enable individual users to analyze with IBM will also allow the FI to explore their bank accounts and spending patterns how other emerging technologies, such as and come up with detailed assessments of blockchain and quantum computing, could their financial statuses, for example. Such enhance personalization. offerings are intended to allow customers to make more data-driven plans regarding their financial actions, like paying off debts or reducing expenses.

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ANT FINANCIAL SEES SURGE IN CHINESE FIs’ ADOPTION OF CLOUD SOLUTIONS

Banks in China are also boosting their use of cloud solutions, according to recent figures from Chinese technology and financial services provider Ant Financial Services Group, which reported that the number of FIs and businesses integrating its solutions grew more than 175 percent through March and April. This marks the highest growth in adop- tion for Ant Financial’s software solutions since it began selling them to banks two years ago.

The company stated that much of the increase can be attributed to brick-and-mortar branch closures caused by public health concerns regarding COVID-19’s spread. Many banks sought to offer solutions, including cloud-based technologies, that could help customers receive services seamlessly while FIs closed down physical operations. Ant Financial said its cloud solutions target smaller lenders and banks rather than larger FIs that likely have the funds to build out their own private cloud servers. Approximately 200 lenders in China now utilize its cloud offerings.

CONTINENTAL BANK TAPS CLOUD PROVIDER FOR GREATER SCALABILITY

FIs outside China are also finding that cloud technology can give them more flexibility regarding the online services they offer smaller clients. U.S.-based Continental Bank recently announced it would work with a third-party cloud solutions provider to create a cloud-based “digital core” to enhance the solutions it offers banking customers. The bank focuses on sup- porting small to mid-sized businesses’ (SMBs’) financial needs and is hoping the platform will offer more streamlined deposit and lending products, such as using the cloud to integrate lease applications on its site, Continental Bank CEO Nathan Morgan said in a recent interview. The technology will enable Continental Bank to more quickly process and finalize applications and transactions online at a greater scale. The Utah-based FI also offers smaller firms financ- ing solutions for equipment and real estate purchases and transactions.

© 2020 PYMNTS.com All Rights Reserved June 2020 | 15 News & Trends

PRODUCT LAUNCHES AND EVENTS

INTESA SANPAOLO PARTNERS WITH GOOGLE CLOUD AND TIM FOR CLOUD, AI DATA CENTERS

Many FIs are migrating their core baking processes to cloud-based platforms to enhance the services they provide customers, and some are integrating AI and other advanced tech- nologies into these offerings. Italian banking group Intesa Sanpaolo has partnered with technology provider Google Cloud and Italian telecommunications company TIM, for example, to build out cloud infrastructure centers, or Cloud Regions, in the Italian cities of Turin and Milan. The centers will leverage the data hubs TIM currently operates and merge them with Google Cloud’s infrastructure technologies and platform.

These Cloud Regions will aid Intesa Sanpaolo’s banking operations and will also be offered to the group’s business clients. The companies’ Turin center will focus on AI-based innovations, while its Milan center will support data storage and cloud-based services for participating businesses. The companies noted that the centers will focus on training AI professionals for financial startups.

NORWEGIAN BANK HUSBANKEN LOOKS TO THE CLOUD FOR DIGITAL TRANSFORMATION

Norwegian FI Husbanken is also looking to cloud technologies to digitally transform its bank- ing offerings. It will use banking and software provider Temenos’ solutions to accelerate its core banking infrastructure’s processing and transaction times, according to a press release. Husbanken intends to migrate many of its core banking operations, including its lending processes and tools, away from outdated legacy infrastructure and onto the cloud-based Temenos Transact server.

Husbanken intends to first move its lending products onto the server, which will enable it to automate much of the lending process for potential borrowers. The FI will also implement Temenos’ Financial Crime Mitigation solution, which uses AI technology to respond to poten- tial fraud threats and comply with anti-money laundering (AML) regulations.

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BHD LEON WORKS WITH TEMENOS TO GENERATE DIGITAL TRANSFORMATION

Dominican Republic-based bank BHD Leon is also utilizing the cloud to create a more robust digital platform for customers, part- nering with banking and cloud software provider Temenos to integrate Temenos Transact into its online platform. Temenos Transact is a cloud-based core banking PNB TO SUPPORT ITS DIGITAL- product that enables speedy transactions ONLY BANK WITH THE CLOUD FOR for corporate and retail banking solu- QUICKER SERVICE tions, and BHD Leon will move its corpo- Digital-only banks are continuing to estab- rate, retail, SMB and wealth management lish themselves in the banking industry products from its legacy systems onto as 2020 continues, and traditional FIs are the cloud-supported Temenos service for responding by unveiling online-only ser- greater scalability and efficiency. vices of their own. Pacific National Bank BHD Leon aims to grow its customer base (PNB) recently rolled out a digital-only by harnessing the cloud’s greater data bank brand called FACILE, for example. hosting and sharing capabilities as well as The offering officially launched in the U.S. by expanding into other markets. The bank in late May utilizing technology created by currently has 1.5 million customers and a third-party cloud services solutions pro- will initially gear its cloud-based products vider, according to a press release, and is toward serving underbanked individuals. It aimed at “tech-savvy” users. is specifically developing financial tools to PNB is looking to cloud technology to address women’s and SMBs’ unique bank- create seamless experiences for FACILE ing needs. customers while competing with other online-only offerings in the U.S. such as Europe-based challengers Monzo and N26. It will rely on its third-party cloud partner to support digital payments and bank- ing requests while also handling requests made through the digital-only bank’s call center.

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SOUND COMMUNITY BANK TURNS TO THE CLOUD FOR DATA PROTECTION

Banks of all sizes are also hoping cloud platforms can keep data secure as more transactions are conducted online. Seat- tle-based FI Sound Community Bank has partnered with a third-party cloud provider to enhance the bank’s security by creat- ing cloud backups of financial data that include the bank’s directory and exchange information. The bank’s migration to cloud- based services intends to address issues stemming from the “aging” core banking hardware it has thus far utilized for such exchanges.

The FI also said its outdated physical serv- ers have made it challenging to comply with federal financial regulations and that the new system will allow it to quickly scale up its data storage needs. This will enable the community bank, which serves roughly 15,000 households in the area, to support transactions and information exchanges on a greater scale.

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UNIFY TO BUILD PRIVATE CLOUD FOR ENHANCED SECURITY

California-based CU UNIFY Financial Credit Union is also turning to the cloud, as its current core banking system is struggling to meet its digital customers’ needs. Greg Glawson, chief information officer at CU UNIFY, stated in apress release that the CU will augment its existing infrastructure by working with a third-party provider to build out a private cloud server. He said that utilizing a third-party provider will help the CU avoid the high costs of developing its own cloud solution while also enabling it to bolster its platform’s safety as the third party will be responsible for maintaining secure and seamless access to its data centers. UNIFY intends to leverage the solution to provide products and services to consumers looking for increased digital support.

LEGACY BANKS’ OUTDATED INFRASTRUCTURES KEEP THEM FROM THE CLOUD

Some legacy banks are struggling to move their digital operations onto cloud-based plat- forms even though they recognize the benefits of doing so. One recentstudy found that 43 percent of banks cite costs and limitations surrounding their outdated IT infrastructures as key issues preventing the implementation of innovative core banking solutions. Forty-six percent of banks also stated that their legacy infrastructures’ security issues are presenting challenges.

The study also found that banks are spending between 10 percent and 30 percent of their total annual IT budgets to address issues with their current platforms, such as patching up weak points regarding online security. Using private cloud solutions could ease these banks’ frictions, but creating proprietary solutions can be costly, especially for smaller FIs. Turning to third-party providers, however, could help banks move their core banking platforms to the cloud without requiring the same upfront costs that in-house solutions entail.

© 2020 PYMNTS.com All Rights Reserved June 2020 | 19 DEEP DIVE

HOW THE COVID-19 PANDEMIC IS PUSHING LEGACY FIs’ CLOUD MIGRATIONS

igital banking tools’ use continues to rise as the COVID-19 pandemic wears on, and mobile banking usage in the U.S. has increased by 50 percent since the beginning of the crisis, for example. The rising demand worldwide has required FIs to manage a flood of new requests and transactions on their online platforms, Dand many legacy institutions are finding it difficult to keep up. More than 3,000 customers reported issues with United Kingdom-based Lloyds Bank’s mobile and online banking ser- vices on June 1, for example, while 1,780 customers took to Twitter and customer service channels to discuss similar outages affecting FI Halifax’s services.

Such outages are frustrating to consum- November 2019 following a 2018 IT systems ers who cannot head to brick-and-mortar crash. These issues reveal that many FIs branches during the pandemic, but they are rely on legacy core banking infrastructures just the latest in a series of similar prob- that are struggling to adequately manage lems FIs have faced. Halifax and Lloyds online transactions, with one recent study experienced large-scale online platform finding that 55 percent of legacy banks still crashes in January, for example, and Brit- lack “digital maturity.” ish FI TBS confronted technical glitches in

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Banks working to swiftly serve consum- migrating to the cloud can be both costly ers during the pandemic are eager to and complicated. One report found that 33 upgrade their solutions to reach that percent of FIs see their outdated IT sys- maturity, however, and some are migrating tems as significant barriers to innovating to the cloud to handle the recent uptick their online operations, and another sur- in online transactions as well as the flood vey revealed that core banking replace- of sensitive data across their platforms. ment initiatives cost an average of $350 The following Deep Dive explores the million and can take more than 5 years to challenges banks typically face when fully implement. These time constraints migrating to the cloud and how the pan- and expenses are significant hurdles for demic’s impact on consumers’ banking many FIs, especially small to mid-sized needs is pushing FIs to quickly solve such banks with modest budgets, and could hurdles. explain why some banks have chosen to build upgraded consumer-facing services A LOOK AT CLOUD MIGRATION’S rather than address the limitations of their HISTORY platforms’ underlying infrastructures. The COVID-19 pandemic may be running out FIs’ interest in moving to the cloud has the clock on that approach, however. been building for some time, especially given that relying on their traditional infra- structures can cost them. FIs have felt the financial impacts of outdated core bank- ing systems since 2012, when banks such as JPMorgan Chase and the Royal Bank of Scotland lost millions due to collaps- ing online networks. Such issues have prompted these and other banks to build or migrate to solutions that use public cloud systems for at least some of their online services, with 74 percent of finan- cial services companies in 2017 noting that they were using hybrid cloud models to some extent.

The share of FIs that are actively utilizing this technology for their core banking sys- tems remains low, however, partly because

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THE COVID-19 CLOUD EFFECT Consumers are reporting other struggles stemming from banks’ legacy systems, Consumers have become reliant on digital including issues receiving unemployment banking tools during the COVID-19 crisis. checks. Forty-three percent of banks still This shift has been somewhat expected as run on COBOL software, even though the the industry has recently seen large-scale computer programming language is over digital growth, with one March report pre- 60 years old, presenting problems for dicting that U.S. digital banking usage will customers. Those withdrawing cash or increase 54 percent by 2025, for exam- making routine transactions at ATMs could ple. The rush to digital solutions amid the also experience strains due to outdated pandemic could have deeper implications systems: physical mainframes support 95 for banks, though, as customers begin percent of such withdrawals. expressing more frustrations with ser- vice glitches. Many are unwilling to accept Addressing these frictions is more import- inadequate online account access, and 41 ant than ever for FIs, and this urgency percent of business banking custom- is putting a spotlight on the benefits of ers claim they are looking to switch FIs migrating services to the cloud. Cloud- because of poor service during the pan- based systems have several key advantages demic.

THE RUSH TO DIGITAL SOLUTIONS AMID THE PANDEMIC COULD HAVE DEEPER IMPLICATIONS FOR BANKS, THOUGH, AS CUSTOMERS BEGIN EXPRESSING MORE FRUSTRATIONS WITH SERVICE GLITCHES.

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over legacy core banking infrastructure that relies on physical servers. The former can handle greater volumes of data and allow banks to test innovative new tools before bringing them to market. These technolo- gies also enable FIs to access the informa- tion necessary to provide products such as loans to customers experiencing financial hardships during the pandemic, for exam- ple. Cloud-based tools can also expedite approvals for daily payments and transac- tions, allowing businesses and consumers to send and receive funds as necessary.

The COVID-19 pandemic has laid bare that the patchwork approaches many legacy FIs are employing to tackle expanding dig- ital banking volumes are no longer enough. These banks will need to quickly address the frictions stemming from their outdated core banking systems, lest they risk losing customers to more innovative, cloud-savvy competitors. Migrating to the cloud — and leaving physical mainframes grounded — could help them address their customers’ needs now and in the future.

© 2020 PYMNTS.com All Rights Reserved June 2020 | 23 ABOUT

PYMNTS.com is where the best minds and the best content meet on the web to learn about “What’s Next” in payments and commerce. Our interactive platform is reinventing the way in which companies in payments share relevant information about the initiatives that shape the future of this dynamic sector and make news. Our data and analytics team includes economists, data scientists and industry analysts who work with companies to measure and quantify the innovation that is at the cutting edge of this new world.

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