Regional banking technology and cloud adoption
As banking goes digital, regional banks look to keep up
Regional banks play a vital role in the US financial ecosystem. But these days, they’re playing from behind—at least when it comes to their IT infrastructure. One key area that constrains them is cloud and technology infrastructure. How can regional banking institutions evolve their technology to compete with industry heavyweights?
The cloud infrastructure challenge
Developing and maintaining world class regional banking technology is an expensive undertaking. The largest banks spend billions of dollars annually on their technology, often with much of that going to just “keeping the lights on,” never mind the investment in innovation and change required to get and stay ahead. Huge data centers make modern IT departments sizable businesses with significant budgets. And every dollar spent on running that infrastructure is a dollar not spent on developing software and services that attract and keep clients and grow revenue.
Economies of scale and standardization of commodity services are a key success factor in IT. The largest firms can drive scale efficiencies with their IT infrastructure. But when it comes to IT migration, even large-scale banking institutions are turning to cloud service providers. This gap between national and regional banking technology was brutally exposed recently with the rollout of the federal Paycheck Protection Program. Many banks were challenged to meet the swell of incoming applications. But smaller banks fared worse, since many lack the modern technology and staff to manage surges in demand.
If scale, critical mass, and standardization are key to tech efficiency, then regional banks have a number of built-in constraints that have resulted in the status quo.
Regional bank constraints
Regional banks tend to have less profitable small business loans and a smaller overall deposit base. This can constrain both their overall IT expenditure and the ratio of budget spent on run-versus-change investment. The result is aging systems, slower adoption of emerging and more effective technology, and continued use of manual processes.
Mergers and acquisitions are an important growth strategy in the regional banking market, and the space has recently undergone significant activity. While great for growth and for building economies of scale, integration or divestment can create a host of technology issues. The outcome? Regionals can have difficulty hiring the best IT talent, who want to focus on current and emerging technologies. This competition is exacerbated by maintaining IT operations outside of geographic talent hubs paired with relatively smaller compensation packages.
As if that weren’t enough, rate reductions from the Federal Reserve have created more pressure on efficiency ratios, provoking a strong desire to reduce costs. The pandemic has also driven rapid increases in the need for digital banking products at regional banks. And as remote working becomes more widespread, new strategies and technologies are needed to enhance and sustain the new distributed workforce.
Regionals should respond to these challenges by shifting from capital-intensive assets toward utility-based services, from patchworks to standards, and from spending dollars to keep the lights on to investing in tomorrow. They should use someone else’s scale instead of trying to create their own. Fortunately, there is a marketplace ready and waiting: cloud.
Benefits of cloud
Cloud service providers bring massive ready-to-use products, enabling strategic benefits around time to market, IT migration efficiency, security, and resilience. When research and development take moments instead of weeks or months, potential new business value is more rapidly realized.
Regional bankers also have an agility advantage, allowing application developers to bring new revenue-generating products and services to market faster. The increased productivity is coupled with a decrease in providing and managing IT infrastructure. Together, these features optimize the cost base and reduce capital expenditure.
The security and resilience of data and services are critical to regional bank reputational risk, as well as the legal and regulatory compliance requirements. Precertified solutions, automated control processes, security releases, encryption, and proactive threat detection delivered by cloud providers help to ensure the needed levels of cybersecurity.
With the challenge, constraints, and benefits clear, what sort of capabilities are there to take advantage of, and how can regional banking technology shift to cloud? Ready-made banking services are available from vendors and cloud service providers, and there are numerous prebuilt platform and technical services that assist with IT migration through ongoing operations.
There are a growing number of cloud-based capabilities to serve processes across the bank—from anti-money laundering to customer onboarding, risk analysis, and more.
Safe and secure ingestion of large data sets, rapid and scalable computing, compliant processes, and advanced analytics and insight allow banking IT functions to avoid cost-intensive requirements-gathering, process engineering, and application development or modification.
For customer service and contact centers, there are virtual customer service agents with human-like conversation capability, along with machine learning and artificial intelligence (AI) algorithms that provide improved levels of data insight and analytics. These offerings can reduce call times, increase consumer satisfaction, lower employee turnover, and inform service offerings and revenue opportunities.
Major cloud providers also have prebuilt technical platform services, such as data warehousing, analytics, and cybersecurity, on top of their compute and storage. To help integrate and manage these applications, data, and services, there are open application programming interface (API) platforms and management tools available.
All these services, platforms, and tools unlock the power of the cloud. But that still won’t solve the work required to initiate the journey, see it through, and sustain it over time. So what are some of the challenges and solutions to getting there?
Embarking on the journey
With most regional banks facing financial, regulatory, and operational headwinds, accelerating digital cloud adoption is critical to remain competitive. Here are some key aspects to consider:
Having embarked on the cloud journey, getting ahead and staying there is the long-term goal. Some strategic considerations include reinvesting the efficiencies, increasing the adoption of platforms and services, and embedding a cloud culture.
There is an opportunity for structural change in the run-versus-change budget over the long term. Tracking and maximizing that ratio enables continual advancement and innovation and avoids the requirement of over expenditure to “keep the lights on.”
The target-state portfolio likely includes a mixture of infrastructure-as-a-service (IaaS) and some platform services. Banks should seek out opportunities for next-generation technologies, robotics, and AI to have a proportion of emerging capabilities in the portfolio mix. Regional banks can leverage the agility their size affords to keep moving forward.
Finally, embed a cloud culture throughout the organization—one that embraces change, thrives on collaboration, isn’t afraid to fail, and values new talent.
Deloitte’s approach to cloud in the banking sector melds technology with human capital. We deploy a phased approach that can fast-track your path to cloud in a regulation-compliant, secure manner. Our operating model diagnostics can highlight where capability gaps exist, as well as focus areas for improvement. Our workforce analytics can help you make quicker, better talent decisions and fill gaps through retraining, hiring, or shifting roles in the organization.
Our services cover four overarching areas—operating model transformation, application modernization, cloud migration, and cloud managed services—to put you on the path to cloud success. Let’s start a conversation.