The financial services industry has slowly but surely joined the digital age. A sector once dominated by behemoths, it has traditionally been measured and patient when implementing new technologies. Lingering concerns about migration cost, security and regulatory compliance have all factored into digital decision making, and are still justifiably in the thoughts of decision makers. However, the transformation tide is turning.
Intensifying economic and regulatory pressure, combined with competition from ‘digital-first’ challengers entering the industry, has led major financial institutions to explore new ways to drive efficiencies and innovations in products and services. That often means thinking digital. Mobile banking is now ubiquitous among the big players and the emergence of peer-to-peer lending, budgeting and stock-trading sites have added new names to the public consciousness.
The industry has been slow to embrace two much-talked about technologies, cloud and blockchain, but now even here, new ways of thinking mean we’ve reached a tipping-point towards widespread adoption.
The hybrid approach
A recent survey found nearly three quarters of banks believe the cloud will become a major technology for the industry within five years. Having been predictably cautious to move functions to the cloud initially, financial services firms have reached an accession point from which the pace of change will increase rapidly.
It’s important to note that a reason for this, is that as time passes, these institutions are recruiting a generation of cloud-native millennial developers who are looking ahead and in search of innovative solutions. With this transition has come a growing realisation of the cost, scalability and efficiency advantages the cloud can deliver.
Conversations have evolved from whether financial firms are going to migrate to the cloud to how they do it, and which processes will settle where. Keeping everything on-premise and building a private cloud can be expensive and take a lot of physical space, but equally, financial institutions are inherently cautious due to the huge regulatory pressures on them, and the prospect of migrating everything to a public cloud is uncomfortable.
Many are consequently settling on the ‘hybrid cloud’ model, which provides both the security and control of a dedicated on-premises infrastructure or private cloud with the flexibility and scalability of the public cloud.
This level of flexibility is increasingly sought after by companies looking to keep pace with an ever- changing sector. Use cases for cloud applications have been touted for some time, but now we’re finally seeing the financial services industry open itself up to the technology and begin to retire legacy on-premise systems and migrate to cloud-based, pay-as-you-use platforms for critical processes.
Colocation data centres play a significant role in facilitating this, as they provide a high-quality and crucially, low-latency connectivity environment between on-premises infrastructure and private and public clouds. There is also an upward appreciation for the level of physical security coupled with the ease of authorised access provided by a colocation facility, many of which are often strategically built within close proximity of major financial centres within cities.
On the other hand, the industry has been waiting for a tangible use case to emerge that will allow it to fully sink its teeth into blockchain. Often hyped as a revolutionary technology, blockchain adoption has been sluggish despite a generally strong understanding of its potential from those within the financial services community.
That’s partly because until recently, there has been very few use cases to offer significant ROI to make an upheaval of tried-and-trusted methods worthwhile. Particularly in the financial services industry, being first to take a leap of faith towards a new technology is a risk, so we’ve mostly seen big industry players making exploratory baby steps in the direction of blockchain.
However, we’re now seeing the emergence of a strong use case from the insurance and trade finance industries that could hasten those steps forward, in the shape of ‘smart contracts’.
A smart contract is a computer code that runs on tops of a blockchain that contains the rules for a particular agreement. The code ensures that the contract is automatically enforced when certain pre-defined rules are met, which means the processing of insurance applications, claims and payouts can be dealt with more efficiently. These smart contracts could be the first concrete use case of blockchain technology, but the industry is still tentative due to long-standing security concerns. The measure of success will be whether smart contracts can establish greater trust from the financial services sector and lead to wider adoption and innovation.
Trust is Key
The main trust concern for adopters of blockchain has been how to safely secure blockchain wallets when they are ‘hot’, meaning when they are actively being stored in the cloud, as opposed to when they are ‘cold’ and being stored offline. As a result of the security uncertainty, many institutions have been storing their blockchain wallets as ‘cold’ wallets on their own premises, but this isn’t always efficient. The industry is consequently exploring solutions that can bridge the gap and offer secure ‘hot’ storage.
We’re seeing a growing trend towards the use of encryption key security services. These services use Hardware Security Modules (HSMs) to generate and secure keys in dedicated appliances, outside of, but in close proximity to the cloud. As the technology continues to grow in popularity, it’s likely we’ll see many institutions turn to colocation datacentres to provide the physical security for cold wallets, but close-quarter connectivity to likeminded business communities.
The safe guarding of encryption keys will be a crucial proof-point for the financial services industry if it is to continue to adopt blockchain technology and reach new standards of innovation in its products and services.
Innovative digital-first challengers aren’t going to disappear anytime soon, and neither are the regulatory pressures of the industry. The longstanding giants of the financial services sector are very aware of their need to embrace technologies. Following years of tentative toes being dipped in the pool, we are on the cusp of the industry finally taking a dive and getting its shoulders wet. Once institutions feel assured their assets can be protected, and use cases can be steadily implemented, we’ll see the pace of change increase further still.