Businesses are learning countless lessons from the COVID-19 pandemic. For many financial services companies — thrust into a central role dispersing federal aid — the danger of relying on outdated tech infrastructure might become so clear that they accelerate the messy process of modernizing the old but critical applications that move money around the world.
The tech powering the finance industry has fared better than that of local and state governments during the crisis, but like those governments, many companies rely far too heavily on mainframes and software designed before the web, let alone the smartphone. For a variety of reasons, from technical to regulatory, financial services firms dragged their heels through much of the last decade as cloud computing matured into a solid foundation for all types of businesses.
Once upon a time, financial services companies were Silicon Valley's favorite customers, desperately buying as much computing power as possible to help their clients move faster. But it took a much longer time for them to embrace cloud computing, skeptical of the benefits and unwilling (or unable) to hand over control of their data.
With the notable exception of Capital One, only in the last few years have the bulk of these companies started to realize they need to refashion their tech infrastructure and move at least some tasks to the cloud, according to enterprise tech experts who work with the financial services industry. They expect the economic shocks of the pandemic to accelerate that shift, not only because financial service companies will serve as critical infrastructure for the world economy, but because younger companies built around modern technology are poised to take their business.
"Banks today need to urgently respond to the massive consumer demand that's ever-increasing with the Amazon-like experiences that consumers are demanding, and competitive pressures are popping up," said Dan Spurling, who as director for cloud and transformation at Slalom Consulting helps financial services companies remodel their infrastructure.
As recently as a few years ago, around 80% of financial transactions and around 95% of ATM transactions were processed by mainframes. For a long time, that wasn't a huge issue; the world economy was humming along just fine on the back of technology first developed in the late 1950s, at least until about six weeks ago.
But for some banks, the rollout of the federal Paycheck Protection Program has exposed the limits of their tech infrastructure. Even as larger banks have mostly been able to handle the swell of clients' PPP applications, smaller regional banks have found that they often lack the modern technology infrastructure and trained IT staff to deal with an unexpected surge in demand for their services.
Like state governments, a great many financial services companies became dependent on old technology for a simple reason: It works. And while new technologies enable new capabilities, they also introduce complexity.
Security concerns were the traditional excuse for sticking with older, well-understood technologies. But cloud providers and other software companies have come a long way in securing cloud infrastructure with the requirements of sensitive customers in mind.
"Financial services lags a little bit because there is so much concern around the problems that occur if you get it wrong: There's a lot of money involved," said Craig Lowery, a VP analyst at Gartner.
And while some large banks and investment companies have moved portions of their operations into cloud computing — think human resources, finance or enterprise-resource planning applications — they remain hesitant to touch the critical applications that actually move the money.
"The challenge of getting every bank in the world to support a new mechanism for money transfer just takes time," Spurling said. "The really strategic and innovative banks are probably not going to solve that with a technology shift; they're going to solve that with a business and technology transformation."
Make it work
The largest banks in the country are further along in this transformation process, with Capital One, a cloud-computing pioneer, leading the way. Capital One has been building all of its new applications on AWS since 2015, allowing it to close multiple data centers running older tech.
Last year, JPMorgan Chase, the biggest bank in the U.S., announced it was running applications on all three major cloud providers as well as maintaining its own infrastructure. Bank of America is working with IBM to develop a cloud service that other financial institutions can use, ensuring compliance with legal and regulatory rules. Goldman Sachs recently hired a senior AWS executive to lead its cloud effort.
Rackspace, which once competed with AWS but now counts itself as a close partner of the cloud giant, is one of several companies working with the finance industry to move infrastructure to the cloud.
"What we're hearing in recent customer meetings is that most clients have gotten more optimistic about moving workloads to public cloud," said Michelle Doss, a Rackspace spokesperson. "Given the complex web of systems and applications, which have gotten even more complicated with M&As, financial services leaders are looking for solutions and partners that help them meet regulatory compliance needs and build a secure environment."
Even before the pandemic, financial services companies were under siege from startups like Robinhood, SoFi and Stripe, who are enabling financial transactions across mobile and other newer platforms. Backed by billions in venture capital without existing business lines to service, these newcomers are putting intense pressure on incumbents. (Though Robinhood's horribly timed meltdown at the onset of the pandemic damaged its reputation.)
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But smaller banks tend to rely on third-party financial services firms like FIS, Fiserv and Finastra for help when they finally decide to modernize their tech infrastructure, Spurling said. And those companies might go the way of many home renovations, building a pretty facade over what remains an aging foundation.
"The consumer experience will be delivered by more cloud-native services," he said, "but the back end of data, or movement or actual financials, will continue to rely on those heritage technologies."