Even though the financial services industry has been slow to adopt the cloud, pundits are optimistic that the industry may have turned the corner. Gartner (NYSE:IT) asserts more than 60 percent of banks worldwide will process the majority of their transactions in the cloud by 2016. Ovum claims capital markets will accelerate their adoption of cloud this year. Are all these predictions rooted in reality?
When Oracle's (ORCL) CEO declares that its main rivals are no longer IBM (NYSE:IBM) and SAP (NYSE:SAP) (he says his rivals now are Amazon (NASDAQ:AMZN) and Salesforce (NYSE:CRM) ), you know it's time to stop disputing the cloud's momentum. In the financial industry there are also plenty of strong indicators pointing to a significant uptick in cloud adoption this year.
So, let's look into what some of these indicators are.
If it's good enough for the CIA…
With Google (NASDAQ:GOOG) (and the government) accused of teaming up to share data and spy on us, the cloud still has some convincing to do when it comes to safeguarding information. Foreign institutions, in particular, have been very antsy about storing data with US based cloud providers.
Nonetheless, even though security has long been a barrier, financial institutions are finally starting to trust the cloud (the fact that the CIA, has jumped into the cloud may also have helped). In fact, according to Ovum, regulatory compliance is expected to drive a 2014 increase in IT expenditure in the sector, with the benefits of cloud computing and growth prospects identified as main drivers. If the industry and regulators can help the cloud get over the security hurdle, adoption will increase considerably.
Cloud vendors are becoming less blue sky and zeroing in on pain points
The cloud's main story so far has been one of horizontal providers such as Salesforce, Microsoft (NASDAQ:MSFT) and Amazon, offering one-size-fits-all solutions that didn't address industry specific issues. However, vertical cloud (or SaaS) providers are now arriving. Set up to serve specific vertical or niche markets within financial services, these providers are set to grow rapidly during 2014. Financial industry cloud provider Navatar has already proved that the devil is in the details when servicing sub-verticals such as asset management, wealth management and investment banking. As highly specialized solutions speak to key industry pain points, expect small and large financial firms to rally behind them.
As financial firms educate themselves, they will be in the driver's seat
Depending on the vested interests of the vendors describing it, the cloud can be public or private, multitenant or single-tenant, real or fake. Vendor hype often trumps customer interests. The trouble is that all the noise leaves many clients unsure about what they should be buying, who they should trust and what represents value for money. Because of a lack of clarity, large financial institutions sometimes put the same rigor into assessing a $10,000 yearly SaaS subscription that they would for a $10 million CapEx investment.
That may be changing soon, as more firms report real ROI from the cloud. Not only will financial firms get better at cutting through the hype, they will also become nimbler so they can take advantage of innovation offered by smaller cloud providers. They will become more aware of their increased clout in the cloud and demand more, forcing vendors to get their act together.
Customers of financial firms are demanding more
Online retailers like Amazon have set new standards in customer service and found innovative ways to collect and use customer feedback, using cloud and social technologies. Financial firms, in contrast, have lagged behind so far.
However, as their customers demand more, banks and financial services firms are proactively looking to improve their customers' experience. CMOs and business managers are bypassing CIOs and bringing in newer technologies that can bring banks closer to customers, fostering loyalty and commitment. Expect to see the front office continuing to pressure IT and leading the charge in cloud adoption.
Cloud vendors will connect the dots
As vertical cloud providers gain traction, they will be expected to fully address clients' needs rather than offering standalone, piecemeal solutions. Cloud vendors are responding by building alliances with other product and data vendors and integrating their products to make things simple for their clients. Navatar, for instance, provides wealth managers with CRM from salesforce.com, content sharing from Box, and data from custodians, portfolio management and reporting systems - all bundled into one offering. As cloud providers start making things easier for their clients' needs, their market penetration is bound to improve.
Social media will evolve for financial services
In our personal lives, social media has utterly transformed our lives but, as Greg Johnsen writes, "our corporate information systems were designed for a world without an internet" built with little or no connectivity in mind. The cloud promises to fix this, since it is delivered through the internet.
Newer cloud-based B2B platforms, designed specifically for inter-company process orchestration and collaboration, are on the way. Navatar Deal Connect helps dealmakers around the world collaborate on M&A opportunities. Expect to see SaaS platforms help financial firms connect with counterparties, for seamless transaction execution. This will trigger the network effect, accelerating adoption.
The future looks bright, but there is plenty we don't know
All of this sounds great, but there are still a lot of open questions that could make things go either way.
For instance, how soon will some of the small and large cloud providers serving the industry be able to figure out how to play together to focus on the industry? What damage could a couple of hacking disasters wreak on cloud adoption rates? Will regulators continue to hinder the path of innovation?
Questions notwithstanding, the trends seem very promising so far and we may see some great vertical cloud providers emerge, as a result.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). Navatar has a business relationship with salesforce.com.