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Banks are still reluctant to use the cloud for core banking applications

Despite predictions over the last few years that banks were just a heartbeat away from adopting cloud technology, only 1% of banks are actually running core processing in the cloud today, according to a new report by Temenos.

In its eighth annual report, Shifting Sands: banking in the digital era, Temenos and Capgemini report a mixed picture. On one hand, the 2015 survey reveals that 89% of institutions are now running at least one application in the cloud, which compares against just 57% back in 2009 when the question was asked for the first time. However, the report notes a continued reluctance to run core banking applications in the cloud. Reasons cited included reticence about putting the bank’s most sensitive data in the cloud, with 34% citing concerns around data security.

“It is increasing more slowly than expected, we’d have thought it would increase more by now,” said Chris McGinnis, head of strategy at Temenos and co-author of the report. “It’s still very minimal for core banking software. But we continue to expect change.”

The reasons highlighted for future change include continued low profitability at financial institutions, a need to redirect IT budgets from maintenance to innovation, and the capability to scale to meet an explosion in enquiries brought on by the move to mobile channels and the internet of things, according to the report. So far, the applications that are most likely to be running in the cloud are email (67%), CRM (52%) and data storage (35%).

Further surprises emerged from the results. Notably, the number of respondents citing regulation as the industry’s biggest challenged actually declined markedly compared to last year, from 25% to 17%. Regulation had previously been one of the top two factors for the last two years, and the number one factor before that, said McGinnis. At a briefing hosted to discuss the results, Craig Donaldson, chief executive at Metro Bank, commented that the regional results were particularly worrying for Europe, where 21% reported regulation as their key concern, versus just 12% in Asia Pacific and the Middle east and Africa and 17% in the Americas.

“That’s a standout result for Europe,” he said. “Looking at this from a competitive standpoint, if you’re thinking of what impact that’s going to have on your business, Europe is in danger of damaging itself.”

Other factors respondents were increasingly interested in include their ability to hire top talent (14%), their capacity to capitalise on their data assets (15%) and their ability to achieve profit. The biggest competitive threats identified by respondents were the entry of non-financial companies such as Google and Apple into the sector (52%) as well as new banks (22%); these numbers mean that only 26% of respondents think the established banks are their biggest competitive threat.

“The biggest reason for data becoming an issue is that I it’s locked into silos,” said McGinnis. “The other two main factors are difficulty finding the right people or technology or lack of strategic focus. In terms of restoring profitability, banks have done a lot of the easier stuff like offshoring and outsourcing already. The low-hanging fruit has been taken but profitability still needs work, leading banks to focus on investment in IT.”

The figures from the survey indicate that IT budgets will increase in 2016. Overall, 64% of respondents anticipate higher spending over the next 12 months. The 58% difference between the banks expecting their budget to increase versus those who expect theirs to fall is the largest since the survey started in 2008. Temenos notes that in general, a wider gap between these measures represents rising investment. Core banking systems (23%), digital channels (21%) and analytics (14%) are set to receive the three largest chunks of investment respectively.

“The big priority in terms of corporate investment this year is IT modernisation,” added McGinnis. “That’s a big jump compared to a year ago. A lot of investing has been on the front end to make it look sexy, but they are still limited by the legacy systems. It was number four concern before, now it is number one.”

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