How Canadian Banks Can Maximize Cloud

Canada’s financial system is among the world’s sturdiest and safest. Global Finance magazine’s annual rankings of the world's safest banks placed eight Canadian banks in the top 40 worldwide. Canadian banks took up the first six slots of the safest banks in North America specifically.

The Bank of Canada promotes the nation’s financial welfare. The Office of the Superintendent of Financial Institutions regulates banks, insurance companies and private pension plans. The Department of Finance supports the Minister of Finance in enacting financial-sector legislation. The Canada Deposit Insurance Corporation insures bank deposits. The Financial Consumer Agency of Canada ensures banks comply with public commitments and legal responsibilities.

Comprising Canada’s Financial Institutions Supervisory Committee, these organizations and agencies share pertinent information for maintaining the financial sector’s stability and reinforce the distinct mandates of the others.

“There's a very high level of regulation and compliance requirements from the Canadian government and financial oversight body,” Li said. “As a result of that, adoption of new technologies has been slower compared to the international counterparts. That’s a matter of regulation as well as culture.”

Despite safe and sound financial systems, Canadian banks feel the pressure to innovate with new digital offerings. This pressure comes largely from tech giants and digital startups.

“The smaller ones are nipping at financial institutions’ heels. These are the fintechs that are unbundling financial institution services. They can innovate very fast and are customer-centric so they can lure away certain groups of users,” Li said.

Even though they are nowhere near as big as major Canadian banks, fintechs can slowly erode the market share of their services. For example, a startup might be able to attract a significant number of young investors with simple but efficient robo-advisers.

“Threats are always small in the beginning. By the time they are large, it’s too late,” Li said.

Big tech companies like Google and Amazon are a more direct threat. They have deep pockets, experience and digital nativity that can disrupt the market.

Pressure to modernize is also coming from regulators. Payments Canada, an organization that owns and operates the nation’s clearing and settlement infrastructure, is responsible for ensuring that financial transactions in Canada are safe and secure. Payments Canada is in the process of adopting ISO 20022, an international standard for payments messaging between financial institutions. Already adopted by Swift in the U.S., ISO 20022 provides richer and better-structured data sets.

Rather than lifting and shifting existing software and platforms onto the cloud, banks need to look at this transformation holistically. It’s not about migrating old processes to the cloud but building new processes on the cloud that leverages the possibilities of the technologies and services cloud enables. When done right, cloud can solve the competitive and regulatory problems that Canadian banks currently face.

By adopting the modern cloud-based architectures and technologies, Canadian banks can innovate quickly, efficiently and often. Anyone building an application for a business worries about its architecture, infrastructure and technology. They must meet the business’ needs and maintain these applications over time. Cloud services have commodified much of that management so the developers can focus instead on delivering the product or technology to the business quickly. Banks adopting cloud will experience higher levels of automation and productive engineering.

“There is pressure on Canadian banks to modernize their payment,” Li said. “Payment applications tend to be based on really, really old-world applications, sometimes mainframe applications by IBM. They have to modernize payment and the skills. That's a really good reason to adopt cloud.”

You cannot speak about modernization without seriously looking at the benefits cloud is providing.

“When we're talking about the value of the cloud is the banks have invested billions of dollars into their core systems. A lot of the mainframe systems that they're using are based on mainframe, COBOL, IBM Systems. The skills, currently available to work on those applications are almost non-existent,” Li said.

Most of the people with skills on mainframe and COBOL have silver hair. When they retire, there won’t be enough young people with comparable skills to replace them. But if banks modernize their applications and build applications on the cloud platform, all of a sudden, the necessary skills will become widely available.

Spending on information technology (IT) at banks typically falls into two categories: building and running. They are either building new applications and features or providing daily support for running the current applications. Most cloud providers have moved toward IT Service Management as a Service (ITSMaaS), taking over most support activities for a more streamlined experience for end users. This significantly reduces the costs associated with running the backside. Cloud encourages users to adopt more modern engineering practice because it involves continuously integrating systems and deploying solutions.

According to Publicis Sapient’s Digital Life Index, a consumer-centric research initiative, 81 percent of Canadians managed their finances (savings, checking, investments) online and 45 percent use contactless payment from May to October 2020.

Some basic elements of cloud computing, such as pay-as-you-go payment methods, help deliver infrastructure needs for the bank and improves the user experience with consistency. Thanks to the cloud architecture, almost every tier of an application can scale automatically – based on demand without any performance degradation or wait times during peak periods. It’s much easier for banks to meet demand spikes and provide a consistent experience for end users.

Banks need to adhere to regulations around security and data privacy. These are table stakes for opening a financial institution in Canada. The security department used to handle all this fundamental imperative across all systems, but once banks move to a cloud-based infrastructure, most of that has been addressed. Cloud providers usually pre-package security and compliance capabilities, such as traceability and retention of data.

Cloud reduces the risk-compliance risk, when it comes to rules for data intention and data residency. There’s a huge disparity between the technical capabilities of a financial institution and a cloud provider like AWS or Google. Therefore, when partnered with a cloud provider, the likelihood of negative incidents is far lower. This reduces the compliance risk but can also reduce the compliance cost.

“Traceability of audit trail and other capabilities come with the platform. So, you don't have to establish those kinds of things for yourself,” Li said. “You don't have to manage the infrastructure. You don't have to manage the data. And to some extent, your labor cost is reduced because there's less for you to manage. So that's positive both from a risk perspective and a cost perspective.”