Financial Industry Taps Cloud to Power New Services

The payments platform Square is best known for its small, square-shaped plastic dongle, which merchants can insert into the port of a phone or tablet in order to easily accept credit card payments from customers. In July 2021, however, Square introduced a brand-new offering: Square Banking, through which it offers checking and savings accounts to small businesses owners with interest rates that are eight times those of the average bank.

“We’ve reimagined the financial system for small business owners with their cash flow needs at the center,” Square Banking Head of Product Christina Riechers said in a press release. “We’re introducing fair, accessible financial services that connect directly with our sellers’ payments, helping them unlock instant access to their sales, automate their savings, and receive personalized financing offerings.”

But Square isn’t the only one that’s reimagining the financial system. Just look at the cryptocurrency market, for example. In November 2021, it reached a market cap of $3 trillion as the world’s two largest cryptocurrencies, Bitcoin and Ether, surged to record highs.

Together, these and similar developments over the last decade are challenging the status quo for more established financial services. Traditional banks are increasingly turning to new technologies to create new services that meet changing customer needs. Customers want more options, more visual information and real-time access from anywhere.

By being innovative, open, and agile, the fintech market has soared to a valuation of nearly $310 billion, according to The Business Research Company. If they borrow from the same playbook, traditional banks can reinvent themselves in pursuit of lower overhead, increased profits and renewed relevance in a digital economy.

All it will take is a new mindset — and new cloud-based technologies with which to embody it.

The Case for Cloud

For financial services, cloud computing offers numerous advantages. In the face of growing competition from fintech firms, convenience is perhaps the biggest for their customers. Thanks to fast-acting interconnected data systems – more often powered by cloud computing – banks can alert customers when there are fraudulent charges on a credit card, make faster and better decisions on loan applications, and facilitate mobile banking services like remote check deposits. All of that creates loyal banking customers.

Just as important as having loyal customers, however, is having lean operations. To that end, financial institutions can use cloud computing to easily scale up or down. If a mobile banking application has hundreds of thousands of signups, for example, they can instantly increase bandwidth. And they can do it without upgrading legacy infrastructure since cloud service providers furnish automatic updates with the latest security patches and the newest features.

“Banks and other financial institutions keep an immense amount of data and it’s historically all been onsite,” says Nate Tseng, founder and CEO of WallStreetZen. “By moving data to the cloud, they benefit from faster access, easier utilization, and less overhead costs.”

Although traditional banks were slow to embrace the cloud, expect to see cloud computing and banking collide more frequently in pursuit of the aforementioned benefits. Bank of America, for example, built its own cloud and unlocked $2 billion in annual savings as a result. Goldman Sachs, meanwhile, has partnered with Amazon Web Services (AWS) to offer analytics and financial data for its customers. And Penn National Insurance moved to a hybrid cloud setup that allows it to configure applications in just 30 minutes.

Whether banks serve individual consumers, small businesses, or large corporations, the cloud benefits all customers, according to Jim Pendergast, senior vice president of altLINE by The Southern Bank.

“Creating a cloud available to everyone within the community can increase profits,” explains Pendergast, who says their customers can help banks offset the initial costs of moving to the cloud. “Banks can include a small fee into their price for every customer to counteract the high price rate.”

Contactless Convenience

Cloud-based architectures are the beginning for banks that want to modernize. But they aren’t the end. In the race for digital relevance, traditional banks are embracing a host of technologies that will help them reinvent themselves for a new generation of customers.

Contactless payments and digital wallets are two such technologies. The former utilize near field communication (NFC) to transfer payment information between a merchant’s point-of-sale (POS) system and a consumer’s credit card or smartphone without physical contact. The latter are similar. They store payment information and other assets — for example, coupons, loyalty cards, and transit tickets — securely on mobile devices and transmit them to merchants either by NFC or through the web via an app.

Although Apple Pay and Google Pay are the most popular digital wallets, financial institutions are beginning to offer their own solutions. In 2021, for example, Mastercard unveiled its Cloud Tap on Phone service, which uses software hosted on Microsoft’s Azure cloud platform to turn phones into receivers for payments.

The contactless experience also includes paperless loans and cardless ATMs, the latest iterations of which utilize biometric data. Instead of bills or cards exchanging hands, a bank scans a person’s face or fingerprint, then verifies their identity via the cloud. The resulting transactions are quick, convenient, and secure.

Transactions will be even faster and more secure when banks embrace voice recognition, predicts Chelsea Cohen, co-founder of SoStocked. 

“Voice recognition is taking the spotlight as a more secure authentication method for financial accounts,” she said. “And with cloud-driven companies like Microsoft entering the fintech sphere, traditional banks may soon need to rethink their PIN and password-security processes.”

Banking on AI

Artificial intelligence (AI) is another area in which traditional banks are leveling up. In particular, chatbots. Capital One’s Eno, for example, is an AI assistant that alerts customers to questionable purchases and offers insights on recurring charges, promotional offers, and more.

Chatbots serve a dual purpose. On the one hand, they automate basic customer service queries—answering simple questions about cash back rewards or account balances, for example—so that bankers and financial advisors can devote more time to higher-value services. On the other hand, they also help banks make sense of financial data, which they can leverage to drive improvements in customer experience.

For example, banks can use AI to parse data about their customers’ income and spending for the purpose of creating personalized financial plans. If a customer is planning to buy a house, for instance, the bank can send them personalized insights, tips, and reminders that help them reach their home buying goal.

AI-powered mortgage advisors can help. Using machine learning, they can determine whether a customer will qualify for a mortgage, suggest customer-appropriate mortgage products, and offer actionable suggestions to help aspiring homeowners improve their creditworthiness.

Importantly, banks that want to use customer data must also work overtime to protect it.

“Making sure account holder data is protected adds to the relevance of a bank in today’s digital economy,” explains Ryan Christiansen, senior vice president of data access at Fincity, a Mastercard company, who says open banking APIs can help banks get new customers, broaden their services, and enhance security. “Customers can feel that they own their data and know it’s being protected by their bank when they share it with third parties.”

What About Digital Currencies?

Increasingly, an outgrowth of digital economies is digital currencies — including digital versions of fiat currencies, known as central bank digital currencies (CBDCs).

Issued by countries’ central banks instead of commercial banks, CBDCs can reduce reliance on existing payment methods, increase competition among payment service providers, stimulate innovation, make payments more transparent, and create inclusivity for unbanked populations, says David MacKeith of Amazon Web Services.

CBDCs are part of a larger move toward decentralized finance (DeFi), which uses secure distributed ledgers to improve trust between financial institutions and consumers. Specifically, DeFi uses blockchain and AI to create smart contracts and to integrate digital currencies into financial portfolios in ways that eliminate banking fees and accelerate transaction times.

“Because DeFi doesn’t require processing through a bank, users can easily avoid banking fees,” Pendergast says. “More people will choose to create a cryptocurrency to avoid direct fees in the future.”

Because they allow consumers to circumvent them, many traditional institutions understandably have decried digital currencies. Others, however, are embracing them as a gateway to new opportunities. Among them are The Bank of New York Mellon and Northern Trust, both of which offer bank accounts that hold Bitcoin; U.S. Bank, which offers cryptocurrency custody services to money managers; and JPMorgan Chase, which is the first U.S. bank to have its own cryptocurrency, JPM Coin, a digital token representing a fiat currency.

Notably, JPMorgan also offers an all-digital take on the traditional “overnight repo” market, wherein banks exchange short-term U.S. government debt securities for cash. Using JPMorgan’s system, transactions that used to take more than a day to complete can be executed in just 15 minutes.

Seizing the Cloud Finance Future

Although most traditional banks view fintechs as competitors, the most successful institutions will view them as role models and partners, instead, according to Christiansen.

“Banks [should] take the steps to collaborate with early-stage fintechs, partner with those that are enabling others, and build a better ecosystem right alongside them,” he says. “The synergies boost relevance in the eyes of younger generations, but can also help both continue to innovate and find solutions that matter to consumers.”

Consider Visa, for instance. Through its Visa Cloud Connect platform, it partnered with global technology company TransferWise, users of which can leverage Visa’s global processing network to hold and transfer more than 50 global currencies. Doing so makes it easy and affordable to send and convert money across borders.

It’s an example of how traditional financial institutions and fintechs can unite around technology and bring their respective strengths to bear.

“It was an exciting opportunity for us to…show how we’re thinking and working differently to help today’s fintech innovators scale up quickly,” Visa Executive Vice President and Chief Product Officer Jack Forestell said in a press release. “We’ve created an approach that lets TransferWise tap into Visa’s global infrastructure—one of the most secure, reliable, and resilient systems in the world—through a single integration.”

Whether they want to compete with fintechs or collaborate with them, banks are embracing the cloud.

“These institutions are often slow to change and skeptical of new technologies, but cloud migration has really proven itself over the pandemic's remote work shift,” Tseng says. “A major evolution is definitely on the horizon.”

Joey Held is a writer and podcaster based in Austin, Texas, and the author of Kind, But Kind of Weird: Short Stories on Life’s Relationships. Connect with him on Twitter or LinkedIn.

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