The Extract: The Impact of Cloud Computing on Banking Business Models

  • Alex Jimenez
  • April 26, 2021

The Extract from Extractable is a condensed roundup of digital experience news for financial services institutions, and our take from San Francisco.

This week we look at the ways that innovation is implemented as a response to disruption in the banking industry. Also, we examine the impact of cloud computing on banking business models, particularly Open Banking and Banking-as-a-Service (BaaS).

Disruption and Innovation

Many years ago my manager, an EVP of retail banking, called me to her office with a challenge. During that year’s strategic planning, we had imagined the future of banking. I was one of the more vocal participants. The executive team had noticed my interest in the future and were ready to challenge me. Would I want to lead the organizations’ innovation efforts? I agreed on the spot.

During the following weeks I struggled to put together a framework for innovation in an organization that didn’t allocate any funding for innovation. Ultimately, I described a framework for implementing innovation programs like the one I proposed to that organization.  Today innovation in banking is most likely framed around digital transformation. The digital strategy framework that we follow at Extractable is quite similar.

Defining Purpose

While reading an article in Fast Company on the acceleration of digital innovation, I was pleased to find that PA Consulting covered familiar ground. The process they recommend for enterprise innovation starts with defining purpose. They share an example for their experience: the challenge of working to produce as many ventilators as possible at the onset of the COVID-19 pandemic. PA’s Chief Innovations Officer, Frazer Bennett, is quoted, “Our business every day is to do things that others say can’t be done. That’s what we do for a living.” This brings to mind the many US banking organizations that rose to the challenge to offer PPP loans.

Multidisciplinary Team

The second step shared is putting together a multidisciplinary team. Again, the example of PPP loans comes to mind.  Collaborate via co-creation follows. PA notes that collaboration can be across teams, with other organizations, or even with customers. For small organizations, it is likely that collaboration means partnering with other firms. I saw many smaller banks and credit unions partnering with fintech partners of various kinds to offer PPP loans.

Look at the Big Picture

While the work is taking place, PA recommends to look at the bigger business picture. “Amazon’s understanding of the e-book reader market (is) an example. The Amazon Kindle device isn’t the firm’s primary driver of revenue in this space – that’s the sales of the digital books. But the e-reader enables this market, and to support it, Amazon required a system to sell books, manage digital rights to protect sales, and even included free mobile downloads for the first iteration, to encourage book sales.”

Fail Fast

Going back to my own story, I often told people that we needed to “fail fast.” Eventually I was forbidden to use that phrase because “the bank doesn’t set out to fail.” PA says that innovators need to “fail fast, but make it count.” This is a wrinkle I didn’t verbalize. PA’s Bennett notes:

“it’s better to make a wrong decision and learn from it than not take action at all, and that requires not only getting the right people in each meeting to make those decisions, but enabling creative dissonance, an environment where they can disagree.”

Repurpose with Purpose

One final key PA covers is to repurpose with purpose. In the PPP example, banks and credit unions were repurposing processes and resoures for all types of lending and applying them to business loans. We even saw this in organizations that had very limited experience with business lending.

Jeff Wong, Global Chief Innovation Officer at EY, writes in an article in Forbes that innovation is a post-pandemic necessity. Wong covers some similar points. He recommends organizations should “seek out nontraditional skills sets.” He notes, “disruption underscores the need to gather diverse voices and skill sets in the room to ask better questions that will lead to more equitable solutions.” Later on he adds, “a commitment to investing in highly skilled and diverse talent helps move disruptive technologies forward while seeing around corners.”

Wong suggests,

“innovation is about reframing traditional thinking to embrace a shift in mindset. This starts with corporate leaders encouraging the rest of their organizations to adapt – creating what I call a ‘cultural permission to change.’”

Building a Culture that Fosters Innovation

Similar ground is covered in another Forbes article by Rachel Carpenter, CEO of Intrinio.  Carpenter focus is on building a culture that “fosters innovation at every level.” She shares the five ways to build such company:

  1. Work continued education into your culture
  2. Encourage ‘challenging others’ regardless of rank
  3. Make failure OK
  4. Reinforce daring behavior
  5. Lead by example

Carpenter notes:

“if you’re able to get these recommendations into practice, you’ll stand out in an industry that favors tradition, hierarchy, bureaucracy and playing it safe.”

Interestingly, given that banks are all about risk management, playing it safe is not always the best move.

Banking in the Cloud

We participated in a BWG Strategy Banking-as-a-Service (BaaS) virtual forum last week. There were two dozen or so participants from banks, consulting firms, fintech, and banktech firms in attendance. Our colleagues in other parts of the globe have probably tired of the topic, but in the US it is heating up. The consensus from participants in the forum is that BaaS and/or “Open Banking” has begun to catch on in the US and banks need to get ready now. From our vantage we see a small number of larger or future-focused banks that are getting ready, while the vast majority of banks and credit unions continue to be ambivalent.

Finextra published a sponsored article by Amazon Web Services (AWS), which says that BaaS “enables innovative financial and payments services <to be> embedded into digital apps and products.” It adds that “the deployment of BaaS enables a faster time to market for more personalised propositions.” They quote Stephan Schmidt-Tank, head of the Financial Services Specialist Team in EMEA at AWS, who brings up the example of Stripe. Through BaaS, Stripe has “revolutionised payments, because they allow other businesses to integrate payments through an API, with just a few lines of code. Now, major websites like Shopify or Instacart are using Stripe.”

Companies are Already Stepping In

AWS highlights their partnership with the German bank Solarisbank AG. They quote Hima Mandali, CTO at Solarisbank,

“Financial services should be an organic part of life, not hidden behind brick walls and reams of paperwork. For example, Samsung in Europe has the potential to become a leading financial service provider with Samsung Pay, a virtual Visa debit card with an integrated buy-now-pay-later service called Splitpay.”

This model isn’t limited to Europe. During the forementioned virtual forum, we discussed how non-financial players in the US are expanding their services into banking, such as Amazon and Google. Even WalMart has plans to create a fintech super app.  Walgreens is also planning to launch a bank-account product in addition to offering credit cards.

The purpose of the AWS article is to ultimately highlight how cloud computing is revolutionizing banking. This is also the point of an article in Global Banking & Finance Review by Matthew Glickman, VP Customer Product Strategy, Financial Services at Snowflake. Glickman writes:

“the cloud offers companies the opportunity to house all their various types of data in one secure place, enabling them to personalise services for customers.”

Glickman adds that “by using the data cloud, companies have a consolidated governed location for all types of data (for example, clickstream, transactional, and third-party) that can ingest data from new sources such as IoT devices. This enables organisations to gain a 360-degree view of customer behaviours and preferences from multiple inputs.”

In an article in Payments Journal by Jasen Meece, CEO of Cloudentity, Meece looks at the benefits of BaaS and Open Banking for the consumer. He writes,

“With Open Banking platforms, users can have a holistic view of their financials across different banks, move those funds around at-will, make payments and find deals on loans, term deposits, lines of credit and more.”

The main consideration for Meece, as you might have guessed from his company’s name, should be how organizations manage identity and consent. Meece writes, “Open Banking apps must rigorously support the ability for customers to manage their consent, starting at the API level. APIs with strong consent guardrails and authentication give consumers the highest level of security and builds trust across the whole Open Banking ecosystem. Consumers need to be able to trust that the app is treating their privacy and data with the utmost respect and providing real-time logs of how, when, where and why certain data was shared.”

Glickman points out the competitive nature of the market with an added sense of urgency.

“the continued challenges of the current market now make it impossible for financial companies to ignore cloud computing capabilities as doing so would leave them firmly behind the competition. The data cloud gives businesses a future-proofed technology stack that delivers business agility, competitive customer services and enhanced data sharing capabilities.”

The same can be said for other cloud-enabled models that bring Open Banking or BaaS to the forefront of banking.

If you are interested in defining your digital strategy, innovation practice, or are unsure on how to leverage cloud computing models and need help, contact us.


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