Banks are tiptoeing into their cloud-based future
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By Lananh Nguyen, The New York Times Company
Michael W. Lucas has made big plans to tour the world in March 2020. He has arranged to travel from his home in Detroit to Tokyo, then attend conferences in Hong Kong and Bangalore, India, before to make a last stop in Paris.
But on her first attempt to buy plane tickets, the ambitious itinerary – costing $2,932.48 – caught the attention of Capital One, who blocked the fee.
“I was both annoyed and thrilled that the credit card company found out that someone was booking unusual flights,” said Lucas, a 54-year-old tech writer who is also a detective novelist. After calling the bank to explain their plans, the transactions went smoothly. (The trip, however, was ultimately canceled due to the pandemic.)
Lucas’ fraud alerts were made possible by an invisible force tiptoeing into Wall Street: cloud computing. Before moving to the cloud, his bank, Capital One, was limited to tracking fraud using the bandwidth of the servers it owned. Now that it’s leasing the capacity from Amazon Web Services, the bank can use machine learning to process the numbers faster — and at scale — to catch anything out of the ordinary.
As Lucas said, “Cloud is a fancy word for ‘other people’s computers’. ”
Banks see huge potential in cloud technology to make their systems faster, more agile and more responsive to their customers’ needs. Consumer banks can develop cloud-based tools to quickly introduce new features into mobile banking apps or detect fraud. Lenders can use the cloud to process loan applications and analyze underwriting decisions for everything from mortgages to business borrowings. They can use machine learning to detect money laundering. As volumes increase in financial markets, traders can use additional computing power to analyze price movements and manage spikes in client activity.
Yet the banking industry has generally been slow to adopt cloud computing. Currently, major banks operate their own data centers, which house computer servers that process vast amounts of customer account data, payment records, and transaction logs. The machines are expensive to operate as they require a lot of electricity and also need to be kept in air-conditioned premises.
While Wall Street executives have long recognized the potential of cloud computing to cut costs, they’ve only allowed their companies to take hesitant action. Executives balked as banks are tightly regulated by governments and any sudden changes involving consumer deposits or privacy are not possible. They also fear that computing on the Internet opens the door to cyberattacks. And some businesses are held back by legacy IT systems that are difficult to revamp or retire, making the transition even more difficult.
David M. Solomon, CEO of Goldman Sachs, is optimistic about the migration of financial services companies to the cloud. However, “it must be done with high levels of security and real data and information protection,” Solomon said. “That’s why you have to go slow and you have to go carefully,” he said.
In North America, banks manage just 12% of their tasks in the cloud, but that could double in the next two years, consulting firm Accenture said in a survey. Jamie Dimon, CEO of JPMorgan Chase, said the bank needed to embrace new technologies such as artificial intelligence and cloud technology “as quickly as possible”.
Wells Fargo plans to move into data centers owned by Microsoft and Google over several years; Morgan Stanley is also working with Microsoft. Bank of America saved $2 billion a year in part by building its own cloud. Goldman said in November it would partner with Amazon Web Services to give customers access to mountains of financial data and analytical tools.
Cloud services allow banks to rent data storage and processing power from providers such as Amazon, Google or Microsoft, which have their own data centers located around the world. After migrating to the cloud, banks can access their data over the Internet and use the computing capacity of technology companies when needed, instead of using their own servers all year round.
Seeing a big opportunity to sell cloud computing services on Wall Street, some tech giants have hired former bankers who can use their knowledge of the rules and constraints under which banks operate to kickstart the industry.
Scott Mullins, AWS Business Development Manager for Financial Services, previously worked at JPMorgan and Nasdaq. Yolande Piazza, vice president of financial services at Google Cloud, is the former CEO of Citi FinTech, an innovation unit of Citigroup. Bill Borden at Microsoft and Howard Boville at IBM are Bank of America alumni.
Cloud providers are “moving at a much faster rate of development when you think about security, compliance, and control structures,” compared to individual banks, said Borden, vice president of global financial services at Microsoft. According to Borden and the other executives, the cloud allows companies to increase their computing capacity when they need it, which is much cheaper than running servers on their own premises.
But glitches occur. A week after Goldman partnered with Amazon, an AWS outage interrupted webcasts of a conference hosted by the bank that brought together the CEOs of America’s largest financial firms. The issue also caused problems for Amazon’s Alexa voice assistant, Disney’s streaming service and Ticketmaster. AWS and its competitor, Microsoft Azure, have both experienced outages recently.
Banking regulators in the United States, including the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency, jointly highlighted the need for lenders to manage risk and have safeguard systems in place when outsourcing technology to cloud providers. The European Banking Authority has warned companies against the risk of concentration or overreliance on a single technology company.
The Financial Industry Regulatory Authority, which oversees brokers – firms that engage in trading activities – has already moved all of its technology to the cloud. The group previously spent tens of millions of dollars a year to run its own servers, but now rents space on AWS servers for a fraction of that amount, said Steven J. Randich, chief information officer of FINRA.
Randich estimated that without the cloud, FINRA would have had to incur at least $100 million in expenses to track market movements using its own data centers, especially as trading volumes have exploded these last years.
“We’re all in,” Randich said. The use of web-based systems has enabled FINRA to process hundreds of billions of market records and its supervisory staff to analyze unusual trading activity by extracting data in seconds or minutes, compared at previous times. But Randich added that “there’s a way to do it right and there’s a way to do it wrong,” and the wrong way can leave a company vulnerable to security breaches.
Capital One is all too aware of the risks. In 2019, it suffered one of the biggest data thefts ever at a bank after a hacker obtained the personal data of more than 100 million people. The bank was fined $80 million by a regulator and ordered to tighten its security controls as it moved its IT operations to the cloud. He also agreed to settle a class action lawsuit covering 98 million consumers for $190 million.
“The security of our customers’ data is of paramount importance, and we’ve invested heavily in our cybersecurity capabilities to defend it,” said Mike Eason, Capital One’s chief information officer for data and learning. automatic in Richmond, Virginia.
Despite the breach, Capital One said it saw huge benefits from migrating to the cloud. It closed its eight data centers last year and runs its technology through AWS. As customers increased their holiday spending, the bank used rented servers to handle a seasonal surge in transactions, without having to pay for all servers year-round as it had previously. It also plans to move most retail call center operators to work permanently from home.
The new arrangement is working well for Rosie Hardy, an employee at Capital One’s Tampa call center. In March 2020, as the pandemic raged, Hardy packed her tech gear away in a large cardboard box and returned home to Gibsonton, Florida. Within an hour, she was back online from her spare room with plenty of natural light, answering calls from the bank’s small business customers.
Hardy and his colleagues were no longer connected to phone banks thanks to a service that routes calls through the cloud, allowing them to work remotely. “You couldn’t tell where I was. All I needed was internet access, and I picked up like we never left,” Hardy said.
This article originally appeared in The New York Times.
Banks are tiptoeing into their cloud-based future
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