The lack of a common industry taxonomy has long been a problem for the capital markets in various segments of the market, and the area of cloud technology is no different. Assessing levels of cloud adoption within a firm, let alone across the market, is challenging because not every individual has the same definition of “cloud.” The way vendor solutions or services are marketed and the rather hazy vendor descriptions of various hosting models exacerbate the problem—though a solution is offered as a managed service, that does not necessarily mean it is a cloud-based offering. The distinction between private clouds and public clouds is also rather blurry for most executives. One the parameters have been set, firms can also struggle to assess how much they have hosted within a cloud environment across the enterprise.

By Virginie O’Shea, Research Director, Institutional Securities and Investments, Aite Group

Enterprise-level innovation within capital markets firms is always much slower than functional-specific innovation within revenue-generating areas, such as the front office. Given that moving to the cloud has often been viewed by financial institutions as a strategic enterprise decision, it is unsurprising that the size or existing technology footprint of the firm has a significant impact on how quickly the firm pulls the trigger on the rollout of a cloud strategy across its divisions.

Financial institutions don’t have to be directly working with cloud platform providers to move to the cloud—many have opted to rely on third-party vendor solutions and services providers instead. There are many more vendor-hosted solutions and services offered in the market, which means that firms have more options to choose from than solely on-premises implementation. Some of these are hosted on the vendor’s private cloud, while other vendors have opted to partner with one or more cloud platforms.

The financial services industry as a whole has been slower than many other industries to adopt cloud technology, and large capital markets firms lag those from other sectors. Cybersecurity and data security risk have been on the radar of all market participants over recent years due to high-profile data breaches and denial of service attacks, which has made some C-suites wary of moving mission-critical systems to a public cloud environment. There are also a host of cultural and operational hurdles to overcome before a firm can adopt a cloud-first approach to technology.
Regulations in capital markets are stringent and becoming more so as the transparency and ownership of data become hot-button topics. Most firms in this type of environment will be averse to technology risks and hesitant to begin technology transformations (though hedge funds, which inhabit a less-regulated sector, may be the exception). It is often easier to be a follower than an innovator in such an environment; hence, many firms have rolled out clouds in a cautious and measured manner.

Firms’ own IT departments can also stand in the way of cloud adoption, as they fear that their firms will decide they are no longer necessary employees if they are not managing the company’s core technology functions. These same teams also fail to accurately predict the TCO for in-house systems, so the firm’s management can’t truly see its operation cost. And of course the C-suite still sees these systems depreciating in the capex cost model, and these factors taken together result in glacial progress. 

The diagram below shows a high-level snapshot of where the industry is in terms of moving on-premises functions to a public or private cloud environment. Legacy technology and non-client-facing post-trade operational functions still tend to be hosted on premises because they are perceived as being harder to move to a cloud environment and because C-suites view them as cost centers and lower-priority functions. At the opposite end of the spectrum are research and development environments and marketing and email systems, which are more client facing and less sensitive in terms of data privacy in the case of marketing information. The more industrialized and standardized processes, such as reconciliation, are also perceived as easier to move to a cloud-hosted environment because of the IT team’s greater understanding of data flows and processes.

The Functional View of Cloud Adoption
 

Source: Aite Group

Large capital markets firms have a lot of remaining hurdles to overcome before they will put mission-critical functions into a cloud environment. Helping business-line heads and C-suite executives push through change by highlighting pitfalls and successes is important to spur the industry toward a tipping point in public cloud adoption.

To find out more about the challenges faced and progress made, read Aite Group’s recent report on the subject: https://www.aitegroup.com/report/cloud-adoption-capital-markets-far-fluffy-subject