Bank ring-fencing could be a catalyst for cloud adoption, says industry expert

Matthew Williamson, global head of payments at bank software provider Misys, told Out-Law.com that the need for large banks to separate their retail and investment banking functions offers those companies an opportunity to migrate their existing legacy IT systems to the cloud.

Speaking at a global payments conference hosted by Pinsent Masons, the law firm behind Out-Law.com, Williamson said: "Fintechs are the ones driving cloud adoption in banking at the moment, as these start-ups and digital disruptors do not have a complex legacy IT infrastructure to unbundle like the large market incumbents. Instead, they can start with a blank canvas and take advantage of cloud-based solutions that are helping them attract customers through slick digital offerings."

"The cost and risk involved in moving to the cloud is a major barrier for incumbents. They want the benefits that come with cloud solutions like others joining the market are able to take advantage of. We could see the big banks acquire challengers in the market that already implement cloud solutions, or cloud providers themselves, as a way to shortcut their way to the cloud. Ring-fencing can also help define cloud adoption. It will allow banks to operate banking software in the cloud from scratch with a general migration strategy as they set up new retail and investment arms," he said.

UK banks that take in more than £25 billion in 'core' deposits from individuals and small businesses will be required to formally separate their deposit-taking activities from their riskier investment banking activities by 1 January 2019. Affected banks will have to 'ring-fence' these core functions into a legally and operationally distinct entity, which will not be able to hold or own the capital of entities that are "associated with trading and financial interconnectedness" of the wider banking group. EU reforms will place similar structural change requirements on banks in other EU countries.

Williamson said it was likely that if ring-fencing was a catalyst for cloud adoption then banks would be likely to deploy cloud solutions in their retail arm first through dialogue with regulators.

"If successful there would be no reason for them not to then take their investment banking entity and migrate that across too," he said.

Williamson said that proposed new guidance on cloud outsourcing issued last week by the Financial Conduct Authority (FCA) would help provide confidence to banks looking at adopting cloud solutions.

Williamson also predicted a major shake-up in the charging model for payments in the coming years.

"Consumers currently pay for payments through a complex fees structure that ensures all parties to payments receive a cut for their involvement in the processing of transactions," Williamson said. "However, I think in the next five years that we will no longer have to pay to move money."

Williamson said that data is likely to be "the new currency in the payments market".

"Companies are interested in the transactional data that exists around payments. There is potential for this data to be regionalised to give local insights into what products and services are being paid for at a local level, and at what time. For example, it would likely reveal a huge spike of coffee sales in London between eight and nine in the morning. This data then becomes very valuable to retailers and others who could offer a range of spin-off services on the back of it, like time-specific discount offers for coffee," he said.

Williamson said that there is an opportunity for payment service providers to share the data they have access to with third parties to eliminate the cost of payments to consumers. However, he said that it would be important to raise awareness of the benefits of the data sharing to consumers so that, where the data is personal data, consumers are encouraged to give their consent to it being used in this way.

"Apple is the master of this," Williamson said. "They make people desire products and services they did not even know they wanted previously and flawlessly execute on those innovations."