FinTech and Cloud Computing: New Benefits, Possibilities, and Synergies2023-09-08 15:29:15
With no signs of abating, cloud adoption is growing, and according to Gartner, it will reach almost $600 billion by the end of 2023.
Cloud computing is transforming all industries. Finance and its younger sibling – fintech – are no different.
Developing software and apps, fintechs are reconfiguring the incumbents' solutions to deliver better user experience, faster transactions, and lower fees. The scale and pace of change often lead to new business models, like P2P lending or no-frills digital banking.
The cloud has been a vital enabler of many of these innovations. That's why I will shed light on the special relationship between fintech and cloud computing: how they use it to challenge the status quo and collaborate with incumbents on new initiatives like open banking.
I will also discuss significant regulatory changes and trends that will shape the future of fintech and cloud computing.
Why fintechs love the cloud
According to research, the global fintech cloud industry will hit $196.2 billion by 2031, registering a CAGR of 16.4%.
These predictions are surprising, as fintechs have long benefited from several cloud advantages aligning well with their needs and goals. The most important include:
Scalability and flexibility
The cloud enables fintech to scale operations as required without worrying about their infrastructure. As a result, they can respond more dynamically to market changes and customer needs.
Cloud computing often allows fintechs to reduce costs as they don’t have to invest in hardware, benefit from economies of scale, and pay only for the used services. They also make use of other ways to optimise cloud costs.
Managing sensitive information, fintechs need to comply with strict industry regulations. Cloud providers continuously expand their cloud security measures with techniques like firewalls, intrusion detection, endpoint security, data encryption, audits, penetration testing, VPNs, and many more.
Thanks to the cloud, fintechs can collaborate more efficiently with partners and clients worldwide, accelerating innovation and rolling out new products faster.
Access to advanced technologies
As part of their services, cloud providers often also offer technologies like AI, machine learning, or blockchain. This enables fintechs to gain a competitive advantage and unlock new opportunities.
In the fintech industry, speed to market is key. Using the cloud, fintechs can spin up new services within minutes and be the first to launch, test, and iterate new product ideas.
How is the cloud transforming the banking sector?
Fintechs have challenged banks with their agile approaches, disruptive solutions, and user experience that match modern customer expectations. And these have never been higher.
According to Salesforce research, 80% of customers now believe that the experience a company provides is as important as its products and services.
Fintechs’ ability to accommodate this challenge wouldn’t be possible without cloud computing. With mobile technologies, AI, and machine learning, the cloud pushes the boundaries of what’s possible in banking.
And as digital transformation progresses, banks are pressured to change business models to meet new market demands. This can be a challenge, as incumbents struggle with complex legacy systems that are too difficult to integrate with modern standards.
That’s why traditional banks are increasingly turning to fintechs for help. According to recent Finastra research, 75% of global banks plan to connect with an average of three fintech startups to boost their digital transformation efforts.
One successful area of such cooperation is open banking.
The impact of the cloud on open banking
By accessing customer banking data through open APIs, third-party providers create innovative services and enhanced customer experiences. They are rapidly reconfiguring areas such as personal finance, payments, investment, and wealth management areas.
Examples of popular open banking apps include Plaid, Mint, Tink, Yapily, and many more.
With the global value of open banking transactions reaching $57 billion in 2023, Statista predicts it will increase sharply in the coming years.
Again, the open banking revolution is only possible with the cloud’s scalable and secure infrastructure.
Cloud-based platforms facilitate seamless integration of open banking APIs and ensure real-time data access and processing. The cloud’s flexibility and cost-efficiency enable banks and fintechs to collaborate on joint initiatives and deliver more innovative solutions faster.
As cloud platforms play a significant role in the fintech and financial sectors, they are subject to increasing legal regulations. DORA – Digital Operational Resilience Act – is a critical set of legislative acts in the European Union.
Here’s what you need to know about it.
DORA: reshaping the fintech and cloud computing relationship
The Digital Operational Resilience Act has evident ambitions to strengthen the IT security of financial organisations and boost their resilience in severe disruptions.
Within nine chapters, DORA describes uniform network and ICT systems security requirements across all EU member states.
It creates a regulatory framework for digital operational resilience as all companies must ensure they can withstand, respond, and recover from all types of ICT-related disruptions and threats.
Specific articles in DORA outline measures such as:
ICT risk management
Financial institutions must establish and maintain effective risk management frameworks, policies, and procedures to identify, assess, manage, and mitigate ICT-related threats.
ICT-related incident reporting
Companies must report significant incidents to relevant authorities immediately to enable a coordinated response and analysis of potential systemic risks.
Operational resilience testing
Financial companies must conduct regular testing and assessment of their operational resilience to ensure they can spot, mitigate, and recover from incidents.
ICT third-party risk monitoring
Monitoring and managing risks related to third-party providers, such as cloud providers, will also be compulsory.
The regulation allows financial entities to make arrangements to exchange cyber threat intelligence. That’s why companies must implement mechanisms to review and take action on the information they receive.
Published by the European Parliament in December 2022 and effective January 2025, DORA leaves companies less than two years to ensure compliance.
And since there’s quite a lot to take in, consulting an experienced cloud expert could be a good idea.
What other trends will impact the future of fintech and cloud computing?
Market forecasts make it clear that the future of fintech and cloud computing is poised for substantial growth.
It will be driven by trends that have already been shaping the landscape of financial technology. The most important include the following:
Trend #1: Even more cloud adoption
Cloud computing is already widely embraced in fintech, and this trend will continue accelerating. More fintech companies will use the cloud to streamline operations, scale their services, reduce costs and bring innovative products faster.
Trend #2: Hybrid cloud solutions
Combining public cloud with on-prem infrastructure, hybrid cloud setups offer greater control over sensitive data and the benefits of scalability and cost-effectiveness.
Trend #3: Advanced data analytics
Cloud-based data analytics will play a vital role in fintech’s future, providing insights necessary to deliver personalised financial offerings and improve decision-making.
Trend #4: Further development of open banking and APIs
The rising use of APIs will continue influencing fintech’s cloud adoption and the growth of open banking. Cloud-based APIs will facilitate seamless integration with banking systems and data sources, enabling fintechs to securely access and use banking data.
Trend #5: Cybersecurity and compliance
Fintechs handle sensitive data, so security and compliance will remain paramount. Cloud providers will continue to develop security offerings and compliance certifications to meet the regulations such as DORA. Fintechs will continue building robust cybersecurity strategies to protect customer data and maintain regulatory compliance.
Trend #6: AI and automation
Cloud-based artificial intelligence and automation will continue revolutionising fintech operations. AI-powered chatbots, virtual assistants, and robo-advisors hosted on the cloud will streamline customer service processes and accelerate the delivery of new products.
Trend #7: Edge computing in fintech
The convergence of cloud and edge computing will impact fintech applications. It will enable low-latency processing, support real-time decision-making, and time-sensitive financial processes like algorithmic trading and payment systems.
Fintech and cloud computing: the never-ending affair
Fintech and cloud computing are intrinsically connected. For innovators in finance, the cloud has provided the scalability, cost-efficiency, and increased collaboration needed to unlock new opportunities.
Fintechs have demonstrated that new technologies can reconfigure existing services and
dynamically respond to changing customer expectations. Traditional banks have long failed at meeting new market demands, so once confronted with new agile competitors, they also started turning to fintechs for collaboration.
Open banking is an example of fruitful collaboration between incumbents and fintechs – and yet another field powered by the cloud’s capabilities.
But as cloud computing plays an ever-growing role in the financial industry, its regulation becomes more important. Significant legislation comes from the Digital Operational Resilience Act, which aims to strengthen and unify IT security in finance across all EU member states.
DORA comes into force in early 2025, so little time is left to ensure your fintech’s compliance. And when working on that aspect, you’ll also need to account for a few more trends that will shape the future of the fintech and cloud computing relationship.
Not sure where to start? Book a free consultation with our experienced fintech expert, and let’s get the ball rolling!