This time around, it’s the tech giants including Google, Amazon, and Microsoft that are hosting a growing mass of banking, insurance, and marketplace operations on their vast cloud-based internet platforms that keep watchdogs out of business. sleep at night.
Sources at the central bank told Reuters that the speed and scale at which financial institutions move critical operations such as payment systems and online banking to the cloud was a dramatic shift in potential risks.
“We are only at the start of the paradigm shift, so we need to make sure we have a suitable solution,” said a financial regulator from a Group of Seven country, who declined to be named.
It’s the latest sign of how financial regulators are joining their data and competition counterparts to take a closer look at the global influence of Big Tech.
Banks and tech companies claim that greater use of cloud computing is a win-win because it results in faster, cheaper services that are more resilient to hackers and outages.
But regulatory sources say they fear that a problem in a cloud computing company could bring down key services in several banks and countries, preventing customers from making payments or accessing services, and undermining the confidence in the financial system.
The US Treasury, the European Union, the Bank of England and the Bank of France are among those stepping up their scrutiny of cloud technology to mitigate the risks that banks rely on a small group of companies and technology companies “stuck”, or excessively dependent, on a single cloud provider.
“We are very careful that things will fail,” said Simon McNamara, chief executive officer of UK bank NatWest. “If 10 organizations are not prepared and are connected to a vendor that goes missing, then we are all going to have a problem.”
The EU proposed in September that external services “critical” to the financial sector such as the cloud be regulated to strengthen existing recommendations on outsourcing of the bloc’s banking authority dating back to 2017.
The Bank of England’s Financial Policy Committee (FPC), meanwhile, wants to better understand the agreements between banks and cloud operators and the Bank of France told lenders last month that they need to have a written contract. clearly defining controls over outsourced activities.
“The FPC believes that additional policy measures to mitigate financial stability risks in this area are needed,” he said in July.
The European Central Bank, which regulates the euro area’s largest lenders, said on Wednesday that banking spending on cloud computing increased by more than 50% in 2019 compared to 2018.
And that’s just the beginning. Spending on cloud services by banks around the world is expected to more than double to $ 85 billion in 2025, from $ 32.1 billion in 2020, according to data from technology research firm IDC shared with Reuters.
An IDC survey of 50 major banks around the world identified only six major cloud service providers: IBM, Microsoft, Google, Amazon, Alibaba, and Oracle.
Amazon Web Services (AWS) – the largest cloud provider according to Synergy Group – reported $ 28.3 billion in revenue in the six months to June, up 35% year-on-year previous and higher than its annual revenue of $ 25.7 billion in 2018.
As all industries have increased their spending on the cloud, analysts told Reuters that financial services companies have moved faster since the pandemic after a surge in demand for online banking and loan programs. emergency.
“Banks are still very diligent but they have become more comfortable with the model and are moving at a fairly rapid pace,” said Jason Malo, chief analyst at Gartner Consultants.
Regulators fear cloud failures will cause banking systems to crash and prevent people from accessing their money, but say they have little visibility into cloud providers.
Last month, the Bank of England said big tech companies can dictate terms and conditions to financial firms and don’t always provide enough information for their clients to monitor risk – and “secrecy” must end .
There are also concerns that banks are not spreading their risk sufficiently among cloud providers.
Google told Reuters that less than a fifth of financial companies use multiple clouds if they fail, according to a recent survey, although 88% of those that have yet to spread their risk plan to do so within a timeframe. one year.
Central bank sources said part of the solution could be some form of reassurance mechanism on the resilience of cloud providers to banks to mitigate the industry’s overall exposure to a cloud service – with the banking regulator having the power. global point of view.
“Regardless of the allocation of control responsibilities between the cloud service provider and the bank, the bank is ultimately responsible for the effectiveness of the control environment,” the US Federal Reserve said in a draft guidance issued to lenders last month.
FINRA, which regulates Wall Street brokers, released a report on Monday ahead of possible rule changes to ensure that using the cloud does not harm the market or investors.
However, being able to easily switch cloud providers when needed is an easier said than done task and could disrupt operations, according to the FINRA report.
Banks and tech companies challenge the idea that greater adoption of the cloud makes financial system infrastructure inherently riskier.
Adrian Poole, UK and Ireland director of financial services for Google Cloud, said the cloud may be more effective at bolstering a bank’s security capabilities than building it in-house.
UK digital lender Zopa said it has moved 80% of its transactions to the cloud and is working to mitigate risk. Zopa chief executive Jaidev Janardana said the company is also deliberately relying on the expertise of tech companies.
“Cloud providers are investing a lot of resources in security on a scale that few individual companies could manage,” he said.
Google’s Poole said the company was willing to work more closely with financial regulators.
“We may one day see regulators pull data on demand from regulated banks with cloud-enabled application programming interfaces (APIs), instead of waiting for banks to periodically send them data,” a- he declared.
McNamara of NatWest said the bank is working closely with tech companies and regulators to mitigate risk and has put alternative services in place in case things go wrong.
“The responsibility ends with us,” McNamara said. “We don’t put all of our eggs in one basket.”
One problem, however, is that not all banks have a full understanding of the resilience risks that could arise from a massive move to the cloud, said Jost Hoppermann, senior analyst at Forrester, especially smaller lenders.
“Some banks don’t have the necessary know-how,” he said. “They think doing this will make all of their problems go away, and that is certainly not true.”