Fourth Industrial Revolution

Cloud and SaaS technology can drive inclusive banking. Here are 3 reasons how

Asian woman hand using mobile phone with online transaction application, Concept e-commerce and internet investment

Advanced banking technology will help inclusive banks harness new opportunities, such as the recent surge in mobile phone use, for financial inclusion. Image: Getty Images/iStockphoto

Max Chuard
Chief Executive Officer, Temenos
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  • Cloud and SaaS adoption are key drivers of future success in inclusive banking.
  • Inclusive banking faces a challenging environment, but much of it all is greatly offset by the advantages Cloud and SaaS brings to communities with poor financial services.
  • Financial vulnerability – heightened by the COVID-19 crisis – makes Cloud and SaaS tech appealing to the developed world too.

In a recent blog for Agenda, the IMF highlighted the ‘game changing’ impact that digital technology could have on financial inclusion. It referenced surges in mobile phone penetration being an opportunity to extend financial services widely, reaching underserved communities.

Indeed, smartphone use is expected to hit 74% in the Middle East and Africa by 2025 –according to a Temenos recent report with the Economist Intelligence Unit – and 78% in Latin America.

Inclusive banks are those focused on financial inclusion – delivering financial services at affordable costs to disadvantaged and low-income sections of society. Temenos has counted them among its clients for over 20 years, and our financial inclusion solution was the first ever core banking system to be deployed on a public Cloud.

Where the technology comes in

Advanced banking technology will be required for inclusive banks to harness these new opportunities for financial inclusion. Of particular importance is Cloud computing and the Software as a Service (SaaS) delivery model.

Cloud and SaaS present an alternative way of running a bank’s IT infrastructure. Core banking and/or the digital front office operates on a public or private Cloud rather than on physical infrastructure in the bank’s premises. Banks pay a subscription to access the solutions.

Both Cloud and SaaS carries lower infrastructure costs, they allow products to be created, delivered and changed faster, and they offer immense resilience, scalability and security. Cloud-based SaaS platforms are also continuously updated, meaning banks benefit from the latest innovations.

And it’s an area that’s growing fast as can be seen in the chart below:

Total size of the public cloud software as a service (SaaS) market from 2008 to 2020 (in billion US dollars) Image: Statista

Cloud and SaaS adoption will be key to future success in inclusive banking for these three major reasons:

1) It is a hyper-efficient model, largely in terms of cost

Cloud and SaaS offers a hyper-efficient cost model that allows banks to move away from a large capital expenditure (Cap Ex), where there is a need for expensive up-front investments in IT. It also avoids high ongoing costs associated with maintaining ageing “spaghetti software” infrastructure or running data centres in-house.

Cloud and SaaS have an operational expenditure (Op Ex) model which requires a much smaller, monthly subscription.

This is very important given the uniquely challenging environment banks operate in today. Low interest rates are impacting profitability, and fuelling the need for new products. At the same time, competition is intense as FinTechs rise and incumbent banks launch digital-only brands.

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Inclusive banks feel these pressures even more. By their very nature, inclusive banking products must be delivered at low cost to the customer. The World Bank estimates around 60% of unbanked individuals in Latin America cite cost as the reason they don’t have accounts.

The amounts serviced are also low, and involve reaching remote and sparsely populated areas of the planet. Without high levels of automation and mobile delivery, this can result in unsustainably low profit margins.

And competition is becoming particularly fierce for inclusive banks in areas like mobile money, especially from non-financial players. Just over half of those partaking in the global mobile money market are located in Sub-Saharan Africa.

The cost savings derived from Cloud and SaaS can be passed on by inclusive banks as affordable banking services. They can also focus more of their limited budget on creating personalised experiences and responsive services for their customers.

2) Its elastic scalability makes inclusive banking manageable and efficient

With inclusive banking, you don’t have to maintain an infrastructure that has capacity for your maximum possible need all the time.

Take mobile banking as an example of why this is important. Mobile banking presents inclusive banks with an opportunity to grow at a rapid pace. Orange Bank in West Africa — a partnership between Orange and Bancassurance company NSIA — has an aim of attracting 10 million customers in Senegal, Mali, Burkina Faso and the Ivory Coast in the next five years.

Accommodating these ambitions by upgrading on-site IT infrastructure would require major — and most likely prohibitive — capital investment. Cloud and SaaS technology is ‘scalable’: its capacity grows with the business. And consumption-based pricing means you only pay for what you use.

In addition, while other banking channels tend to have ‘peaks’ at certain times of the day, our mobiles are with us 24/7. Cloud and SaaS is particularly suited to this model as it has ‘elasticity’; it can expand its capacity to accommodate peak periods and shrink in the quieter times. Meeting this capacity through traditional on-premise systems would require a costly overprovision.

Until recently, the potential for Cloud and SaaS in Latin America and Africa has been limited by a lack of local servicing. The good news is that the major Cloud providers are now establishing their presence in Africa, and capacity has doubled in the past three years.

3) It helps along financial inclusion in the developed world too

With financial exclusion far from limited to emerging regions — some 6.5% of households in the US are unbanked and 16% underbanked — Cloud and SaaS can go a long way towards supporting inclusive banks in the developed world too.

The current economic crisis has made millions more financially vulnerable. And because Cloud and SaaS solutions allow new products to be tailored to customer needs and brought to market quickly, they have helped banks to step up for their customers in these tough times.

Temenos made a set of Cloud and SaaS-based COVID-19 solutions available to banks as the crisis took hold. Atlantic Union Bank in the US used one to deliver over $1.4 billion in US Government Paycheck Protection Program loans for 6,500 businesses in less than two weeks. Another allowed banks to use AI-driven technology to identify vulnerable businesses and match them with the product that would provide the best assistance.

Cloud and SaaS also has a role in driving longer-term solutions to financial exclusion in the developed world.

Varo in the US is a trailblazer in this area. It’s a new kind of bank that is focused on using advanced technology to tackle financial exclusion and inequality. It’s using Cloud and SaaS’ hyper-efficiency and capacity for fast innovation to offer low-cost and ever-evolving services to customers.

Today’s advances in digital technology are a once-in-a-generation opportunity for banking.

Max Chuard

The result? Solutions like no-fee overdrafts – which have already saved Americans over $100 million – and automatic savings tools. Varo also offers users an ecosystem of partner products and services like car insurance, bill reduction and connecting shift workers to employers.

The company also recently became the first consumer FinTech player in US history to receive a banking charter – with Cloud and SaaS technology important in demonstrating the viability of its business model. It was an important milestone in the US’ digital banking journey, and testament to what can be achieved with Cloud and SaaS technology in the inclusive banking space.

The Cloud has cleared

In the past, banks were reluctant to move to Cloud because of concerns over security and privacy. Regulators have also been sceptical because of the potential posed by Cloud for aggregated risk. However, these issues have been addressed in recent years.

Cloud is now seen as just as secure, if not more so, than on-premise. It is also equally as resilient.

Today’s advances in digital technology are a once-in-a-generation opportunity for banking. As the IMF suggests, this includes the chance for inclusive banks to extend financial inclusion on an epic scale. It’s a challenging environment for inclusive banks, but technologies like Cloud and SaaS are there to help them make a huge difference.

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