How Embedded Finance, Cloud Offer Paths to Profit

To say that the finance industry has experienced rapid and unprecedented disruption is putting it rather mildly. According to a 2021 J.D. Power survey, an astonishing 41% of consumers have moved away from brick-and-mortar banks to digital only. McKinsey saw the industry return to profitability after several years of flat returns thanks to significant innovations and disruptions.

See also: Five Areas Where FinOps Tools Fall Short

Banks and other financial services institutions are piloting innovative ways to improve their operations, increase efficiency, and enhance customer experiences. Two technological advancements, namely cloud computing and embedded finance, are disrupting traditional business models and providing immense opportunities for firms willing to adapt. This article explores these technologies and their symbiotic relationship, offering a roadmap for companies keen to harness their transformative potential.

Cloud computing has changed finance for good

Cloud computing has been a significant disruptor across various industries, including finance. Here are several ways in which it has been reshaping the finance sector:

Cost Efficiency

Traditionally, financial institutions have maintained extensive on-premise data centers, requiring significant upfront investments to set up and deploy. Cloud computing, however, allows companies to shift from a capital expenditure (CapEx) model to an operational expenditure (OpEx) one. By leveraging cloud services, they can reduce costs associated with maintaining and updating physical servers and other IT infrastructure.

Capital One is an excellent example. In 2015, the bank transitioned from on-premise data centers to Amazon Web Services, which not only resulted in significant cost savings but also enhanced agility and innovation.

Scalability and Flexibility

Cloud computing provides financial institutions with the flexibility to scale computing resources up or down based on demand and changing business needs. This scalability is particularly valuable in finance, where workloads can be highly variable–think the end of the financial year or during periods of high market volatility.

For example, leveraging cloud services allowed Goldman Sachs to scale its computing resources up or down based on market volatility or periodic financial reporting needs, shifting from maintaining redundant capacity to a more efficient use-as-needed approach. Additionally, the cloud’s flexibility has expedited the launch of innovative digital products like their consumer banking platform, Marcus.

Enhanced Data Analysis

Cloud platforms offer powerful tools for data analysis and AI, enabling financial institutions to gain deeper insights from their data. This capability can enhance decision-making, risk management, and customer service. For instance, machine learning algorithms running in the cloud can help detect fraudulent transactions in real time.

JPMorgan Chase leverages the cloud to enable machine learning algorithms to analyze millions of transactions in real time, resulting in swift responses to potential fraud and enhancing risk management. These data-driven insights also inform the personalization of customer experiences and product customization. Cloud computing has not only bolstered JPMorgan’s risk management capabilities but also enriched its customer engagement strategies and product offerings.

Improved Customer Experience

With the help of cloud technologies, financial institutions can offer a better customer experience through seamless digital services. This includes things like mobile banking, real-time transaction processing, personalized financial advice, and more.

The cloud-native digital banking platform Revolut leverages cloud technology to offer its users a seamless digital banking experience. Customers can manage accounts, make transactions, and access a range of financial services through a single app, all powered by the cloud. This platform also uses real-time data analytics, enabled by cloud computing, to provide personalized financial advice and services.

Innovation and Product Development

The flexibility and capabilities provided by the cloud enable quicker development and deployment of new financial products and services. This agility can provide a competitive advantage in a rapidly evolving market.

A prime example of how cloud computing can foster innovation and product development in the finance industry is Ant Financial, an affiliate company of the Alibaba Group. Its “310 model” for loan approvals – “3 minutes to apply, 1 second to approve, and 0 human intervention” – is powered by cloud computing. By harnessing the cloud’s computational power, Ant Financial has been able to develop and deploy innovative financial products like this, enhancing its service offerings and competitiveness.

Compliance and Security

Cloud service providers often have robust security measures and regulatory compliance capabilities. They can assist financial institutions in navigating complex regulatory landscapes and protecting sensitive financial data.

Square, leveraging its cloud-based infrastructure, exemplifies rapid innovation in the finance industry. Square’s entire ecosystem, from its signature card reader to its suite of services like Square Capital and Square Payroll, is built on a cloud infrastructure. This setup enables them to innovate rapidly and roll out new features or services based on customer feedback and market needs. For instance, during the COVID-19 pandemic, Square quickly launched new features to support online selling and contactless payments for businesses pivoting to digital operations.

See also: Multi-Cloud Adoption a Growing Interest for the Finance Industry

The Synergy of Cloud Computing and Embedded Finance

Embedded finance is the integration of financial services into non-financial platforms, apps, or processes—whether that company is traditionally involved in finance or not. It enables companies to offer financial products as a natural part of their customer journey, thus enriching the customer experience and creating new revenue streams.

For instance, Uber has integrated payment systems within its ride-hailing app, and Amazon offers lending services to sellers on its platform. Advancements in technology, including APIs and cloud computing, have facilitated the growth of embedded finance, which has made it easier for non-financial businesses like these to integrate financial services into their platforms.

When combined, cloud computing and embedded finance can significantly amplify a company’s capabilities. Cloud computing provides the infrastructure needed to deliver financial services at scale, while embedded finance offers an innovative way to monetize these services.

In addition to the examples mentioned in the previous section, an excellent example of this synergy is Stripe, a tech company that provides a suite of payment APIs enabling businesses to accept payments online. Leveraging cloud computing, Stripe can process billions of transactions, while its embedded finance capabilities allow for seamless integration with various e-commerce platforms.

However, while the benefits are substantial, integrating these technologies is sometimes challenging. Security concerns, regulatory compliance, and the need for technological expertise are among the hurdles companies may face.

Adopting Cloud Computing and Embedded Finance

Adopting cloud computing and embedded finance technologies involves several key steps:

1. Evaluate Current Infrastructure: Identify areas where cloud computing and embedded finance could provide benefits.
2. Select Technology Partners and Vendors: Choose suitable partners with considerations for security, compliance, scalability, and cost.
3. Plan the Transition: Recognize that implementation can be complex and may require significant changes to existing systems and processes.
4. Ensure Technical Expertise and Resources: Confirm the availability of necessary technical expertise and resources to manage the change.
5. Implement the Technology: Execute the transition, keeping in mind that careful planning and resource allocation is essential for successful implementation.
6. Monitor and Adjust: After implementation, continuously monitor the new systems for any necessary adjustments or improvements.

The Future of Cloud Computing and Embedded Finance

The intersection of cloud computing and embedded finance will likely drive the next wave of digital transformation. As technology continues to evolve, we can anticipate even more seamless integrations, more innovative financial services, and new business models.

Forward-thinking businesses can prepare for these changes by investing in their technological capabilities, fostering a culture of innovation, and continuously monitoring industry trends.

Cloud computing and embedded finance are more than just buzzwords; they represent an exciting frontier of opportunity for businesses that McKinsey believes will experience explosive growth over the next three to five years. By understanding and effectively leveraging these technologies, organizations can enhance their operations, deliver superior customer experiences, and drive business growth.