The disruption introduced by new fintech start-ups, combined with the entrance of Tech giants into the financial arena and a new COVID-19 reality, have led to a market-wide understanding that innovation is an essential tool that all financial institutions need to rapidly adopt.
In Israel, too, the financial sector, and specifically banks, have aimed to transform, but it soon learned that it lags behind the global market leaders. To bridge this gap, Israeli banks should adopt a new way of organizational thinking, one that promotes rapid digital transformation journeys to allow innovation to be built into the fabric of their organization.
Are the Israeli banks ready for such a transformation, and will such transformation benefit us, the customers?
Even to the most skeptical, the last decade has proved that moving to the cloud is a first and vital step in advancing digital transformation, certainly in traditional industries.
The cloud is one of the significant growth engines in the economy – it helps increase enterprises’ focus on core business development, rapid development and deployment of innovative financial services, and state-of-the-art tools that will allow meeting compliance and regulatory requirements.
This is true now more than ever. In a world where digital services are available anytime and anywhere, and where artificial intelligence and data analytics are essential business tools, financial institutions cannot lag behind.
Banks that operate in cloud environments are more flexible and efficient, in part because they do not need to manage expensive legacy infrastructure, periodically purchase local DC hardware, maintain local DC facilities, and heavily invest in professional training for their IT employees. Alternatively, such banks can focus on developing financial services that their customers demand.
But the need for adequate risk management and regulatory compliance cannot be ignored. Until recently, there was a widespread perception that innovation conflicted with compliance and regulatory requirements. In recent years, as the markets have transformed, and more imminently during the recent COVID-19 pandemic, it has become clear that cloud-based technologies reduce organizational risks and can assist financial organization to meet compliance and regulatory requirements.
Organizations that have adopted advanced technologies were better prepared for the COVID-19 crisis and were able to make informed decisions while managing risk in a responsible way (and without a huge stress from the business to deploy unmanaged tools to meet the market requirement under the pandemic). It turned out that contrary to popular belief, cloud use actually facilitates, and even promotes, strict risk management and compliance with regulatory requirements.
This does not mean that this suggested cloud and digital transformation journey, or the move to a managed cloud infrastructure, are a simple to implement. Contrary to the perception that this journey should be driven by the IT department, successful digital transformations require a cross-organization effort, and an intimate involvement of managing risks, data security and legal departments, mainly in order to manage the transition to a shared responsibility environment.
Israel’s banking regulator, the Bank of Israel, has not remained indifferent to the growing demand for innovation in financial markets. The latest update of the central bank’s cloud computing circular from November 2018 allows banks to independently manage the transition to cloud infrastructure (with the exception of “core systems,” a definition that is also under the banks’ control).
In internal discussions and public statements, the Bank of Israel encourages banks to adopt advanced technologies, while understanding that in a rapidly evolving financial-technological landscape, digital stagnation is a significant risk which might lead to customers loss, in ability to create and leverage new growth engines, and could ultimately undermine financial stability.
In conclusion, the cloud can assist financial enterprises to develop and implement advanced systems and services quickly and efficiently while complying with risk management and regulatory requirements. In country cloud infrastructure can present an additional alternative further mitigating compliance risk.
The pace of innovation and disruption in the financial markets indicates that organizations of all sizes that do not digitally transform and innovate will soon find themselves at a disadvantage in the face of increasing competition, both in Israel and around the world.
Digital transformation in heavily regulated industries is not an easy endeavor but clearly, in a rapidly changing market, the advantages outweigh the disadvantages and using cloud-based technologies to fuel that transformation is the order of the day.
The writer is Microsoft regional corporate counsel, CELA Middle East and Africa HQ.