Cloud banking: challenges and opportunities for Germany’s banks

Digitalisation in the financial sector is moving at a rapid pace, with cloud technology taking on a central role. It offers flexibility, scalability and cost efficiencies, but also represents a number of challenges. This article highlights the current state of cloud banking in Germany and the challenges it brings with it.

Use of cloud technology  

German banks are now using cloud technology for many aspects of their business. In customer relationship management (CRM), cloud-based solutions offer a 360-degree view of clients and support personalised services. Data analysis and risk management also often make use of cloud technologies, which can efficiently process large amounts of data and perform real-time analyses.

In addition, banks use the cloud to automate back-office processes, which significantly improves efficiency. On the payments market, cloud-based systems allow for faster, cheaper transactions. And banks are increasingly taking advantage of offers from cloud-based services that allow them to more efficiently comply with regulations pertaining to compliance and fraud-prevention, and to protect their clients by identifying attempted fraud in real time.

Europe needs favourable technical and regulatory framework conditions to remain competitive

In terms of IT architecture, most banks utilise a hybrid mix of traditional IT systems and cloud applications. Migrating data into the cloud provides a significant competitive advantage. Most banks have switched to public cloud solutions; use of hybrid models is in decline. “Public cloud” means that banks are accessing virtual hardware, software or other supporting infrastructure supplied by an external cloud provider. However, particularly sensitive data is often stored on-premise or in private clouds. That means the data is “in house,” or stored in the bank’s data centre and is thus only managed by and accessible to the bank. Which cloud strategy banks decide on depends on regulatory and technical security requirements.

One major problem is that the top cloud service providers are based in the United States, while banks remain wholly responsible for the services they outsource. Cooperation with large cloud providers has improved, however individual banks have limited negotiating power.

One solution is a pooled audit, in which multiple banks cooperate to audit a cloud provider. The Collaborative Cloud Audit Group (CCAG) is an initiative organised by financial institutions that performs pooled audits of cloud providers in order to establish standards, increase transparency and avoid redundancy.

On a regulatory level, the European Cloud Certification Scheme plans to establish a voluntary certification scheme for cloud services. The scheme is currently under development, coordinated by the European Union Agency for Cybersecurity (ENISA). However, there is controversy surrounding the discussion of digital sovereignty, which could mean that businesses could only contract cloud providers located in Europe. Banks are worried that this will make it harder to access important cloud services located outside of Europe, which could affect their ability to compete on the world stage. It will be important to find a balance between technical requirements and political ambitions.

Conclusion: Banks need to take a holistic approach and foster close cooperation

The German banking sector is forging ahead with the use of cloud technologies: hardly surprising, as they offer significant opportunities for improving efficiency and for innovation. However, banks face many diverse challenges, from regulatory requirements to security concerns to integrating new technologies such as AI. Mastering these challenges will require a holistic approach. Banks must work closely with cloud providers to develop tailored solutions that can meet and satisfy specific financial sector requirements. In addition, they will have to work closely with supervisory authorities to create regulatory framework conditions that allow for innovation while simultaneously providing the required security and stability. Successfully mastering these challenges will, in the end, determine to what extent German banks will be able to utilise the full potential of cloud technologies and secure their ability to remain competitive in an increasingly digital financial world.

Foot note:

1 Sieben wesentliche Trends für Banken und Finanzorganisationen im Jahr 2024