Perfectly placed to access markets in Africa, South and North America, Spain is fast becoming an investment hot property and Europe’s data capital.

Seen by many as a growing digital giant, the country’s digital ambitions are matched by those of its biggest bank, Santander. Andrew Tunnicliffe speaks with finance IT expert Professor Dr Philipp Brune about the digital challenges banks face in accessing the cloud.

From Amazon Web Service and Google to Microsoft Azure, tech giants are ploughing money into Spain, expanding their cloud service offerings in a bid to reach deeper into the domestic economies of the continent – to say nothing of the broader EU.

Offering a stable political and economic environment, with a highly skilled workforce and relatively low salaries compared with Germany and France, the country is prime real estate.

Its culture is another charm: European of course, but interwoven with that of its South American cousins.

Professor Dr Philipp Brune of the University of Applied Science Neu-Ulm in Germany tells us it’s fast becoming the “nearshoring location” of choice for IT services. “For many European companies,” he says, “it is attractive.”

The figures certainly agree: the Spanish cloud market is growing at a staggering pace. Analysis by Research and Markets suggests the country’s data centre industry will enjoy annual growth of up to 5.4% by 2026. This generates investment in subsectors such as 5G and artificial intelligence.

Spain currently has at least 35 data centres, with a further nine planned for the coming years.

The cloud appeal

Spain’s Santander is carefully manoeuvring its way through a multibillion-euro digital transformation project to modernise its legacy systems.

The €20bn programme, which includes the recruitment of thousands of engineers, involves Amazon and Microsoft, and a mix of public and private cloud technologies.

The bank believes it will ultimately position it to compete with fintechs and challenger banks. It aims to have largely completed the project by 2023.

So, why are Santander’s ambitions not shared by all in financial services? By the banks own admission, the challenge hasn’t been an easy one.

It says security was key, engineering what it called a ‘secure umbrella’ before any migration could begin. The bank also had to contend with the risk of placing everything with one provider, in one place.

“Data security and data protection have always been crucial for financial services, they are businesses built around trust,” Brune says, adding there are very few other industries where data is so important.

As crucial as it is to gain trust among clients, banks and financial service providers also have to be trusted by regulators, meaning compliance isn’t optional – it’s a must.

Regulators take more than a dim view on data breaches. That’s particularly true in the EU, where fines of up to €20m, or 4% of a company’s annual global turnover, can be imposed.

In addition, individual countries within the bloc are also free to levy financial penalties. The US too takes a robust stance; in 2020, credit card provider Capital One was hit with an $80m fine for a breach, which saw more than 100 million customers’ personal data exposed as the company migrated to the cloud.

As the Office of the Comptroller of the Currency (OCC) put it: “While the OCC encourages responsible innovation in all banks it supervises, sound risk management and internal controls are critical to ensuring bank operations remain safe and sound, and adequately protect their customers.”

It’s a view Brune shares, suggesting that the best data security can be achieved by employing the right techniques. “For banks, it’s important which techniques are used in a data centre to minimise risk and avoid or contain, say, malicious attacks from outside harming other systems.

Banks must be able to document these things to show they have taken all the necessary measures to protect systems.”

Of course, none of this is only true for cloud data storage: it’s true for so-called ‘on-premises’ operations too. Nor are these on-premises centres – physical data centres owned and operated by a company – a new concept for banks.

They’ve been using this type of approach for decades, with many continuing to do so even now. To put it another way, not all banks are as attracted to migration on a large scale as Santander. But will it get to a time when the sector is fully migrated?

One way or the other

Word from Santander would suggest that’s a possibility. Speaking in an interview earlier this year, Dirk Marzluf, the bank’s global chief operating and technology officer, said 60% of its overall IT infrastructure had been migrated, with the remaining 40% likely to be the hardest. He did, however, hint that this was still the target.

If the Spanish giant achieves its aim, Brune feels it will be the exception rather than the rule. “I would say it’s not one or the other, it’s not either/or. I think in most cases it will be a kind of a hybrid approach,” he says.

On-premises services, he believes, will be there for the foreseeable future. They will, however, be significantly reduced from what they are today, just housing systems that banks would prefer not to have somewhere else, those critical to infrastructure or compliance.

Cost is a driver of this model too. Brune says that banks might want to migrate operations that are only used for certain roles, or at certain times of the year, such as accounting season.

“Of course, cloud is useful and has the advantage to change costs, fixed and running, but it’s also a cost because the top providers want to earn a margin. So, it’s not always cheaper.”

Added to this is the total cost of ownership. Brune, therefore, believes that banks will mix cloud and on-premise storage, a balance unique to each institution and one determined by their own specific needs.

A lasting legacy

Another reason hybrid models will likely prevail is legacy systems – outdated hardware or software still functioning – and the limitations they have when incorporated into modern systems.

Although dating back as far as the 1970s, legacy systems in some of the world’s older banks remain critical to both the institutions themselves and the global financial market in general. After all, some estimates suggest these mainframes facilitate upwards of $2tn in transactions a day.

“I think that, for banks, this is actually one of the big challenges regarding shifting services to the cloud,” warns Brune.

“Most of the core systems of all the big things are running on mainframe platforms.” Brune adds that, for years, the belief was that these workloads could be shifted to the cloud with relative ease. But over time, all of the proposals on how to
do it have failed: the complexity was too great or the applications too integrated.

“Because of this,” Brune continues, “for years investments in core systems and traditional core systems have been very low. But now more and more companies are realising they have to find a new strategy to modernise systems and make them ready for moving parts of them to the cloud, or at least managing them as a part of the cloud.”

The problem is there simply isn’t the skilled workforce in many parts of Europe to help manage it. Because banks have believed they could just migrate and drop ageing capabilities for newer ones, investment in skills and training never happened.

All the same, Brune says that banks are gradually waking up to these challenges. “There was not much education, not much practical training on legacy technologies,” he says, “and this is a big, big issue because it is probably the prerequisite to a modern cloud strategy, or to digitalise services.”

The future is in the air

Despite the challenges migrations pose, banks are slowly but surely being enticed by the cloud. Whether that’s what they want or need is another story entirely.

In February 2021, HSBC said it had moved some of its transaction services to Google Cloud, while at the end of 2020, Deutsche Bank and Google Cloud announced a partnership that would, in the words of the German bank, ‘reshape how products and services are designed and delivered’.

Arguably, this change is both necessary and inevitable. Challenger banks and fintechs are snapping at the heels of the legacies, bidding for every possible client in some markets. Brune, however, doesn’t believe the threat they pose is a mortal one, at least not yet.

Even so, their rise is leading traditional banks to review what they’re doing and how they’re doing it. “The role of the traditional bank is changing to offer more of the fintech services,” Brune says.

“Challengers are less about disrupting the banking industry anymore – it’s more about cooperating, providing added value services to the banks; and so, the banks turn into some kind of consumers.”

As these developments take hold, so too will the change that is inevitably coming to legacy banks. They will have to be more agile – arguably requiring a more ‘modern’ approach.

For now, though, Brune says many banks are still largely managing their own data, with migration largely in its very early stages – making the likes of Santander outliers rather than the norm.

Expanding their European digital footprint, big cloud players will bring change to the banking sector, whether it’s welcome or not.

The challenge for the banks is what change do they lead and which do they follow? Brune thinks there’s room for all in the banking landscape – large or small, legacy or challenger.

They will, in fact, come to rely on each other, making use of similar technologies and systems as they go. “It will be more like an ecosystem,” Brune suggests. “Big banks will be turned into providers for this ecosystem, having a lot of smaller services integrated but still operating

This article originally appeared in Future Banking winter 2021.