How I learned to stop banking and love the cloud

As a FinTech company you are well advised to avoid metioning banking and the cloud¹ in the same sentence. Cloud providers advise you to instead refer to specific cloud services like “elastic compute resources,” “encrypted, redundant storage,” “continuous delivery” and “virtualisation.” No matter how you frame it though, the fact remains that banks are not using the cloud and the reason is not a technological one.

The myth of banking safety

MYTH: At the turn of the 20th century (as opposed to now), it really mattered which bank you banked with. Banks were robbed regularly by bandits, fraud was ripe, corruption was everywhere and you could not trust anyone with your money. Now banks are extremely secure, never robbed and your money is in much safer hands.

FACT: “There are more bank robberies in modern-day Dayton, Ohio, in a year than there were in the entire Old West in a decade, perhaps in the entire frontier period!” - Foundation for Economic Education

Banks are robbed much more frequently nowadays, maybe even hundreds of times per day. So why do we perceive banks to be safer nowadays? The difference is that it is hidden from our view to the extent that it doesn’t affect us. Banks nowadays have controls and security measures in place to mitigate frauds, forgeries and theives. Even after the crisis people still feel banks are a safe place to keep their money. Consider even the notion that a bank only has, at a given point in time, only [3% or 1/30th] of its assets actually available to its depositors for withdrawal. If you think about it, that is a huge amount of trust we place with our banks. Banks in turn must adhere to strict regulations in order to benefit from Government Deposit Guarantee Schemes (up to 100k per customer) which in turn promotes further trust by customers into a virtuitous cycle of deposits which fuel credit that stimulates the economy.

Virtuous Virtualisation

This virtuous cycle, as it is based 97% on trust and nothing else, is essentially virtual. My cash, my savings and my investments all live in a virtualised world of theoretical existence. The elder generation will be familiar with the Gold Standard which was ultimately abolished because physical representations of money were not longer sufficient or suitable for the scale and efficiency required of a globalised world. Without the evolution of this virtualised banking system we would still be carrying around little bags of gold guineas.

This shift to virtualised currency was accepted not simply because it made life a whole lot more efficient, but also due to the opportunity it gave for managing the risks of theft. Now a bank can “price-in” the probability that 3% of its 1mn customers will experience fraud and on average lose $205 and will provision (205) x (1,000,000) x (0.03).

In reality, we have not removed the risk of losing our cash but let the cash experts manage that risk for us. The cloud is no different.

Data is safer on the cloud

Until last year, I ran my own NAS drive at home that was hooked up to our domestic LAN and eternally plugged into a socket in the guest bedroom. Last year, two things happened: The size of my personal data started approaching the limits of my NAS setup and Diana’s trusty long-term external HD gave out, necessitating a costly data recovery operation. These two events caused me to re-think my view on data, privacy and the cloud.

I listed the pros and cons of both options and eventually came to the conclusion that the risk of me losing my own data was greater than the risk of an expert losing my data. Once you accept this, the immense cost benefit of moving all your files to Dropbox or Google Drive comes as an added bonus.

It also means I can drop my laptop in the pool, get a new one, re-connect my cloud drive and continue where I left off. ²

So while most people assume banks will gradually move to the cloud due to cost considerations, I believe the change will come when banks accept that their shareholders are better served with someone else managing their IT infrastructure.