FRR SaaS Model - Iceberg
ComplianceFinance13/9/2021 12:00:00 AM

Enhancing operational resilience by shifting your digital strategy to a SaaS model

By Tom Van de Velde, Lead Product Manager, SaaS

When was the last time you listened to music on a compact disk or watched a movie on a DVD? No doubt it has been a while. Technology has changed to the point that we can enjoy the experience without having to fumble around with the equipment and paraphernalia through which it used to be delivered.

Under the streaming paradigm, companies use ever more sophisticated software to maintain vast, centrally located databases of continuously updated material acquired through licensing arrangements with content providers. This enables consumers to benefit from far more choice at lower cost. Instead of selling a product – a DVD or CD – these companies sell entertainment as a service.

As experiences go, financial regulatory compliance and reporting may not be all that enjoyable, but a similar dynamic is playing out there, as well. The work done to satisfy supervisory mandates is migrating from systems kept in house to servers owned and operated in secure, remote facilities that provide access to their tech, rather than the tech itself, in a format that is cheaper and easier to use.

The push to adopt software as a service (SaaS) – to convert compliance and reporting systems into a service in the cloud from a machine in the basement – is being driven by a virtuous circle. Innovation creates recognition within the financial services industry that these new technological wrinkles can help compliance and IT staff meet regulatory and business goals. That, in turn, stimulates demand for fresh innovation.

Under the traditional ownership model, compliance and reporting systems are a capital expense, often a big one. And not a one-off, either, as the frenetic pace of change in financial supervision ensures that hardware and software upgrades will be needed continually. Given the tendency of authorities to add items to a bank’s to-do list, the cost of upgrades, and of ancillary items like staff training, can be substantial.

FRR SaaS Model - figure 1

One innovation driving many

A SaaS model, by contrast, allows firms to treat systems as a quantifiable, all-in-one operating expense, covering licenses, maintenance fees and so forth, that could be lower in the long run than the capital outlay to buy and maintain systems on premises. And they get a lot for their money: Cloud computing, the technology underpinning SaaS, is one of several innovations in recent years that enable financial institutions to boost performance beyond compliance and reporting, enhancing efficiency across the business, and therefore profitability.

Indeed, SaaS optimizes the utility of many of the other innovations. It allows firms to make the most of the latest advances in hardware, such as in-memory computing, that may be difficult to house on premises, especially for smaller firms, such as challenger banks, because of the expense involved and/or a shortage of skilled personnel.

SaaS solutions also facilitate flexibility by allowing institutions to scale up or down through the use of modular hardware configurations, and by adding, updating and subtracting software to meet commercial demands – new business lines, new markets – and demands from regulators, too. When institutions outsource key tasks to a service provider, part of whose job is to ensure that its systems are equipped with software compatible with the latest regulatory updates, information that in-house staff may not always be aware of, they can be more confident in the results they submit.

That last part surely has crossed regulators’ minds. It is one reason that they are encouraging banks to embrace software as a service. SaaS solutions permit another circle to be drawn that supervisory bodies no doubt find virtuous. The greater adaptability of the hardware and software, enhanced by the expertise of the specialists who configure and run it, allows technological advances and the demands imposed on banks to shape and refine each other. Regulators know that updates can be incorporated more readily into systems, and so they make more, and more complicated, demands.

Supervisory authorities have moved certain items higher up on their agendas – requests for more granular data; an ability to grab information rather than ask banks to submit it; longer, clearer audit trails; more closely integrated systems that facilitate cooperation among key functions – in part because they know they are within easier reach under a SaaS model. The understanding of what regulators are looking for then drives the development of it.

An understandable but misplaced reticence

Some organizations may be reluctant to try a SaaS solution. Perhaps, like parents sending their child off to school for the first time, they are wary of letting their data out of their immediate control. Security concerns are understandable, but there is less cause for them than in the past. Chances are, in fact, that remote servers and connections are more secure at Microsoft Azure or Amazon Web Services facilities than at almost any financial institution. The service providers spend billions of dollars to make sure that is the case.

There may be no safety misgivings at all behind a reluctance to migrate to the cloud. Firms could just be satisfied with their legacy systems. They may have been designed and installed just for them, and they may serve their purpose well enough. It could be that some IT departments fear the impact a SaaS solution will have on their operations – or on their jobs.

But anyone who works in tech knows that change is inevitable; it is a hallmark of the trade. SaaS is simply better at handling change than in-house architecture. One of the most important aspects of a SaaS solution is the service contract, with performance guarantees, that comes with it. No vendor that installs a system on a firm’s premises and then walks out the door can provide the same level of commitment, and in-house staff, even in a large organization, may not be able to fill the gap. They will continue to play a vital role in the SaaS era, however. The understanding of their company’s needs will shape the solution employed and the ongoing relationship with the service provider, and they will remain involved in matters such as network security.

No letup by regulators or innovators

Financial institutions face pressure from many directions: the accelerating pace of innovation, the desire of regulators to ride that wave and push firms to move to the cloud, and the need to look for any edge in an increasingly competitive industry – especially as challenger banks with a lot of ambition and not much capital proliferate, and more established firms work to fend off the encroachment. With the SaaS model coming to be recognized as a useful way to relieve the pressure, it is virtually certain that take- up will reach 100 percent.

That may seem hard to believe, especially if you work in an organization that has come to rely on in-house technology and in-house operators keeping it running. But one constant of history is the tendency for a dominant technology to be replaced swiftly and utterly by a more efficient and simpler alternative. It is a story you have seen play out many times. And if you have watched it play out lately, it was probably not on a DVD.