An IDC InfoBrief, Sponsored by VMware | July 2018

Banking IT Modernization and the Adoption of Hybrid Cloud

Document #US44161318

IDC InfoBrief | Banking IT Modernization and the Adoption of Hybrid Cloud

Sponsored by VMware | Page 2Document #US44161318

The retail banking industry must continue to minimize costs even as regulatory pressures and customer engagement demands increase. Included among the drivers for cloud – which is a foundation for digital transformation – are the following trends:

Executive Summary

• Demand for responsive customer engagement

• Rise of data/analytics (internally and externally sourced) as a critical component of digital transformation

• Drive to enable agility in the middle and back office

• Need to maintain secure and compliant infrastructure

• Enable faster innovation at the front office and as a way to improve efficiency, agility and security in the back office

IDC InfoBrief | Banking IT Modernization and the Adoption of Hybrid Cloud

Sponsored by VMware | Page 3Document #US44161318

Source: IDC Financial Insights’ Banking Channel Preference Survey, 2017 and 2018

Source: IDC Financial Insights 2017 Consumer Banking Preference Survey, n=2750. Note: Multiple responses allowed.

Banks Are Challenged to Respond to Preferred Customer Behavior and Demands for New Models of Engagement

Online/Website

Branch

Mobile

Call Center

Customers Want Omni-Channel Experiences…

62%

53%

18%

7%

Better security - including fraud monitoring

Improved service requests - balance inquiries, address changes, etc.

Personal financial management tools - spending trackers

Management of risk - credit scoring, product suitability

Contextual marketing - location based offers

New channels - chat bots, voice banking

… and Are Demanding Better Services

82%

40%

31%

29%

14%

11%

IDC InfoBrief | Banking IT Modernization and the Adoption of Hybrid Cloud

Sponsored by VMware | Page 4Document #US44161318Source: IDC Financial Insights’ Omni-Experience Digital Transformation in Retail Banking in the U.S. MaturityScape Benchmark Survey, 2017

IDC’s MaturityScape Benchmark for Omni-Experience Shows Nearly 90% of Banks Are Stuck

Ad Hoc Opportunistic Repeatable Managed OptimizedAd Hoc Opportunistic Repeatable Managed Optimized

Ad Hoc Opportunistic Repeatable Managed OptimizedAd Hoc Opportunistic Repeatable Managed OptimizedAd Hoc Opportunistic Repeatable Managed Optimized

IDC’s MaturityScape Benchmark for Omni-Experience DX in banking - measuring the ability to leverage digital technologies to deliver an optimized omni-experience - shows that only 11% of banks can deliver innovative or disruptive customer engagement.

Growth is slow due to the inability to engage

and keep up with technology changes.

Digitally enabled customer experiences

and products are inconsistent,

unsustainable, and not repeatable.

The bank provides consistent and

repeatable products and experiences and is on par with peers, but there is no true

innovation yet.

The bank is an early adopter in its markets, providing competitive digital products, services, and experiences.

The bank’s business is able to grow

sustainable business faster than its peers’

while disruptiing markets and creating new ones to its own

advantage.

45% 43%

2%8%

3%

IDC InfoBrief | Banking IT Modernization and the Adoption of Hybrid Cloud

Sponsored by VMware | Page 5Document #US44161318

Investment between operational and business analytics is split almost 50/50. And the need for advanced data and analytics capabilities is growing stronger every year.

At the Same Time, Data and Analytics Are Becoming Critical Resources to Protect the Enterprise and Better Engage with Customers

Source: 2017 Industry IT & Communications Survey, IDC Customer Insights and Analysis, April, 2017 Source: 2017 Industry IT & Communications Survey, IDC Customer Insights and Analysis, April, 2017

To avoid risk

To improve security

To support Internet of Things (IoT) initiatives

To understand and

target customers

To allocate resources more effectively

Business Analytics

47% Operational Analytics

53%

Top 5 Ways U.S. Banks Are Using Data/Analytics Bank Spend - Operational vs Business Analytics

33%

30%

26%

26%

25%

IDC InfoBrief | Banking IT Modernization and the Adoption of Hybrid Cloud

Sponsored by VMware | Page 6Document #US44161318Source: IDC Financial Insights’ Omni-Experience Digital Transformation in Retail Banking in the U.S. MaturityScape Benchmark Survey, 2017

Overall Digital Transformation Progressing Only Slightly Better

Ad Hoc Opportunistic Repeatable Managed OptimizedAd Hoc Opportunistic Repeatable Managed Optimized

Ad Hoc Opportunistic Repeatable Managed Optimized

Ad Hoc Opportunistic Repeatable Managed OptimizedAd Hoc Opportunistic Repeatable Managed Optimized

IDC defines digital transformation as the continuous process by which enterprises adapt to or drive disruptive changes in their customers and markets (external ecosystem) by leveraging digital competencies to innovate new business models, products, and services. Work on areas like security, fraud, and regulatory compliance has been the focus of transformation in the back office, slightly improving overall DX scores.

31% 31%

22%

9% 8%

Growth is slow due to the inability to engage

and keep up with technology changes.

Digitally enabled customer experiences

and products are inconsistent,

unsustainable, and not repeatable.

The bank provides consistent and

repeatable products and experiences and is on par with peers, but there is no true

innovation yet.

The bank is an early adopter in its markets, providing competitive digital products, services, and experiences.

The bank’s business is able to grow

sustainable business faster than its peers’

while disruptiing markets and creating new ones to its own

advantage.

IDC InfoBrief | Banking IT Modernization and the Adoption of Hybrid Cloud

Sponsored by VMware | Page 7Document #US44161318

Banks realize that the future of the organization lies in its ability to create an open, agile and responsive infrastructure in order to connect to external sources of value. These digital market-places are ecosystems of third-party firms with which banks can extend the products and services to their own customers.

For example, a bank could connect to a real estate company to provide a more holistic experience of home ownership by including geographic information on homes for sale, and combining that with the bank’s own information about interest rates, credit worthiness, and the customer’s avail-able funds. The customer then sees the specific homes for which he/she may be pre-approved.

However, the Move to Digital Marketplaces Is Acknowledged by Banks as a Driving Force Behind Digital Transformation

Source: Digital Transformation (DX) Leader Sentiment Survey-2017, IDC, March, 2017

Participation in Digital Marketplaces

Digital Revenue as a % of Total Revenue

Market Share Growth

Market Recognition

Improved ROI

Other

KPIs Used to Measure Digital Transformation Success

58%

51%

43%

35%

35%

1%

IDC InfoBrief | Banking IT Modernization and the Adoption of Hybrid Cloud

Sponsored by VMware | Page 8Document #US44161318

Source: IDC 2018

So Banks Are Moving to “Connected Banking” Architectures Using Open APIs to Consume and Provide Innovative Solutions through Cloud-Based Ecosystems

To overcome the challenges of legacy modernization and leverage opportunities in the digital marketplace, banks will move to a Connected Banking architecture that can:• Expand beyond traditional financial products

• Support participation in the growing payments/e-commerce space

• Provide multiple sources of collaborative platforms and data-as-a-service solutions to enrich the bank’s own capabilities

• Enable faster response to market conditions by quickly adding to, or modifying, the partner ecosystem

Non- Financial Partners

Real Estate, Automotive,Education

Enterprise Platforms

Compliance, Credit Svcs, Data/

Analytics

CUSTOMERSRetail, SMB,

Corporate/B2B, Affiliates

Financial Partners

Insurance, Wealth,

Investment

eCommerce Platforms

Amazon, eBay, Apple Pay

Internal Product Development & Marketing

Open API Architecture Cloud

Enabled “As-A-Service”

IDC InfoBrief | Banking IT Modernization and the Adoption of Hybrid Cloud

Sponsored by VMware | Page 9Document #US44161318Source: 2017 Industry IT & Communications Survey, IDC Customer Insights and Analysis, April, 2017

As a Deployment Model, Cloud Is Gaining Significant Traction

On-Premise and Outsourced

40%

Public Cloud

15%

Private Cloud

45%

Software Deployment Models: U.S. Banking

On-premise

Private cloud

Public cloud

Have not implemented

36%

35%

19%

9%

IDC InfoBrief | Banking IT Modernization and the Adoption of Hybrid Cloud

Sponsored by VMware | Page 10Document #US44161318Source: 2017 Industry IT & Communications Survey, IDC Customer Insights and Analysis, April, 2017

Note: Percentages do not add up exactly to 100% due to rounding.

This Is Further Evidenced by Banks Moving to Public Cloud as a Deployment Model for Some Critical Workloads

Deployment Models for CRM Solutions at U.S. Banks

IDC InfoBrief | Banking IT Modernization and the Adoption of Hybrid Cloud

Sponsored by VMware | Page 11Document #US44161318Source: CloudView Survey, IDC, April, 2018

Overall, There Is a Shift from Traditional Infrastructure Spending from On-Premise Models to Private and Public Cloud

Change in IT spending on public

cloud — 2018 to 2020:

Change in IT spending on private

cloud — 2018 to 2020:

Change in IT spending for on-premise and

traditional outsourcing – 2018 to 2020:

26% 7% 26%

IDC InfoBrief | Banking IT Modernization and the Adoption of Hybrid Cloud

Sponsored by VMware | Page 12Document #US44161318Source: CloudView Survey, IDC, April, 2018

Some Concerns Remain in the Move to Public Cloud...Security remains a top concern for banks looking to move to a public cloud model for critical workloads.

Security concerns

IT governance issues, including challenges related to defining standard services and SLAs

Regulatory or compliance issues

Downtime causing business interruption

Difficulty centrally managing IT systems, IoT services and integration cloud services

Top 5 Concerns of Public Cloud

49%

41%

39%

37%

32%

IDC InfoBrief | Banking IT Modernization and the Adoption of Hybrid Cloud

Sponsored by VMware | Page 13Document #US44161318Source: CloudView Survey, IDC, April, 2018

Security is cited as the top benefit to the move to public cloud. This apparent paradox is attributable to a lack of knowledge around the depth of security capabilities at cloud providers in the industry.

...But Improved IT Security Is Also Seen as the Biggest Benefit to Moving to Public Cloud

Improved IT security

Improve business agility

Get access to the newest functionality faster

Give LOB control over sourcing their own IT solutions

Simplify and standardize IT

Top 5 Benefits from Public Cloud

47%

44%

43%

42%

41%

IDC InfoBrief | Banking IT Modernization and the Adoption of Hybrid Cloud

Sponsored by VMware | Page 14Document #US44161318

Banks must deliver on better customer engagement strategies today, including an increasing importance of data and analytics.

Legacy system modernization is holding back a bank’s ability to execute improvements on data/analytics and customer engagement.

Connected Banking – the ability to source solutions in a digital cloud ecosystem – promises to enable more agile responses to market pressures.

Although security remains a concern around public cloud adoption, it is also recognized as a benefit to adoption.

Key Takeaways

IDC InfoBrief | Banking IT Modernization and the Adoption of Hybrid Cloud

Sponsored by VMware | Page 15Document #US44161318

Essential GuidanceResearch the realities of public cloud capabilities and robustness.

Continue to modernize systems using open APIs and with an eye toward “right-sourcing” workloads as they become untangled from legacy.

Determine which workloads the organization can transform by connecting to and consuming cloud-based services as line of business opportunities.

Treat cloud (private/public/hybrid) as an enterprise resource with appropriate governance, risk, compliance, and security policies and procedures.

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IDC InfoBrief | Banking IT Modernization and the Adoption of Hybrid Cloud

Sponsored by VMware | Page 16Document #US44161318

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