In concert with most businesses, banks require IT just to stay competitive. Eschewing the functionalities and efficiencies that it makes possible would render them incapable of offering the sine qua non of customer service, not to mention the competent performance of their other financial dealings. However, as essential at IT is to their operation, it is not their core business but the back room infrastructure on which it functions. The capital expenditure required to purchase and maintain the hardware and software necessary for a bank’s purposes, not to mention the employees to staff this department, is significant. Furthermore, since IT has generally raised the bar for all businesses, it does not in itself create a competitive advantage for any one company. However, until Amazon and others offered “cloud service”, a business had no choice but to bite the bullet and open its wallet to remain in the game.
Amazon’s EC2 and S3 services effectively enable an operation to buy as much, an only as much, computing and storage facilities as it needs. This removes the need for large capital expenditure investments and the haggling and hand wringing which usually precedes them. They make it possible for the financial benefits resulting from the competent use of these tools to roll in and offset their cost in a fraction of the time it would have taken had the hardware been purchased by the bank. With Amazon’s no-upfront cost structure, the bank would only pay for usage, effectively offsetting some of the business risk resulting from a downturn in the company performance versus its projection.
The API (application program interface) is another advantage of this company in that it makes it possible for the bank’s internal developer to get started right away. In addition, the availability of Amazon’s Premium Support program reduces the risk of getting bogged down in technicalities and not meeting completion timeline goals.
Another not inconsequential advantage of the reduction in startup cost is that it makes it possible to go after underserved or less traditional markets. IT generally reduces the marginal cost of doing business but by reducing the upfront cost of implementing the IT functionalities, Amazon’s cloud service reduces the risk of targeting these overshot customers who found banking fees to be onerous given the relative value of their funds. This significant reduction in financial risk opens the way to potentially new and innovative business venues. Given that the US banking market is mature, opening up a novel segment represents a distinct competitive advantage.
On the other side of the equation, security concerns need to be examined. The bank’s proprietary information must be protected, not to mention our customers’ information. There is significant business risk attached to any breach in the integrity of our security. In addition, legislative mandates, such as Sarbanes-Oxley, that govern the storage and confidentiality of our customers’ information need to be addressed. Amazon’s ability to safeguard our stored data will need to be assessed by technical and legal reviewers. In addition, given the bank’s dependence on the functionality of the IT infrastructure, any downtime would be highly detrimental to our business. In this regard, Amazon has an advantage over competitors in this market in that they were first to market and have had more experience and time to work out the kinks. Their 99% uptime guarantee for the S3 service is a testament to the fact that they have experience issues in the past and have learned from them to the point of being able to offer the guarantee.
The other consideration is that some established players have and are entering this market. Some, such as Microsoft and Google, have a greater affinity to the technology field. However, this does not automatically give them an advantage as this is a new service. Furthermore, Amazon has leaned the imperatives and modalities of implementing and maintaining a network out of their business need and may as a consequence have better insight in what is required and the flexibility needed for real world situations. They are likely less enamored with the “science” and more attached with the banal functionality and reliability.
Given the above it is advisable to outsource these essential but non core functions to an outside source. Doing so would leave enough resources to staff a small and very competent and agile internal IT department. This staff could concentrate its energy, time, and acumen on working with the upper management and members of functional areas to find and implement strategic ways of using technology to not just keep up with competition but create competitive advantages for the company.