Cloud computing will be a vital enabler in advancing open banking, a key innovation that will allow Saudi Arabia’s banking industry to deliver best-in-class services to its customer base, according to Adib Kilzie, Head of Customer Experience, Cloud & Enterprise Solutions at KPMG in Saudi Arabia.

Banks in the Kingdom, however, still face two main challenges: the availability of domestic cloud supply that complies with the Saudi Central Bank’s (SAMA) data sovereignty regulations and the quality of that supply.

Local cloud providers have so far fallen short of meeting the expected demand for reliable, scalable and economical supply.

“The vigor we have witnessed in the cloud market during 2023 was quite exciting. A number of hyperscalers announced their plans to set up shop in the Kingdom, which is likely to be a game changer,” Kilzie said.

Saudi Arabia is witnessing the fruits of that decision with the announcements by Microsoft, Google, IBM, Bios Middle East, and Oracle’s expansion, among others, to develop cloud regions throughout the country.

These large service providers offer computing and storage services at a massive scale, coupled with expertise, innovation, and a wide range of industry-focused solutions.

“Saudi Arabia is currently significantly more expensive in terms of cloud offerings, compared to global peers, due to a lack of competition in the market. The arrival of the hyperscalers will lead to greater competition and, eventually, downward pressure on cost,” said Kilzie.

However, a cloud region typically requires a 12 to 18-month runway to full cloud accessibility and integration.

Significant implications exist for the entire banking and financial sector, from large to small commercial banks, capital companies and the insurance sub-sector. The increased ability to connect services between large and small players will present an opportunity for collaboration and process streamlining, leading to greater efficiencies.

There will be immediate and ongoing cost savings in IT infrastructure; capital investment in physical data centers and capacity upgrades will be consigned to history. Nevertheless, some costs may be associated with legacy infrastructure adaptation and repurposing in the short term.

While the prospect of more regulation may be daunting for some, there is a silver lining to every cloud. Enforcing Saudi Arabia’s regulatory framework on cloud providers could help to reduce the regulatory burden on banks and financial institutions.

The business case for migrating to cloud computing is so compelling that many banks are planning or have already embarked on their migration plans. However, this presents a sector-wide issue of how to realize a return on investment of legacy infrastructure such as data centers and systems, especially considering that, in most cases, a typical five-year write-down will extend far beyond the migration window.

Investment in data centers will continue in the short to medium term, although the general trend will be for data centers to shrink and cloud-based systems to expand.

The expectation is that many banks and financial institutions will adopt a phased hybrid migration model to maximize and repurpose existing investments in data center infrastructure, initially migrating lower-risk functions to the cloud while maintaining core, critical and higher-risk business to an existing data center.

“The arrival of hyperscalers, ongoing investment in cloud infrastructure, and a robust regulatory framework are all factors supporting the sector in its cloud adoption. The journey has just begun, but the sky is the limit,” Kilzie concluded.