MSFT Microsoft Corporation

By Telis Demos 

Technology giants and big banks have been warily circling each other, especially in the payments arena. So far, they are more frenemies than rivals.

The reason: Banks are rapidly emerging as big potential customers for the fast-growing, cloud-computing businesses of Amazon.com Inc., Alphabet Inc., and Microsoft Corp. That is making technology companies think twice about alienating them by becoming direct competitors.

"We are very intentionally approaching banking customers with an opportunity to empower them rather than to be in their space," said Judson Althoff, executive vice president of world-wide commercial business at Microsoft. "Banks see other cloud providers investing in mobile payment capabilities, and there is a concern about disintermediation."

With consumers increasingly turning to their mobile devices for money transfers and financial advice, some analysts have predicted that tech companies will supplant traditional banks as providers of many banking services.

But the dynamic emerging is not so straightforward. The biggest banks, such as JPMorgan Chase & Co. and UBS Group AG, are themselves investing billions of dollars in new technology and, for the first time, starting to use public cloud-computing platforms, in which computing power and storage are purchased over the web.

The leading providers of those fast and sophisticated shared computing services include Amazon's AWS, Alphabet's Google Cloud and Microsoft's Azure.

For years, banks had resisted moving sensitive data or processes to the cloud, citing the security concerns of allowing data outside of their leased or owned data centers. Financial firms also had already invested billions into their own internal data platforms, including so-called private clouds.

But recently, momentum shifted after regulators began using the cloud for data storage and reporting, including the Financial Industry Regulatory Authority, which works with Amazon's AWS. That has led many banks to start doing the same.

Moving from traditional mainframes to the cloud also makes it easier for banks to use artificial intelligence and other new technologies that consume huge computing resources. This is used to create better mobile products and trading tools.

"The ability of the banks to get out from under their legacy cost pile is limited," said Jason Gurandiano, head of financial technology banking at RBC Capital Markets. "So banks moving to the cloud gives them leverage with the tech providers."

Cloud spending by banks is expected to skyrocket. By 2021, banks globally are forecast to spend more than $12 billion on public cloud infrastructure and data services, up from $4 billion last year, according to market research firm International Data Corp.'s public cloud spending guide.

By many metrics, the cloud business offers better opportunities to tech firms than, say, retail banking. Overall cloud-industry revenues are growing at about 60% year-over-year, Jefferies estimates. Meanwhile, retail-banking revenue, comprising products such as checking accounts and cards, at most big banks is growing at a fraction of that rate. And any real foray into banking or financial products could also entail substantial regulatory issues and expense.

"Tech companies are going to get far more consistent and repeatable revenue being infrastructure providers than by being in banking," said Ami Grewal, head of digital strategy at GFT Group, an engineering services firm that works with banks and partners tech firms including Amazon and Google.

A handful of banks, such as Capital One Financial Corp., are already significant cloud customers. Capital One began working with Amazon in 2013, and made AWS its predominant cloud provider in 2016.The bank's deal has incentives for it to spend at least $150 million a year on the service, people familiar with the agreement said. A spokesman for the bank declined to comment.

The upshot is that while big tech firms continue to dabble in banking services, they tend to do so almost entirely through banking partners.

For example, Amazon, Google and Microsoft offer digital wallets that allow users to link their bank-issued credit and debit cards. Citigroup Inc. enables its credit-card customers to pay for goods at Amazon using credit-card rewards points.

Amazon's AWS, says working with banks is a top priority. Frank Fallon, vice president for global financial services at AWS, told the Journal that "interest has grown exponentially over the last few years" in cloud services in the financial-services industry. Rather than competing with banks, he said AWS was instead focused on making sure it was offering the best security, performance, and function. AWS's team "keep financial services customers at the core of everything we do," he said.

Tariq Shaukat, president for global alliances and industry platforms at Google Cloud, said Google begins meetings with banks by assuring them they aren't interested in gathering banking data for its own sake.

"We see ourselves as an enabler and platform for many of those institutions, as opposed to in any way trying to compete with them in their core businesses," he said. "We start cloud conversations with an ironclad rule: A customer's data is a customer's data."

Microsoft said last year it had partnered with Bank of America Corp. to work on public-cloud applications for the bank. As recently as 2016, top Bank of America executives said they didn't see a way to use the public cloud, due to security risks.

Cathy Bessant, the bank's chief operations and technology officer, said the lender was still only spending a small part of its $3 billion annual computing infrastructure budget on public cloud. The bank now plans to increase that, following a rapid improvement in security technology, and with a variety of partners.

Ms. Bessant added that the firm takes into consideration the possibility of tech partners someday seeking to compete with banks, in part by learning from banks' own data. "We're not naive to that potential," she said. "We're sensitive to making sure that...we work with infrastructure providers that are like-minded and have our best interests at heart."

Write to Telis Demos at telis.demos@wsj.com

(END) Dow Jones Newswires

April 26, 2018 12:18 ET (16:18 GMT)

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