Cloud Outsourcing Levels Playing Field for UK Banks

Cloud outsourcing has reduced technological barriers to competition in UK banking, according to research by the Bank of England. The study analyzed 3,443 outsourcing contracts across 90 domestic banks and found that small and medium-sized banks and building societies captured the largest benefits from cloud adoption.

The researchers estimated a structural model of competition in the UK deposit market and simulated two counterfactual scenarios: one where cloud outsourcing was restricted before widespread adoption, and another where capital requirements were lower. The results showed that restricting cloud outsourcing would lead to higher market concentration and reduced market shares for smaller institutions, while lower capital requirements would increase depositor welfare but reduce banks' incentive to invest in CSP technology.

The study found that a 10% increase in CSP spending is associated with approximately a 1.2% decrease in non-interest expenses and a 1.0% reduction in staff expenses, concentrated among large banks and building societies. The researchers concluded that cloud outsourcing has partly reduced technological barriers to competition in banking markets.