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Goldman Sachs, Deutsche Bank and HSBC sign partnership deals in tech awakening

As their booming share prices testify, technology companies have been brimming over with new business during the coronavirus pandemic.

For banks, there has been a special tech awakening: to the merits of cloud computing. After years of foot-dragging, many have been abandoning their cautious approach to cloud-based services and signing up with gusto to outsource their storage of data and other activities that demand high-intensity computing power.

In the past few days alone, Amazon Web Services struck a big new deal with HSBC while Google announced partnerships with Goldman Sachs and Deutsche Bank.

Why now? Some of the reasons are obvious. As banks come under pressure from the financial costs of lockdown — a decline in economic activity, an explosion of loan losses — they are seizing any opportunity to cut costs. Cloud services tend to be priced in ways that mean you pay for what you use, rather than committing to billions of dollars of investment upfront.

But the enthusiasm for cloud computing is not just about scrimping. Banks have been among the most enthusiastic adopters of cloud-based software and video conferencing services to facilitate working from home. Just as the pandemic hit, Microsoft completed the rollout of its Teams video service to 100,000 staff across Santander’s global banking operations, building on a cloud contract struck with the Spanish bank last year.

The pandemic is also accelerating the trend towards digital banking. Dutch group ING said this month it would close a quarter of its branches. Cloud providers are increasingly casting themselves as “digitisation partners” for the banks.

Pre-pandemic, the banking sector was more reluctant than most to move to the cloud. A Bank of England report on digital finance last year estimated that only a quarter of the activities of the largest global banks were cloud-based. 

That tally is far lower than in other sectors, though McKinsey has forecast that between 40 and 90 per cent of banks’ workloads globally could move to the cloud in a decade. Bankers believe coronavirus will accelerate that shift dramatically. An executive at one big cloud provider says: “So far it’s been high-compute intensity areas, such as risk management modelling, that have moved on to the cloud. Personally sensitive data and trading data have not moved. But we’re starting to see that change.”

Banks’ historic reluctance stems in part from their nervousness about security and privacy. But it also reflects longstanding regulatory concerns about the robustness of cloud-based services and concentration risk in the sector.

Thirty of the world’s biggest banks, deemed systemically important, are subject to regulatory capital surcharges in the name of safety. If 90 per cent of bank data moves to the cloud, how much more risky is it that three or four largely unregulated companies dominate that space? 

Over the past couple of years, though, the mood has gradually brightened. Tech giants have engaged with regulators. Their pitch to win bank business has been helped by a broader trend in cloud computing towards so-called “container technology”. This allows companies to use multiple cloud providers as back-up, switching between them in case of problems. Banks and their supervisors have also been persuaded that cloud systems, backed by vast well-financed tech companies with the most sophisticated cyber security, should be especially secure.

A step change in attitudes was evidenced by that 2019 Bank of England report. It concluded that the BoE “should embrace cloud technologies, which have matured to the point they can meet the high expectations of regulators and financial services”.

If it all sounds too good to be true, it may be. Capital One, the US bank and credit card operator, still declares in a case study advertised by Amazon Web Services: “The most important benefit of working with AWS is that we don't have to worry about building and operating the infrastructure.” But that insouciance backfired last year when it suffered a vast cloud breach exposing the personal details of more than 100m credit card customers and applicants and access to 80,000 bank accounts. An ex-AWS employee was blamed. Legal wrangling ensued.

A different kind of privacy threat emerged in Hong Kong last week, with the big cloud companies fighting off regulatory attempts to gain access to the underlying customer data of bank clients. It remains to be seen whether hostile regulators have more or less leverage over big tech than over big banks. But given that the dominant global cloud companies are all American, mounting geopolitical tensions between the US and China, and other parts of the world, will not be helpful.

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GrandVision denies breaking terms of so-called support agreement

A legal fight has broken out between EssilorLuxottica and its €7bn Dutch takeover target, GrandVision.

EssilorLuxottica said on Saturday that it had started legal proceedings in the Netherlands to access information allowing it “to assess the way GrandVision has managed the course of its business during the Covid-19 crisis, as well as the extent to which GrandVision has breached its obligations,” under the merger agreement.

The maker of Ray-Ban and Oakley glasses said that “despite repeated requests, GrandVision has not provided this information on a voluntary basis, leaving it with no other option but to resort to legal proceedings.”

GrandVision said it strongly disagreed with EssilorLuxottica's demands “and has full confidence that these claims will be rejected in court”. It denied that it had broken the terms of the so-called support agreement.

EssilorLuxottica agreed to buy rival GrandVision almost a year ago — snapping up a 76.2 per cent stake in Europe’s largest operator of opticians from Hal Holding — in the hope of adding more than 7,400 stores globally and more than 39,000 employees to the group.

However, the deal has come under scrutiny from European competition authorities — who suspect it could lead to reduced competition and higher prices for consumers. Smaller rivals are also arrayed against it.

Ahead of a crucial, and extended, deadline of August 27 when regulators must decide whether to clear the purchase of the Dutch group, the EU is demanding that EssilorLuxottica sell retail stores to get the deal through, something it is resisting.

Although people close to EssilorLuxottica say the industrial logic of the deal remains solid, there is concern about the price after GrandVision’s shares fell towards €25 in recent months, below the €28 purchase price agreed with Hal.

The concessions being sought by the EU could see EssilorLuxottica, — itself created in a 2017 merger that attracted competition scrutiny — push to renegotiate the price, as could information about how GrandVision’s business has suffered during the pandemic.

Other mergers have fallen through due to Covid, including the planned $9bn acquisition of Bermuda reinsurer PartnerRe by France’s Covéa.

In its statement on Saturday, GrandVision said it “continues to support EssilorLuxottica with the shared objective to obtain regulatory approval for the closure of the transaction within 12 to 24 months from the announcement date of 31 July 2019.”

Hal could not immediately be reached for comment.

EssilorLuxottica’s share price has fallen 13 per cent this year, with the pandemic weighing on the price and a governance tussle between the two sides of the group, over the pending appointment of a new chief executive continuing to lurk in the background.