Stress to the world economy in 2022, arising from factors including geopolitical conflicts, supply chain disruptions and rising inflation, will impact the financial services landscape in 2023, forcing industry players to embrace digital business models and architectures, a new report by IBM says.

The 2023 Global Outlook for Banking and Financial Markets report, released by the technology corporation last month, lays out the headwinds financial institutions should expect in 2023 and discusses how these organizations can improve financial performance amidst these challenging economic conditions.

According to the report, increased macroeconomic tensions, spiking inflation and rising geopolitical risks are introducing economic headwinds which financial institutions will need to face in 2023.

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The ongoing war in Ukraine is prompting governments to ramp up deglobalization efforts to protect their economies from geopolitical risks, subsequently driving up costs and fueling inflation, it warns.

At the same time, the sustainability imperative is introducing new risks and complex compliance requirements which banks must contend with.

These factors are emerging on the back of an increasingly competitive landscape that has seen over the past couple of years the rise of new market entrants. These new digital-savvy, non-traditional players are appealing to customers because of the superior customer experiences they provide as well as their lower costs.

Increased competition is putting pressure on financial institutions’ margins, it says, and yet, banking incumbents are struggling to respond to the threat in a swift manner, hampered by legacy architectures and operating models that are not proving agile enough.

Against these uncertainties, banks must embrace technology and establish a strong digital foundation, a journey which should start with adopting a hybrid cloud strategy, the report says.

A hybrid cloud strategy as a prerequisite for cutting-edge technology adoption

A hybrid cloud approach, where two computing environments are combined and share information with one another, allows businesses to overcome the inherent issues with primitive public cloud platforms, which mainly revolve around security, compliance and customizability. Instead, with a hybrid cloud strategy, organizations can get the best of both worlds, tapping benefits such as lower cost, better regional compliance and security, greater flexibility, scalability, easy management and innovation and growth potential.

According to IBM, a typical institution would deploy an average of four to 12 major platforms a year. A hybrid approach allows an organization to significantly quicken that pace, enabling multiple controlled software releases per day.

Establishing a strong foundation that relies on a hybrid cloud strategy also opens up new opportunities relating to the use of data, the report says. On this hybrid architecture, trusted artificial intelligence (AI) can be deployed at scale for evidence-based decision making, while operations can be simplified via workload automation.

Combining a hybrid cloud strategy with the use of data analytics and AI not only allows banks to tap new tools that simplify and accelerate development, it also provides them with access to new ways of working, allowing them to weather market uncertainties and disruptions with speed and flexibility.

Statements made by the IBM report are consistent with trends observed over the past few years, where enterprises have been found to be rapidly embracing the hybrid cloud approach, as well as data analytics and AI.

A 2022 global survey conducted by 451 Research, part of S&P Global Market Intelligence, on behalf of Cisco, polled 2,500 information technology (IT) decision makers in 13 countries and found that models combining on-premises and cloud-based resources are becoming the norm in the business community.

Of the respondents surveyed, 82% said they currently use cloud-based infrastructure-as-a-service (IaaS) to host their workloads. This hybrid approach enables their organization to achieve a more agile and scalable development environment (42%) and accelerate business agility and innovation (40%), the respondents indicated.

Hybrid cloud models are also driving the adoption of emerging technologies, the research found. 41% and 49% of survey respondents said that some form of edge computing and infrastructure automation capability, respectively, are already deployed in their organizations.

Data analytics and AI are other technologies that are increasingly being adopted by businesses. A 2022 market research commissioned by IBM revealed that global AI adoption grew steadily over the previous year, rising 4 percentage points to 35% in 2022 compared with 2021.

The study, which also polled companies about their plans to use AI in their sustainability initiatives, found that AI is poised to play a significant role in these organizations’ environmental, social and governance (ESG). 66% of IT professionals surveyed stated that their company is either currently applying AI, or plans to apply AI, to accelerate ESG initiatives.

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