Cloud technology is changing more than the way banks store data and run software. New research suggests it may also be altering competition across the banking sector by reducing the cost of accessing modern digital infrastructure.

A Bank of England staff working paper published on 14 August 2026 examines outsourcing agreements between UK banks and Cloud Service Providers, or CSPs.

The study finds that cloud adoption is linked with lower operating costs, stronger deposit growth and improved competitive conditions, although the effects vary significantly by institution size.

<h3>Lower Costs for Banks</h3>

Banks traditionally relied heavily on large internal IT systems that were expensive to maintain, upgrade and scale.

Cloud outsourcing offers a different model. Instead of owning and operating every part of their technology infrastructure, banks can use external providers and expand computing resources as required.

The researchers found that higher spending on CSP services was associated with <b>lower operating costs and higher deposits</b>.

These direct effects were especially noticeable among large banks, which often have complex legacy technology systems. Moving some operations to cloud infrastructure can reduce dependence on older systems and improve efficiency.

<h3>Smaller Banks Gain in Competition</h3>

The competitive impact may be even more important for smaller institutions.

Using a model of the UK deposit market, the researchers found that the demand-side benefits of cloud adoption were substantially larger for small and medium-sized banks and building societies.

The reason is straightforward: smaller institutions historically faced a considerable technology disadvantage because building sophisticated digital infrastructure required large upfront investment.

Cloud services reduce that barrier by giving them access to scalable systems without requiring the same level of internal technology spending.

<h3>What Happens Without Cloud Outsourcing?</h3>

The researchers modelled a scenario in which cloud outsourcing had been restricted before it became widely adopted.

The result was a more concentrated banking market.

Smaller institutions lost market share, while depositors experienced lower overall welfare because they had fewer competitive alternatives.

This suggests cloud services have not simply improved banks' internal efficiency. They may also have helped preserve competition by making it easier for smaller providers to offer modern banking services.

<h3>Capital Rules Also Matter</h3>

The study also identified an interesting connection between capital requirements and technology investment.

Higher capital requirements were associated with increased CSP spending. According to the researchers, larger institutions may respond to stronger capital rules by investing more heavily in cloud technology to improve operational efficiency and strengthen the long-term value of their businesses.

A simulated reduction in capital requirements produced an unexpected trade-off.

Lower requirements directly improved welfare by reducing banks' funding costs. However, they also weakened incentives to invest in cloud infrastructure.

That reduction in technology investment offset roughly <b>32% of the direct welfare benefit</b> generated by lower capital requirements.

<h3>A Changing Competitive Landscape</h3>

The findings suggest that technology policy and banking regulation cannot always be considered separately.

Cloud infrastructure can lower costs, make modern banking technology more accessible and reduce some of the structural advantages traditionally enjoyed by the largest institutions.

At the same time, reliance on external providers introduces other questions around operational resilience, concentration among technology suppliers and dependency on third-party infrastructure.

<b>The broader message is that cloud outsourcing is becoming part of the competitive architecture of modern banking. By reducing technological barriers, it can help smaller institutions compete more effectively while encouraging larger banks to modernise systems that were once expensive and difficult to replace.</b>