Why build, rent what you need – PaaS, the new normal in payments
The bank and the ways of doing things have undergone significant changes. However, at the heart of the bank, the basic underlying functions remain the same. Payments are intrinsic to banking, forming the core business behind every transaction. Reason enough, that banks have been building enterprise payment hubs, making significant capital expenditures to build these robust systems.
Today, the payment industry is experiencing an increased level of disruption from non-traditional players providing value-added services. This new generation of players enables banks and non-bank players to meet growing consumer expectations by offering innovative products and services without incurring high initial costs.
Banks are therefore increasingly outsourcing their core payment functions such as payment engine technology, payment processing, transaction management and operations to keep pace with unprecedented change. What seemed unthinkable a few years ago has become a viable option. In an “everything as a service” world, payments could not be outdone.
Payments were and are at the heart of banking, so how did banks decide to outsource it?
Bespoke payment technology systems were designed for volume, and less for flexibility and continuous change. The advent of real-time payments in nearly 70 countries over the past 10 years has amplified digital payment volumes and the need for banks to modernize and upgrade their monolithic payment systems. Regulations, specific geographic requirements, and newly added features put additional pressure on businesses to continuously innovate.
In addition, competition from non-traditional players and a continued low interest rate regime have put additional pressure on undifferentiated services, making them natural candidates for outsourcing. This has led banks to move from a “build, upgrade and continuously comply” approach to a “rent what you need (now)” approach with the ability to add new features and modes. of payment. From building systems, banks have begun to shift to building operational cost predictability.
So, instead of continuing to invest in a bank’s payment infrastructure, banks have begun to look to specialist payment providers – those who can manage technology, operations and compliance at a lower cost while providing a secure and reliable service to the financial institution. PaaS is coming.
What does PaaS do?
The payment ecosystem is changing rapidly. New emerging technologies and complex regulations pose a significant challenge to the traditional business model that handles payments through payment hubs. These clunky ecosystems processing large volumes on a batch infrastructure are a barrier to payments modernization. PaaS is the contemporary alternative to these traditional payment hubs spanning the full range of the payments value chain.
PaaS providers are partnering with banks, FinTechs and e-commerce players to provide access to cloud-based services to customers. Open APIs can be leveraged by the end customer to integrate their solutions into the PaaS platform. PaaS provides connectivity via a single API to a multitude of services such as domestic money transfers, cross-border systems and alternative payment methods. According to Grand View Research, the global PaaS market size is expected to reach $25.7 billion by 2027.
Payment providers are increasingly turning their products into solutions that can be plugged into existing platforms for a variety of use cases. Last year, Square launched Terminal API, which connects its Square Terminal all-in-one card payment hardware to an existing point-of-sale platform. Moneygram, for example, launched MoneyGram as a service that gives banks access to its API-powered money transfer service, allowing them to explore new, innovative use cases for their end customers. Cross-border payments, reconciliation, and settlement present exciting new use cases in this space that are expected to see more success in the coming years.
What should a PaaS offer contain?
Any process of transformation, to be worth undertaking, must transform the whole process, not just part of it. Payments is a volume-based business where market share goes to the best company that offers low-cost, rapid deployment capabilities. While many vendors claim extensive scalability and fast GTM capabilities, selecting an appropriate PaaS vendor requires careful consideration and is based on several parameters.
- Real-time payments are today’s new reality. A vendor should be evaluated for their current vision and roadmap in the RTP domain.
- Cloud-native microservices-based architecture is the default choice today, offering scalability, speed, and resiliency. Microservices enable dynamic changes and updates without business interruption. The Stripe and Shopify payment systems allow rapid changes and adaptations according to market needs. Cloud security is associated with the cloud because it is important to secure customer data and payment data traveling along the payment rails.
- ISO20022 messaging formats are increasingly accepted, providing finer and richer data for payment messaging. Any choice of payment provider should consider the provider’s adherence to these emerging payment standards.
- Fraud and risk management capabilities must be built into the payment system to flag outliers well in time. Stripe, for example, offers fraud management solutions as well as the infrastructure needed to run online payment systems.
- Reports and analytics provide in-depth insights into the data generated from payment transactions, providing opportunities for customer analysis as well as revenue generation.
What are the deeper benefits of going PaaS?
While the business benefits of moving from upfront capex investments to opex models are known, PaaS vendors are able to provide cost-effective and customized pricing structures to meet specific business needs and situations. Vendors are able to vary pricing based on product and volumes by offering transparent fixed monthly fees and a transaction-based cost model. Equens, the Dutch payment processor, today processes large volumes of transactions for Commerz Bank. Under a multi-year roadmap extending to 2023, the company is expected to execute most of Commerzbank’s SEPA, real-time, cross-border and domestic payments.
Rolling out new features and meeting new regulatory standards is handled by PaaS vendors, leaving enterprise customers to focus on their customers.
PaaS providers, with their technical expertise, can also improve transaction security as they are better equipped to reinforce existing security measures through system integration. This shifts responsibility for cybersecurity-related adverse events away from the financial institution, allowing it to operate on its business and customer base.
Players like Fiserv, TSYS, Paysafe, Verifone and FIS regularly improve their offer to meet market requirements. Their offerings can be broadly segmented into product technology implementation and operations. While Switch implementation services are provided through the former, payment operations and product support functions including handling customer complaints and disputes, transaction monitoring are handled as part of the services. support.
What awaits us?
Although PaaS offers immense opportunities in the years to come, it also comes with its own set of challenges. The decision to adopt PaaS and the subsequent decision of a specific PaaS vendor should be based on a thorough and careful risk assessment in terms of cost versus benefit, security and risk consideration and compliance regulatory with the law of the country.
Payment providers from payments, telecommunications and other walks of life have made a foray into this space by offering their services for markets such as banking, fintech and e-commerce markets. These providers offer specialized services and additionally help banks address security, fraud and regulatory concerns. These services and offers are going to market faster thanks to the optimization of the Bank’s staff resources. However, only the most nimble of these payment providers will be able to deliver large-scale, fast, and secure payment processing capabilities on a global scale over the next decade. All eyes will be on the PaaS platforms that will take the industry to the next level.
Several PaaS providers are currently exploring the integration of next-generation digital technologies such as AI and blockchain to help streamline the flow of payments and provide customers with greater flexibility in terms of currency, channel and payment device. payment execution. Recently, Square, a fintech that offers PaaS as well as smart POS, won the patent that allows it to process crypto-fiat payments.
PaaS is evolving steadily, fueled by the growth of non-monetary global transactions. As the world embraces digital, online and mobile payments, there has become a need to streamline and consolidate the payments ecosystem to deliver a smoother transaction experience. Services are the new disruptor, and payments as a service (PaaS) are about to become the new normal.
Note: The opinions expressed in the article are the personal opinions of the author
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