Banking and ways of Banking have undergone significant change. However, at the heart of Banking, the core underlying functions remain the same. Intrinsic to Banking is Payments, comprising the fundamental activity behind every transaction. Reason enough, that banks-built enterprise payments hubs, making significant investment outlays building these robust systems.

Today, the payment industry is going through an increased level of disruption from non-traditional  players providing value-enhancing services. This new breed of players is allowing Banks and non-bank players to meet growing consumer expectations by offering innovative products and services without incurring high upfront costs. 

Banks have thus increasingly been outsourcing their core payments functions such as payment engine technology, payment processing, transaction management and operations to keep up with the pace of unprecedented change. What seemed unthinkable a few years ago, has become a viable option. In a world of “everything as a service”, Payments could therefore not be left far behind.

Payments were and are central to Banking, How then did Banks decided 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 almost 70 countries over the last 10 years has amplified digital payment volumes, and the need for Banks to modernize and upgrade their monolithic payment systems. Regulation, geo specific requirements and newly added functionalities are putting further pressure on enterprises to continuously innovate.

Further, competition from nontraditional players and a continuing low interest rate regime has put further pressure on non-differentiating services making them natural candidates for outsourcing. This has led to Banks moving from ‘build, continuously upgrade and comply’ to a ‘rent what you need (now)’ approach with the flexibility to add new functions and payment schemes. From building systems, Banks started moving to building predictability in operating costs.

So instead of continuing investing in a bank’s own payment infrastructure, Banks have started turning to specialized payments providers – those who can manage the technology, operations and compliance at a lower cost yet providing a secure and reliable service to the financial institution.  PaaS makes its entry.  

What does PaaS do?

The payment ecosystem is evolving rapidly. New emerging technologies and complex regulations pose considerable challenge to the traditional business model servicing payments through payment hubs. These clunky ecosystems processing large volumes on batch framework, are a roadblock to payment modernization. PaaS is the contemporary alternative to these traditional payments hubs spanning the entire gamut of the payment value chain.

 PaaS providers partner with banks, FinTech and e-commerce players providing access to cloud-based services to customers. Open APIs can be leveraged by the end customer to integrate their solutions with the PaaS platform .PaaS provides connectivity via a single API to a host of services such as domestic remittances, cross border schemes and alternative payment methods. As per 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 varied use cases. Last year, Square launched Terminal API, which connects its all-in-one card payment hardware Square Terminal to an existing POS platform. Moneygram, for example, has 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 new and interesting use cases in this space which are likely to see more traction in the coming years.

What should a PaaS offering entail?

Any transformation process, to be worth undertaking, must transform the whole process, not just in part. Payments is a volume-based business in which market share goes to the best company that delivers rapid deployment and low-cost capabilities. While many providers claim extensive scalability and quick GTM capabilities, selecting a suitable PaaS provider requires scrutiny and is based on multiple parameters.

• Real-time payments are the new reality today. A provider needs to be evaluated for his current and roadmap vision in the RTP arena.
• Cloud native microservices based architecture are the default choice today providing scale, speed, and resilience. Microservices allow dynamic change and updates without business disruption. Stripe and Shopify payment systems allow changes and quick adaptations as per market needs. Associated to cloud is cloud security as it is important to secure the customer data and payments data running along the payments rails.  
• ISO20022 messaging formats are gaining increasing acceptability providing for finer and richer data for payments messaging. Any choice of payments provider should factor in the provider’s adherence to these emerging payments standards.
• Fraud and risk management capabilities should be embedded in payments system to flag aberrations well in time. Stripe, for example, offers fraud management solutions along with infrastructure that is required to run online payment systems.
• Reporting and analytics provides deep insights into data generated from payment transactions, providing opportunity for customer analytics as well as revenue generation. 

What are the deeper benefits for going the PaaS way ?

While the commercial benefits of moving from upfront capex investments to opex models are known, PaaS providers are able to provide cost efficient and customized pricing structures to suit specific business needs and situations. Providers are able to alter pricing based on product and volumes offering a transparent fixed monthly fee and transaction-based cost model. Equens, the Dutch payments processor, today processes large transaction volumes for Commerz Bank. As a part of a multiyear roadmap running till 2023, the company is expected to execute most of Commerzbank’s SEPA, real-time, cross-border and domestic payments

Deployment of new functionalities and adherence to new regulatory norms are managed by the PaaS providers leaving the enterprise customers to focus on their customers.

PaaS providers, through their technical expertise, can also enhance the security of transactions as they are better equipped to augment existing security measures through systems integration. This moves the responsibility of adverse cybersecurity events away from the financial institution allowing it to function on its business and customer base.    

Players like Fiserv, TSYS, Paysafe, Verifone and FIS are enhancing their offering regularly to meet the market requirements. Their offerings can broadly be segmented into product technology implementation and operations. While Switch implementation services are provided through the former, payment operations and product support functions comprising customer complaint and dispute management, transaction monitoring are managed as a part of support services.    

What lies ahead?

While PaaS provides immense opportunity in the years ahead, it comes with its share of challenges also. A decision to embrace PaaS and the subsequent decision of specific PaaS provider should be based on comprehensive and careful risk assessment of cost Vs Benefit, security and risk consideration and regulatory compliance with the law of the land.

Payment providers from Payments, telco and other backgrounds have forayed in this space offering their services for markets including banking, fintech and ecommerce marketplaces. These providers are offering specialized services and additionally helping Banks meet security, fraud and regulatory concerns. These services and offerings are seeing faster Go to Market with resource optimization of Bank staff. However, only the most agile of these payment providers will be able to deliver payment processing capabilities at scale, speed and security on a global scale over the next decade. All eyes will be on PaaS platforms taking the industry to the next level.

Several PaaS providers are now exploring the incorporation of next generation digital technologies like AI and blockchain to help streamline the payments flow and allow customers greater flexibility in terms of currency, channel and device of executing the payment. Recently, Square, a fintech that offers PaaS as well as smart POS, won the patent that allows it to process crypto-to-fiat payments.

PaaS is steadily evolving fuelled by growing global non-cash transactions. As the world embraces digital, online, and mobile payments, it has become necessary to streamline and consolidate the payments ecosystem to offer smoother transaction experience. Services is the new disruptor, and Payments as a Service (PaaS) is on the verge of becoming the new normal.

Note : The views expressed in the article are the personal views of the author

References : 

https://www.fintechtris.com/blog/payments-as-a-service-banks-fintechs

https://www.alacriti.com/what-is-payments-as-a-service/

https://www.penser.co.uk/article/exploring-payments-as-a-service/

https://www.emarketer.com/content/moneygram-launches-payment-service-offering-enterprise-customers

https://www.finextra.com/blogposting/18314/payments-as-a-service---a-new-normal-future-of-payments

https://spendmatters.com/2020/10/14/payments-as-a-service-the-organizations-vehicle-for-growth/

https://www.pwc.in/industries/financial-services/fintech/dp/payments-as-a-service-paas-an-approach-to-outsourcing-the-payments-technology-and-support-functions.html

https://www.fortunebusinessinsights.com/payment-as-a-service-market-105888