Long reads

How do you solve a problem like payments infrastructure?

Madhvi Mavadiya

Madhvi Mavadiya

Head of Content, Finextra

Highlighting 2023 as a defining year for core banking innovation, a recent Finextra and CGI roundtable held at Sibos in Toronto, Canada, featured 15 leading voices from a range of global banks who debated the need for payments-as-a-service (PaaS) and the complexities of outsourcing business critical operations to firms outside of the financial services industry.

It is evident that there is a tsunami of change coming, and payments is at the heart of it. Opening remarks revealed that participants felt that holistic management of digital transformation is required. Further, improving customer experience by leveraging operational efficiencies, technology and taking an agile approach were unequivocally discussed as the way forward.

The debate around PaaS is not necessarily new, but what the bankers that attended the roundtable revealed was that this concept needs to be considered in a different way, because the world in which we live in – and transact in – is now different and will be even more different in 2025. 2025 will be a pivotal year for payments, with the deadline for messages to migrate from MT to MX as per ISO 20022 in November being just one shift among many, cultivating a perfect storm of challenges for banks. This storm continues to gather as new legislation around resiliency and real time payments meet the challenges of cost-efficiency and competition.

While European initiatives like SEPA seemed to have served its purpose for the first wave of change, 15 years later, we are seeing evidence to the contrary. As a first sign of the tsunami, drawing back of the tide during the ISO 20022 migration has uncovered many problematic holes in existing infrastructure, with resilience is becoming a challenge from temporary fixes that became permanent, particularly with regulations like DORA coming to the fore. On top of these changes, the shift towards real time payments also places great strain on legacy infrastructure and due to cost basis being relatively fixed, banks are having to do more with less.

Processing payments has become a commodity

The sentiment among the roundtable participants was that processing payments has become a commodity business; all banks want is the ability to move money from one place to another, but it continues to be problematic. This is the basic expectation for banks, and they should be able to process payments regularly, repeatedly, resiliently, and when they want.

Payments were also described as no longer an adjacent service. At the start of the roundtable, participants believed that it was imperative to have control over their payments, but at the end, they were open to working with a third party to make the most of the dynamic services available.

Now is the time for banks to act and transform those central parts of infrastructure they have been afraid to touch. A sea change is headed our way, and the industry cannot wait for a crisis like those in 2008 or 2020 to accelerate digital transformation, others mentioned.

One candid contributor from a bank also revealed that most of their infrastructure is concentrated on mainframes and is not ISO 20022 ready. However, being a mainframe, the system is resilient. This banker added that payments must be boring to be efficient.

With ISO 20022, overlay services can be implemented, but architecture must be built in the right way in the first instance. The overriding concern for this bank was that very few organisations have moved from one class of payment gateway to another class, and fewer still have moved from one engine to another engine without losing transactions along the way. Running processes in real-time is difficult enough, without having to migrate between engines at the same time.

Banks need to be willing to change

Today, banks need to be willing to adopt new technology to change, and this will involve working with a third-party service provider. Another roundtable participant added that as part of this process, it is imperative to utilise validation evaluation to recycle new enhancements. Otherwise, banks will end up with the belief that the improvements that were made are unique, but in fact, competitors will keep pace or even get ahead when it comes to the innovation game or enticing new customers.

This banker revealed that they opted to not disconnect from their existing infrastructure, but instead chose a top layer architecture to process payments in a more efficient way. In line with this, the participant added that culture must be considered, because this is what brings together the different components that are needed and ultimately reveals when the time is right to change the systems.

Providing background information, this Sibos attendee mentioned that 15 years ago, the bank considered whether it would be more cost effective to map local, regional, or global ISO 20022 messaging into existing architecture or to create a new platform that could work for the next 20 years. They chose the latter and this separate architecture has provided consistent engine processing, as well as composable business processes that can function together to form payment journeys.

This banker also said that to do this, they have partnered with a SaaS provider for their payments gateway, so that they could abstract themselves from several of the scheme entry points. This, the participant revealed, has allowed their bank to move more fluidly into that solution over time.

Process continuity is of paramount importance

The fintech market continues to flourish, but as one attendee pointed out, these firms are picking up the profitable pieces of the payments process because that is where the likelihood their business will succeed is greater.

Typically, fintech firms cannot dive deep into the depths of what needs to occur to make payments happen. This generally remains the bank’s space, with the help of third parties. However, as per new EBA outsourcing guidelines, they must plan for an exit strategy. As one participant highlighted, this is not something that is usually considered when entering a new relationship with a partner, but protecting the continuity of service is of paramount importance.

Further to this, in the same way that choice must be offered to the customer, banks that adhere to this regulation and set up a ‘get out’ clause, must ensure that they are setting up their outsourcing partnerships in a way that also provides them with a choice. One attendee mentioned that it is important for their bank – when leveraging the cloud – to have the choice to purchase a solution off the shelf, or work with a different provider when they want and how they want.

The key to this, as multiple participants pointed out, is an isolation layer that allows for segmentation of internal infrastructure so that it is always prepared for different services, and when decisions to make changes occur, there is no long migration process.

What the industry is seeing now is a developing model and because the infrastructure is significantly more flexible, thanks to the cloud and APIs, to move away from the mainframe is a less static endeavour.

Instead of the entire architecture, the banks present at the roundtable revealed that they are now choosing to outsource chunks of functionality. Customer demand and regulation are pushing banks into this direction, and with increased flexibility comes increased splintering of services, so that those that need to be serviced, can be, in the most efficient way.

In summary, the leading points captured from the Finextra and CGI roundtable are as follows:

  • The impact of PaaS to date has been to transfer - not outsource - a range of functions, largely operational and cost overheads to third parties.
  • The challenge now is to widen the understanding of PaaS when competing in a world of change where regulation, industry initiatives, and generating value for customers needs to be considered.
  • PaaS offers an agile option to meet the increasing demands of regulating payments and meeting industry standards, as the architecture is based on an operating system designed and built to match them.
  • When selecting a PaaS solution, a bank must opt for a provider that prioritises security, resilience, and cloud connectivity, rather than those that offer an overlay to their core product.
  • Among banks, there is the differing opinion of PaaS. While the solution is not new, banks do recognise the modern-day version as an answer to a new set of questions. 

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