Payments-as-a-Service (PaaS) may be the new way for FIs to future-proof payments, enhance payments offerings, and boost profitability. Here’s why.
Banks are facing a massively evolving ecosystem when it comes to payments. Not only are regulations tightening but emerging technologies are turning traditional payments on their head. New, non-bank players like Apple are threatening to take a slice of the pie, making it imperative that banks find a way to increase efficiencies. As a result, banks are outsourcing core payments operations and technology. This Payments as a Service (PaaS) model is quickly becoming the new norm as both competitive pressure and the necessary investments for updating core systems eat away at margins.
By tapping into the PaaS model, financial institutions (FIs) and other entities can drastically improve payments capabilities and efficiency. This allows these businesses to manage higher payment volumes more quickly and inexpensively than they otherwise would be able to. The key is to find a partner that facilitates straight-through processing with acceptance for a broad array of payment types and that can deliver iterative features to help the payments operations become a profit center by acquiring new clients and offering new products. PaaS is the way of the future for organizations that want to grow revenues while gaining market share in an increasingly crowded competitive landscape — all while remaining compliant and secure.
The regulatory changes largely stemming from the 2008 financial crisis have posed new challenges for FIs, many of which are now struggling to update bespoke payment technology stacks to meet the requirements of the Payment Services Directive PSD2, the standards of ISO20022, and the other continuous changes occurring within payments. Adopting a turnkey PaaS solution has many benefits over building an entirely new model or attempting to update legacy systems to meet the needs of new regulatory requirements. Going the PaaS route enables banks to scale and secure payments operations while processing higher volumes at a lower cost.
In the past, one might achieve the same ends by partnering with multiple software providers — one for point-of-sale, one for reporting, one for mobile, etc. PaaS bundles all of those channels and features into one platform, which means one integration. Paring down operations to a single platform simplifies billing, fees, and integration with existing systems. Partnering with a PaaS provider gives FIs the ability to adapt the solution as the market evolves and to accommodate any unique needs an FI may have.
The ability to offer flexible capacity was the top reason given by banks for adopting PaaS, with 68% of banks confirming this was a priority. PaaS removes the need for on-premise, physical servers and transitions to cloud-based software and technology, reducing operating costs and streamlining the path to market for new products. This is important as sophisticated consumer behavior continues to drive new payments types and technology.
As online payment methods continue to gain traction, FIs, retailers, and other merchants must quickly adapt and offer new options to customers to remain competitive. Omnichannel and the ability to meet customers at every touchpoint is critical and requires organizations to adopt the payment methods that their core customers want.
Security must progress in tandem with flexibility and new payment types and methods. As online payments and overall payment volumes continue to increase and as payments become faster, security must continually be fine-tuned. FIs and other organizations are not only beholden to PCI compliance standards, but PSD2, GDPR, and other evolving regulations meant to safeguard sensitive payment card data.
PaaS solution providers are well-positioned to enhance security by offering products that go far beyond legacy security methods. These solutions can easily integrate with existing systems, allowing these organizations to shift focus from the technicalities of security and onto customer-centric products and services.
New revenue streams are an enticing proposition for any business, but especially for banks and other payments organizations that are facing squeezed margins. Some PaaS providers offer value via revenue sharing or Interchange Plus (IC+) pricing.
PaaS can also reduce costs as the payment provider owns hardware and software, relieving FIs from the need to employ technology specialist teams. The shift from managing in-house payment infrastructure and operations to partnering with a specialized PaaS provider automatically reduces costs associated with technology management and optimization. It also allows FIs to exploit economies of scale and redirect attention to more strategic, customer-centric initiatives.
Leveraging PaaS allows FIs to fine-tune payments with increased flexibility, simplicity, value, and security — at a lower cost than upending existing legacy systems to meet evolving regulations and realities. Not only does this pave a new path to profitability through enhanced, faster-to-market payments products, but it enables FIs to shift their focus where it belongs: on how the core business can better serve customers.