SECTOR SPOTLIGHT: Payments-as-a-Service (PaaS) Enhances Banks and FinTechs
SECTOR SPOTLIGHT is a monthly series on FinTechtris exploring a niche sector within FinTech, by examining its current challenges, new framework/model, benefits, and outlook.
In financial services, payments are the underlying activity behind every transaction. Moving funds from one user to another can take place through various methods (or payment rails), each with its own cost and benefits. The technology readily available from smartphones, cloud, and big data continues to push industry innovation forward and disrupt legacy providers such as banks and payment networks.
Cash usage is on the decline globally as consumers and businesses have found faster and more convenient ways to pay for everyday transactions and send/receive transfers. Payments as a sector is a volume-based area in which market share goes to the best company that delivers rapid and low-cost capabilities. Expectations in the payment experience continues to increase, yet so do the challenges that face payment service providers (PSPs), banks, and other intermediaries.
As a response to the growing payment needs of fintech and non-fintech enterprises, Payment-as-a-Service (PaaS) programs have emerged in the last few years. These models provide access to the latest technology, services, and program management with minimal overhead and investment. Banks, PSPs, and any company can take advantage of this offering to boost the payment experience of their end-users.
CHALLENGES FACED BY PAYMENT PROVIDERS
Payments (similar to other area within banking) is a regulated, heavily-monitored sector around the world. Newly added functions put the pressure on companies to continuously innovate. Lack of security and controls in money movement can lead to increased fraud and criminal activity (such as money laundering and terrorist financing). Besides tech and compliance, there are other key challenges that payment players face in today’s landscape:
Security and Fraud: The majority of fraud in financial services is related to payment activity and as the number of companies offering this service grows, so does the risk of exposure. Onboarding users properly (i.e. identity verification, watchlist and sanctions screening checks) and monitoring activity (for anomalies and suspicious transactions) are both critical asks. Balancing this risk mitigation with a positive, effcient user experience makes the whole process even more challenging.
Regulatory Compliance: New guidelines are in play impacting payments in certain regions of the world. Reforms on open banking, data access and protection, security, and standards have companies approaching the sector cautiously in order to avoid regulatory complaints and penalties. The increased complexity between local, federal, and international rules is a concern to payment providers expanding operations across borders.
Technology: As a combination of various tech (APIs, AI, cloud, biometrics, etc.), payment solutions need to be able to stay up-to-date with the latest offerings. The industry’s evolution adds new standards and payment rails that are in demand from consumers and businesses. Many banks struggle to compete and add interoperability due to the legacy infrastructure of their traditional payment systems, often too complex to rip and replace in-house. Recently launched fintech companies strapped for cash also face a similar challenge in developing their payments stack to stay competitive.
New Payment Enhancements: Beyond access to all payment rails, companies are asking for the latest complementary features to help grow their user base. Services such as fraud protection, multi-currency, sync with credit solutions, transaction-based rewards, account reconciliation, and integrating with top fintech apps are all in high demand.
Total cost of ownership: Keeping costs low and maintaining margins is especially critical in payments. The latest tech, features, and payment models can cause payment providers to bring in thin bottom lines. The upfront investment to build a full payments stack (with licensing, compliance, tech, and program management) and then continuously update it is too great for most large banks (let alone fintech firms).
Payments-as-a-Service (PaaS) platforms are able to provide expertise, scalability, technology, and security that companies of any size need to stay competitive in today’s payment landscape. There’s no fixed cost in building a new infrastructure from scratch, or handling system maintenance. A turnkey solution is now available at a lower overall cost and faster implementation period in getting started.
Emergence of Payments-as-a-Service
In an era of “X-as-a-service”, payments is no exception to the mix. PaaS providers have created comprehensive, end-to-end programs that fulfill the majority of tech and operations responsibilities — all through a cloud-based platform for processing payments. Companies now have additional capacity and resources to focus on their user experience, marketing, and expanding client base. These solutions can be customized for fintechs and non-fintechs (e.g neobanks) as a white-label offering or directly integrated for banks (of all sizes) and financial institutions.
Small / Mid-sized Credit Unions and Regional banks: These smaller organizations lack the capability to build out payment systems on their own. The need still exists to stay up-to-date with payment options, but outsourcing to PaaS relieves constraints with resources and upfront investment.
Large national banks: Building in-house payment infrastructure is more likely with larger institutions, but the task of adapting this to their legacy banking core is too daunting. A similar amount of work would go into leveraging a PaaS platform to build something from scratch to a bank’s specifications. These builds can target certain functions and payment options with API connectivity to alleviate implementation concerns.
Fintechs and Neobanks: Known to work with agile tech providers, these types of startups are amongst the early adopters of PaaS platforms. Due to limited capital, prioritizing for low (total) cost solutions makes the most sense. Plug-and-play, developer-friendly APIs with compliance oversight are the critical needs to be met.
There’s a model to match each company (from bank to fintech) with a payment provider. Size, volume, and existing architecture can all vary widely, but the value drivers from Payment-as-a-Service all have a strong impact on delivering the best in payments in fast, cost-effective program.
KEY Advantages of PaaS
Regardless of type of organization, Payment-as-a-Service platforms deliver compelling benefits for all companies interested in modern payment systems.
Speed to market: With the infrastructure already built by PaaS, enterprises can sign up and integrate compliant, full service programs rapidly through a single integration. A faster go-to market approach also reduces setup costs in due to a lengthy implementation period.
Lower total cost of ownership: Grouping most requirements of a payments solution under a single provider leads to cost efficiency for firms. No need to outsource engineers, risk management, or security requirements. Building an in-house solution or combining multiple vendors may seem cheaper on paper, but the added staffing to manage the various relationships becomes too costly.
Flex pricing: PaaS providers are able to alter pricing structures based on product, transaction volumes, and company size. SaaS models often refer to a transparent monthly fixed fee and transaction-based cost, but low volume needs can be met with pay-as-you-go models.
Upgrades in features/services: With a modular platform, Payment-as-a-Service platforms can quickly add the latest methods for transfers (such as blockchain or real-time payments). Alternative payment processors may lack the newest services and features or infrastructure, which can push companies to combine more than one provider in search for a comprehensive, innovative solution.
If an organization has already built out most of their payments architecture, then the strategic decision may be to maintain their proprietary systems. This choice can also provide higher gains in profitability and margins on payment volumes, especially as transaction activity and user growth scale. The challenge is balancing this upside with long-term system maintenance and upgrade costs, which wouldn’t be paid for with PaaS solutions.
OUTLOOK on the payments sector
Payments is a foundational part of financial services. The greatest gains from technology come from enabling speed, access, and lower cost of money movement between users (at the local and international level). As new payment rails emerge (e.g. real-time payments in the US) and gain adoption, user demand at the fintech/neobank/traditional bank level increases. Companies that take custody or manage the flow of funds must able to to provide the latest payment options as part of their user experience. A fast and seamless payments journey can also boost customer satisfaction.
Payments-as-a-Service a delivers a one-stop solution that for all organizations in a low-weight, agile program which optimizes for speed and cost. The burden is no longer on user-facing platforms to build out their own systems and develop relationships with payment networks or banks. As new functionality becomes available, PaaS providers can quickly add features to their products. These partners can also help banks with legacy processors update infrastructure to become hybrid cloud-based and accessible via API. Financial institutions would be better equipped to access their own data and quickly address inquiries from 3rd parties. As new regulations are added, PaaS also provides guidance in meeting standards (such as PSD2).
Despite Banking-as-a-Service dominating headlines in the last few years, the industry’s progress continues to be fueled by payments. Blockhain-based payments will be the next innovation that companies will look to adopt and add as an option for users. Only the most agile of payment providers would be prepared to deliver this and other enhancements on a global scale in the next decade. All eyes will be on Payment-as-a-Service platforms taking the industry as a whole to the next level.
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