As payment innovation accelerates, financial institutions are feeling the pressure. Legacy infrastructure, shifting regulation, and rising customer demand for real-time experiences are forcing banks to rethink how they deliver payments.
In response, payments as a service (PaaS) has emerged as the go-to model for cutting through complexity and speeding up transformation. James Wester, Co-Head of Payments for Javelin Strategy & Research, recently hosted a PaymentsJournal webinar that explored the benefits of PaaS and the challenge of choosing the right provider. Joining Wester were Deepak Gupta, EVP Product, Engineering & Services at Volante; Gregory Prince, Director Core Payments Product at Fifth Third Bank; and Alan Ng, Managing Director of Payments Technology Consulting at Accenture.
Removing the Pain Points
The key concept of PaaS is that it provides the technology enabling a bank or other organization to process its payments. The provider is responsible for creating that infrastructure, which could be cloud-based or on-premises but managed by the provider. In any case, PaaS delivers both the payment processing capabilities and the infrastructure, while the bank remains responsible for the business and operations.
“People know what software as a service is,” said Gupta. “Payment as a service is nothing but payment software as a service. At a very simple level, the provider removes all of the pain points which a bank has to worry about.”
For most banks, it does not make sense to build their own payment solutions—especially when providers like Volante have already delivered such services to multiple financial institutions. PaaS has emerged as the model for handling commoditized processing, allowing banks to expand their capacities and take advantage of the cloud.
PaaS presents itself as an alternative to custom payment solutions. When a new version of Oracle or SAP comes out, banks with custom payment processes must conduct a differential analysis to ensure compatibility with existing systems. Furthermore, when a customized payment system is built specifically for a bank’s needs, it misses out on the collective wisdom gained from the experiences of other organizations facing similar payment challenges.
“People said this is not the way software should be done,” said Gupta. “Software should be out-of-the-box. It should be configurable and scalable, and you shouldn’t have to worry about infrastructure. And that’s where software as a service came in.”
Catalysts for Change
The most obvious catalyst driving the shift from legacy technology to payments as a service has been modernization—the push from mainframe environments to something more up to date. The introduction of instant payments has accelerated this trend. Banks that began working with RTP and FedNow payments realized they needed a modern tech stack.
Another driver is ISO 20022 compliance, particularly protocols that create standards for the information sent with each payment. Financial institutions are already on that journey, implementing changes for the Federal Reserve and SWIFT, with the expectation of more industry shifts to come. Much of PaaS is already built on top of that data foundation.
Finally, there’s embedded payments. Fintechs are continously updating consumer experiences as they evolve and move further into real time. That shift becomes increasingly harder to achieve with a legacy tech stack.
The Challenge of Building Your Own
Creating a bespoke payment application presents its own challenges. Banks would rather focus on client relationships than on patching, upgrading, and maintaining their tech stack—but it’s easy for the latter to occupy much of their time.
“Go to any bank today and if you want to start a new project, IT’s book is filled for the next year, if not longer,” said Gupta. “If your head of business goes to IT and says, ‘Hey, when can you guys do it?’ Most often the answer is: ‘We can add it to our pipeline and start it next year.’ But you don’t have the luxury of waiting for two years, because customers are pushing to launch these new offerings.”
In addition, existing systems are not readily scalable. COVID-19 resulted in a surge in digital payments, as consumers shifted away from in-store purchases to online transactions. Systems could not scale quickly, and banks were reluctant to modify them for fear of breaking something. To complicate matters, many of the employees who originally built those systems are no longer available.
“To me and many of my clients, when we were contemplating the concept of payment as a service, that was the starting point,” said Ng. “I always use this metaphor: Do you dry clean your clothes yourself, or do you take them to a dry cleaner?”
Finding a Trusted Partner
For many financial institutions, payments modernization is uncharted territory. That’s why it’s important to choose partners with a proven track record.
“If you go with a vendor who does it for many other banks of different sizes, you’re already getting the world class infrastructure, security, resiliency, and performance, and you’re not paying for any of this,” said Gupta. “This is part of your basic fee, based on a per transaction basis.”
When evaluating providers, don’t just consider the number of customers they serve—look closely at their uptime. Availability should be near 100%, since the system must be accessible at all times. Security is equally important, as it protects proprietary data from compromised or sold on the black market.
Internally, have an honest discussion about which customizations the organization is prepared to support. Too often, financial institutions focus on customization for the sake of ownership. But if the solution effectively addresses the problem at hand, it’s better to embrace it rather than overcomplicate the process.
“There does not need to be 18 million different ways to process a transaction,” said Prince. “Make sure that you’re grounded on the problem that you’re trying to solve and not trying to customize just for the sake of customization. A lot of financial institutions get very passionate about the way they expect something to work because we have built these things around our own deficiencies. Sometimes we stand in the way of our own success.”
A Long and Happy Marriage
While PaaS is a major component in a payment modernization journey, it should not be equated with payment monetization. That expectation needs to be set across the organization—this is not a magic wand.
“We really need to stop thinking about payment modernization as an end goal,” said Wester. “You are not going to reach a point where you are suddenly modernized and that’s it.”
Gupta added: “When you’re choosing a software vendor in the payment space, you’re choosing for the next 10 or 20 years. It’s almost like dating: you can date with multiple vendors, but once you go to PaaS, you’re married. Anytime there’s an issue, you’re going to call the vendor and say, hey, my payment is stuck. What do I do with this?
“Don’t think of PaaS as a cheaper, better, faster option,” he said. “Think of PaaS as somebody you want to spend next 20 years with, because that’s what you’re going to be doing.”
