Payments-Platform-as-a-Service: A sea-change in payments hub delivery

By Dagan Osovlansky | 23 March 2017

Dagan Osovlansky, Group Leader, Product Management, D+H

Software-as-a-Service (SaaS) is now a standard delivery model across many industries—even financial services firms, representing a major shift in perspective.  The payments space, in particular, shows signs of further evolution of the delivery model. Banks and financial institutions faced with the classic challenges of implementing and maintaining a payments hub are now exploring a new service delivery model concept known as Payments-Platform-as-a-Service (PPaaS).

This new model has some attributes in common with the traditional service bureau model in that it provides all the benefits of off-premises installation and maintenance. However, rather than having a standardized all-or-nothing solution delivered in a box with limited tailoring options, PPaaS offers a menu of packaged microservices that can be delivered via the cloud. This means that all the functional capabilities available in a payments hub can be customized, packaged to order, distributed, and delivered via multiple media, significantly compressing implementation and onboarding times. Thus, what had traditionally been a set of processes and technologies owned and managed in-house now  become an outsourced, end-to-end, cloud-based payments processing environment—in effect, a complete payments platform managed by an external provider.

Being cloud-based, PPaaS brings all the benefits of cost, scalability, and flexibility that accompany cloud provisioning—precisely the capabilities that banks need to navigate their way with pace and certainty through a rapidly-evolving payments landscape.

Despite these clear benefits, financial institutions would not even be considering the PPaaS model were it not for a convergence of catalysts that only recently made PPaaS a viable option.

Historically, financial institutions have been very protective of their technology, security, and data. Banks long held an aversion to risk that stymied adoption of third-party offerings. Financial technology at one time was built and managed only in-house. But the financial crisis of 2008 brought about regulation that radically reshaped the payments landscape with the emergence of non-traditional payments providers. Innovative technologies, combined with rising payment volumes and changing consumer behavior, combined to disrupt the payments environment. Intensifying competition and increased regulation in recent years have put additional strain on revenues. Banks find that they must innovate to meet rising customer demands, address ever-changing regulatory concerns, and grow market share. 

To overcome these challenges, banks need high-performance payments processing that is scalable, compliant and transparent, and solutions that will help them better manage large transaction volumes at a lower cost. However, given that the majority of a large bank’s technology budget is typically earmarked for nondiscretionary compliance and maintenance of in-house infrastructure, there is little scope within the existing model for big increases in spending on innovation. All of this drives the need for a new approach, building on the already substantial advances and evolution in payment services in recent years.

Since the financial crisis, payments services have already evolved through three distinct phases leading to today.  First came the enterprise license. Banks adopted payment hub solutions on-premises. Next came managed services, in which a service providers took the end-to-end payments infrastructure, support, and application management off-premises and managed it on the bank’s behalf. This alleviated many of the resource demands of the enterprise license model. Third, and most recently, banks experienced the service bureau model, which expanded the managed service model into a multi-tenant environment on shared infrastructure, providing out-of-the-box, standardized functionality via a hosted environment. These three phases now give way to the fourth, which makes SaaS payments available on-demand: Payments-Platform-as-a-Service. This model has some attributes in common with the service bureau model, being delivered from off-premises. However, rather than having a standardized all-or-nothing solution delivered in a box with limited tailoring options, it offers a menu of packaged microservices via the cloud, compressing implementation and on-boarding times. This means that all the functional capabilities available in a payments hub can be packaged, distributed, and delivered via multiple media, including over the web under a traditional SaaS model, through a set of application programming interfaces (APIs) or directly to banks via their own APIs.

Meanwhile, as PPaaS offerings become more widely available and adoption grows, a number of industry themes underscore the model’s potential. One is the growing requirement for infrastructure modernization with expanding use of the ISO20022 standard driving significant changes to traditional messaging environments. Another is the growing need for regulatory resilience with banks having to ensure platforms are flexible and adaptable enough to support rapidly changing regulations. Additionally, with ongoing technology advances, such as innovations like blockchain payments rapidly coming onto the scene, banks need a platform that is future-proof for quick adoption of new capabilities. PPaaS holds promise to address these themes for banks.

PPaaS has also been proven to deliver tangible benefits. From an information technology perspective, the model decreases transaction costs by reducing complexity. In fact, one European bank estimated that it could reduce these costs by 60%, mainly by eliminating the need to own payments hardware and software, and staff specialist payments technology teams. Because upgrades and maintenance become the responsibility of the service provider, the bank can focus on its core business and on creating and delivering value-added services for its customers.

Ultimately, banks willing to make a strategic investment in transitioning their payments model from a self-managed infrastructure to PPaaS can realize measurable benefits across all aspects of their payments operations. These include the above-mentioned reduction in per-transaction processing costs, but also increased efficiencies in IT spending, high straight-through-processing rates, a reduction in manual repair and reconciliation effort, shortened time to compliance, improved performance and scalability, and future proofing.

Banks that move to this model further benefit from running all their payment flows seamlessly through one platform, retaining their own intellectual property related to how they modify payment flows within the customer orchestration layer. And they can do all this without ever having to touch the payment engine itself.

Given the clear advantages of Payments-Platform-as-a-Service over preceding models, coupled with the opportunity costs and competitive risks of sticking with legacy approaches, a strong business case is building for banks in all regions of the world to take a closer look at PPaaS. As forward-thinking early adopters begin to reap benefits of the model, PPaaS may effectively soon prove to be a prerequisite for participating in the payments business.

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