In corporate banking, adapting to change is crucial. The rapidly evolving demands from corporate clients mean banks must be on the leading edge of change and identify potential success factors to move in the right direction or risk being left behind. While the technology, such as cloud-enabled platform banking or software-as-a-service (SaaS) solutions enable banks to meet their objectives, it’s imperative—above all else—that they’re meeting customer demand.
In a report titled “Cloud Payments and Payments as a Service are Taking Hold,” Steve Murphy, Director of Commercial Payments at Javelin Strategy & Research, discusses some of the key benefits of cloud-based payment solutions and payments as a service models. Adopting these solutions allows banks to put out new services more easily, and adapt to changing demands more quickly. Also, major players such as Amazon and Microsoft have cybersecurity that is top-notch, satisfying key regulators and making banks more comfortable in partnering with them. Although private cloud servers have historically been the norm, more companies are moving to hybrid operations or pivoting to public models altogether. All of this is making banking as a service (BaaS) and payments as a service (PaaS) more common.
The Cloud: An Old Newfangled Technology
The adoption of cloud-based payment systems by enterprises justifies the use of the phrase “everything old becomes new again.”
Cloud computing represents a return to a computing architecture that predates personal computers. In the early days of computing, most users accessed computing resources through terminals that were connected to large mainframe computers, which handled all of the processing and storage. Similarly, cloud computing allows users to access computing resources through the internet, with the resources hosted remotely.
But there is a key difference: With cloud computing, the resources are distributed across multiple data centers and can be scaled up or down as needed to accommodate fluctuations in demand. This makes cloud computing more flexible and scalable than the old mainframe architecture and makes it helpful for driving innovation in payment systems that layer on top of them.
The adoption of cloud-based payments in enterprise systems is rapidly growing. According to Murphy, this is due to the shift in revenue sources amid the unpredictability of market conditions and the need for more non-interest income in commercial bank models.
For example, banks can charge a processing fee for each transaction processed through their cloud-based payment systems. These fees can be a significant source of non-interest income for banks, especially if they process a large volume of transactions. Through their cloud-based payment systems, banks can also offer value-added services to their customers, such as fraud detection and prevention, data analytics, and customer insights. These services can be charged on a subscription or usage-based model, creating a new revenue stream for the bank.
Clouds can be public, private, or a mix (hybrid), each with its own pluses and minuses. Murphy also notes that banks can struggle to keep up with the latest security breach mitigation procedures and protocols required to secure their private cloud infrastructure. Pivoting to a public cloud like AWS or Azure can obviate the need to deal with all of that. Furthermore, the public cloud model is often cheaper, easier to scale, and more reliable.
When it comes to how banks interact with a public cloud, Murphy highlights the importance of distinguishing between the legacy application service provider (ASP) model versus the SaaS model. In the ASP model, service providers manage third-party software on behalf of banks. In contrast, modern SaaS providers manage their own software on behalf of their customers. This is what underlies public cloud services and the development of BaaS and PaaS solutions.
Use Cases of Cloud Computing and Cloud Payments: BaaS and PaaS
BaaS is a banking model that allows a fintech to offer banking services without needing to obtain a bank license, which avoids the rigorous chartering and capital management process. This occurs through a partnership with a licensed bank, which manages the accounts and gains some fee income. The client-facing activity remains with the fintech brand, but it is fundamentally a collaboration.
For example, the Stripe Treasury platform launched in 2020, in partnership with Goldman Sachs and other banks. According to Murphy, this was the first transaction banking business built entirely in the cloud with an API-first approach.
Another important model for cloud-based payments is PaaS, in which a third-party provider offers payment processing to other businesses. B2B PaaS can encompass a wide range of payment methods and services, including electronic funds transfers (EFTs), automated clearing house (ACH) payments, wire transfers, and virtual credit cards.
One example of the PaaS model is Stripe, a suite of software tools for businesses to manage payments, subscriptions, and billing. PaaS adoption is driven by technological advancements, such as faster payments, global messaging standards, API adoption, and increased innovation in cross-border alternative payment methods.
Advice for Financial Institutions
When financial institutions want to upgrade their payments capabilities, it’s best to approach cloud migration gradually and not disrupt existing delivery methods all at once. Cloud-based SaaS solutions can integrate banks and their clients. FIs might consider partnering with third parties to offer BaaS and take a cut of the fees that are collected by a potential fintech partner.
Real-time payments adoption is a good fit for PaaS deployment. This is because it’s a new service that won’t cause any system disruptions and has low upfront costs, allowing volume to grow over time. The FedNow launch expected in July is likely to lead to additional growth in real-time payments, and companies should plan accordingly. They can rely on third-party companies to scale up RTP for services gradually, as it gains traction.Top of Form
Banks, fintechs, and cloud services companies clearly have become entwined and are producing an ecosystem that is dynamic and flexible and will serve well as the financial system develops over time. For banks, in particular, success will involve reimagining banking as a collaborative effort.