Are you joining the fast-moving world of payments as a service?

New technologies and unexpected global changes like a pandemic are affecting and changing human behaviour. One such impact seen in the financial market is the sudden acceleration towards non-cash payments. The different demands and possibilities are often overwhelming; financial institutions and payment service providers (PSPs) need to keep up and still retain control. One way of dealing with the pace of demand is to outsource a part of the technology by approaching payments like many other software solutions: as a service.

The payments landscape is changing

To understand the challenges financial institutions and PSPs are experiencing, we first look at all the radical and rapid structural changes they are experiencing.

The mode of payment quickly moves from cash to non-cash. This is a trend seen across global markets. Interestingly, the trends in non-cash payments vary across markets . In the US, card payments are the dominant form, with demand for contactless cards picking up. In Asia however, digital wallets owned by big tech, fintech, e-commerce and social media, represent the dominant mode of payments. The adoption of digital wallets is picking up in Europe as well. In African markets, a different trend is seen since a large part of the population is unbanked. Here telcos dominate with mobile banking and wallet-based PSPs.

In the global landscape of payments, banks and payment providers have to consider these trends and try to keep on top of them.

Meanwhile, regulators and payment market infrastructures are advocating digitalisation of payments to improve the experience for the customers. Over 70 countries have moved to a real-time payment infrastructure in the last ten years resulting in an explosion in digital payment volumes. The most significant regulatory development related to the modernisation of the payments market is Open Banking. Which is now actively adopted across markets, with Europe and the UK taking the lead.

One of the primary consequences of the Open Banking strategy is that it has placed the user front and centre of innovation and this has paved the way for fintechs, big tech and non-finance companies such as telcos to enter the payments market. Banks and financial institutions are facing new competitors.

Challenges faced by banks & PSPs in managing payment service expectations

We all know (but somehow this always comes to us as a surprise) that rapid growth and evolution bring their fair share of challenges. In the payments market, these challenges are not only restricted to banks but also affect other PSPs in the ecosystem like acquirers, ISOs, payment facilitators and other fintech service providers. The biggest challenge that they all face is stiff competition from incumbents as well as new entrants in an already crowded payments ecosystem.

Payment has historically been a volume game, and a company’s survival in the market requires strong focus on retaining existing customers, acquiring new customers and achieving an increasing ARPU (Average Revenue Per User). However, to manage the payment service expectations of customers, these participants are faced with multiple challenges, such as:

• keeping up with technology,
• managing regulatory compliance,
• digital service & fraud mitigation,
• managing payment volumes and new payment rails,
• value-added services (VAS),
• cost conundrum.

Financial institutions need top of the bill technology, developers, and safety experts. They also need to deliver the best customer experience to ensure that they retain and grow their customer base. Achieving these key strategic goals is crucial to their growth and development.

What happens when we approach payments as a service?

Technology has become the critical enabler for any financial institution or fintech to remain competitive in today’s payments business. A future-ready payments system is the need of the hour, but it is often easier said than done to implement such a solution. Outsourcing might be the answer, and this can be done by approaching payments as a service.

A payment-as-a-service platform (PaaS) takes care of the operational and technical requirements related to payment processing for a financial institution or a PSP. This enables the financial institution to focus their time and resources on more strategic endeavours like building partnerships, marketing activities, and distribution strategy.

The strategic advantages offered by a PaaS platform are manifold. Banks using a PaaS platform have a higher processing capacity and STP rates. They also have access to additional functionality offered by focused and innovative service providers that can often enhance your service such as multiple subscription-based pricing models. Even more significantly, you can realise substantial cost savings by outsourcing the hardware, software and compliance requirements. This approach frees up your resources from mundane and time consuming tasks and allows them to focus on designing new payment services and customer experiences.

PaaS allows you to be ahead of the game and be future-ready, alleviating the burden of building an infrastructure in-house with all the costs and risks that this implies.

The future of payment-as-a-service

The PaaS model is becoming a more viable option for financial institutions as it offers a one-stop-shop cloud solution that can address legacy complexity. PaaS offers connectivity via a single API interface to a multitude of services such as domestic payment schemes and alternative payment methods. This minimises the time taken to add various new functionality or procedures. It also offers real-time analysis of data and cash flows.

PaaS enables organisations to develop and deploy custom cloud applications without investing in hardware and development tools. In the outlook for PaaS, organisations can also leverage PaaS to re-architect or extend their existing applications in the cloud.

The payments landscape keeps on developing, and PaaS offers the solutions needed by many financial institutions and PSPs. Please read more about all the latest developments in our guide.