The financial services industry is continuously undergoing dramatic changes in response to regulatory updates, emerging technologies, and operating models. The boom of banking-as-a-service, with its innovative approach to delivering banking products, is a case in point. BaaS platform providers enable their partners — which may include insurers, fintech, telecoms, e-commerce firms, and others — to access a cloud-based service and manage the entire banking value chain. Consequently, companies can instantly integrate their solutions with the platforms through open APIs, save time on the development and focus more resources on marketing, distribution, and other revenue-generating activities.
Therefore, it comes as no surprise that the BaaS business model is swiftly getting traction in the payments landscape. Several payment-as-a-service companies have already entered the fray. Some create fully-fledged payment products for end-users. Meanwhile, others offer platforms to third parties, empowering them to build unique solutions addressed to the needs of their customers and partners. What is important, the payment-as-a-service market is actively growing and is projected to hit $16.7 billion by 2024.
Considering the complexities of regulatory requirements and the ever-growing customer expectations, PaaS seems to be a sensible option. Renting what you need, instead of buying or building it in-house, is time- and cost-efficient. However, without accurate planning, it may turn into a ‘payment mess.’ In this article, we’ll delve into the payment platform concept, its benefits and threats for business, and how to use it to your advantage.
Global Market Trends Fuel the Adoption of PPaaS Platforms
Over the last years, banks’ traditional earnings from lending rates have plummeted, all while return on payment processing has held steady. This is one of the factors that literally pushes banks towards the development and adoption of the payment-platform-as-a-service (PPaaS) model. Other drivers are more general, but they play no less role in the industry-wide disruption.
The financial services industry has the highest compliance costs. The worldwide spending on regulatory and compliance is about $270 billion a year, and some industry experts say that these numbers can double in the near future. This burden has caused a heavy increase in the expenditure pattern of many firms. Moreover, if there is a digitization strategy underway, this can bring in a reduction in traditional assets and extensive strains on the business models, all while making it difficult for them to scale.
On the contrary, banks that opt for future payment solutions like PPaaS thrive on lower initial expenses and better business agility. As soon as the integrated payment platform is live, any regulatory updates that are required will be done by the provider, who can alleviate the costs by distributing it among many consumers.
These days most banks face a dilemma. On the one hand, their world is still mainly physical. Their systems are made of numerous infrastructure layers that have been developed over time and currently leads to higher expenses and constantly growing complexity. On the other hand, they are left with no option but to innovate to fill customers’ fast-changing needs and so safeguard their income and protect their market share. However, the ability to morph their traditional infrastructure into a digital ecosystem is encumbered with their complex legacy banking systems.
The situation is also aggravated by the fact that complete IT modernization requires high up-front costs, while obsolete infrastructure should stay up and running to support the existing process and business as a whole. These circumstances only add more ammunition to the adoption of payment platforms since it implies three benefits:
- reduction of transaction costs;
- ability to outsource software management, hosting, and support;
- lower financial barriers to entry since banks only invest nominal funds, kick off, and start to conduct transactions via the service.
All these factors enable financial institutions to initiate their digital transformation process and free up resources to contribute to the development of future-proof infrastructure and so drive digitization.
Now let’s move to the payment platform definition and its underlying operation concept.
Payment Platforms Shape the Future of Payment Processing
Effecting payments isn’t a direct responsibility of most e-commerce platforms, travel firms, or on-demand marketplaces, and it won’t become one in the immediate future. Moreover, as we’ve already mentioned, incumbent financial organizations still need to come a long way to enter the fully-digital world. Therefore, payment platform providers will continue being an essential factor for non-banking organizations. But who are they, and how do they operate? — Let’s start with the definition of a payments-as-a-service platform and how it grows into one of the leading future payment technologies.
Payments platform as a service or PPaaS is a cloud-native environment that, instead of the all-or-nothing solution with limited customizing options, comes as a set of individual payment services that can be configured and delivered to end-users, significantly reducing the implementation timeline and budget. So what used to be a time-consuming and costly process managed in-house, turns into an external service that is built and maintained by a provider.
The PPaaS model enables third parties to use domestic, regional, and cross-border payment solutions via a single interface. Providers take on all the complexities and apparent difficulties associated with moving funds, so the operating algorithm is as follows:
Currently, most online payment platforms cover such needs as twenty-four-seven availability, enhanced security, compliance with regulatory requirements and industry standards, as well as fault tolerance during peak load periods. They bring many innovative capabilities and thus intensify the competition for incumbent financial institutions. However, the future looks even more promising. With investments in automation (combined with AI and ML), open-source technologies, and new security features (e.g., biometrics), these entrants will continue to disturb the market, supported by other industry trends and regulations.
Top Three Payment-as-a-Service Companies Driving the Fintech Payments Industry
Modern payment-as-a-service platforms shouldn’t be confused with prevalent payment service products. The former represents a whole new generation of future-proof solutions — an all-encompassing environment that provides financial service providers with access to all activities needed for secure and prompt payment processing on an outsource subscription/pay-per-use model. We’ve analyzed numerous fintech payment startups and well-established businesses to define the true innovators you should keep an eye on:
- FIS is a technology company that is set to change the way people pay, invest, and bank. It provides a fully-managed end-to-end platform that helps business owners unleash new revenue streams and business models. With FIS payment solutions and services, companies can start offering BACS, CHAPS, Faster Payments, SEPA Instant Payments, and international transfers time- and cost-efficiently. Moreover, cloud-native FIS payment services come with bank-grade security processes and norms, ISO20022 standard compliance, and developer-friendly payment platform API.
- Modulr is a London-headquartered electronic money institution regulated by the Financial Conduct Authority (FCA). The company built an API-based secure platform complemented with activity monitor and multi-factor authentication with access to CHAPS, BACS, SEPA, and Faster Payments services. The Modulr fintech team holds periodic penetration testing and continuously works toward system improvement; for instance, it’s about to add Mastercard service as well. It’s also known for providing Direct Debits Mandate service to run Revolut’s GBP Direct Debits under the terms of the ‘Modulr FS Revolut’ agreement.
- Paystand is a CA fintech company that fast forward business payments to the digital age. Its fully-fledged platform comes with zero fees, various payment rails, and a blockchain-based payment identity verification process. The firm offers a transparent subscription-based model for better predictability, utilizes AI to ensure lower costs, and takes on KYC-AML checks, thus enabling clients to focus on business goals.
These are just a few but widely-used payment-as-a-service examples. Meantime, leading financial institutions also heavily invest in the development of full-stack payment platforms to capitalize on the SaaS model, so we expect to see even more innovative market entrants in the foreseeable future.
Getting Started with Payments Platforms as a Service: Benefits and Implications to Consider
Payments and fintech innovations have never been more exciting. These days we witness forward-thinking startups entering the market, game-changing payment options becoming available online, and new regulations disturbing the ordinary business course. Financial institutions slowly migrate to outsourced platforms to battle them out and enjoy all the benefits, including:
- Higher STP rates. When it comes to implementation, straight-through processing usually turns into a challenge for most financial businesses. Integration of all the systems and ensuring smooth data transactions without delays are the main pain points. Meanwhile, digital payment platforms can simplify the problem reducing manual reconciliation and repair efforts.
- More efficient budgeting. The availability of pricing models adds flexibility and efficiency for various company sizes. Startups with fewer customers can go for the pay-per-use model, so freeing up scarce funds for innovation. Whereas, larger businesses can opt for the subscription for better predictability and transparency.
- Reduction of processing costs. Eliminating the need to own and maintain hardware and software, as well as hiring and retaining tech teams, can result in significant time and cost savings.
- Faster compliance. Being compliant with many local and global standards is critical, but rather time- and cash-consuming. Payment platform providers take on the technical burden of regulatory updates and so enable you to focus on business needs.
- Better reliability and scalability. Cloud-based global payment platforms are designed to perform well during heavy hours and processing stagnation periods, seamlessly responding to the activity changes and ensuring twenty-four-seven system availability.
However, to realize the full potential of fintech and emerging payment systems, both providers and consumers need to reimagine their operating models. We’ve defined the following factors as the prerequisites for success:
- Articulate your goals and expectations to the team and get all on the same page. Elaborate clear criteria and controls to ensure the PPaaS vendors are reliable, compliant, and reputed;
- Believe in the idea of outsourcing a large portion of engineering efforts to the contractors;
- Refocus existing development and infrastructure talent and attract new ones, if needed, to streamline the modernization and thus shorten your time-to-market.
Outlining the advantages and a short list of challenges that businesses need to address, it’s hardly surprising that financial institutions all over the globe are starting to take a closer look at what payment-as-a-service platforms have to offer. A growing number of early adopters have already taken a leap into the future of fintech payments and are actively making gains.
It quickly becomes clear that the payment-as-a-service concept is an advance that financial businesses cannot afford to neglect. So far, PPaaS is one of the most powerful approaches to managing costs and minimizing risks related to payment processing. In addition to that, banking stakeholders can free up valuable resources and concentrate on what matters most — producing customer-focused products and gaining a competitive edge.
If you have any more questions about payment-as-a-service solutions or need assistance with the development or platform integration, you’re welcome to contact our experts and find out how Dashdevs can help your business thrive.