Despite renewed interest in the model, payments-as-a-service (PaaS) is not a new concept. Historically, many banks have banded together to create shared service centres to accomplish tasks or activities that are difficult to do alone.

For example, in Denmark, alongside a few major banks, there are three banking ‘centrals’ that provide banking core software, such as payments, as a service to a range of small banks. Since their formation around 50 years ago, the centrals have been collaborative, non-profit organisations designed to allow a wider range of banks to be competitive with larger players while offering a full-service solution for their clients. This has ensured a healthy and varied banking landscape in Denmark and a greater focus on client segmentation rather than the drive for volume.

Similarly, SIBS in Portugal operates as a “central utility for payments”, and as a major payment processor serves banks, Banco de Portugal, and the government. Since its launch in 1996, SIBS continues to offer over 100 interoperable services on ATM networks and more than 30 on POS networks.

Other examples include Natixis in France that builds PaaS solutions across the entire value chain, covering issuing, acquiring, and processing, and Erste Group in Austria that supports payments in almost all currencies. However, like much of today’s payment infrastructure, these systems were built over 20 years ago. They were designed for a different era, and this has had a substantial impact on how B2B payments are handled.

Why do B2B payments require a PaaS model?

Business payments come in big batches. A bulk load of payments that must be processed approximately at the same time. Going back to our examples, Denmark’s system currently makes same-day transfers such as salary payments or monthly invoicing possible. Large organisations will send hundreds of thousands, or in some cases, millions of payments to their banking partners to be processed. For this to be completed quickly, banks or their providers have traditionally had to size and scale their infrastructure to meet demands on that key moment in the payment month.

During this time, typically at the end of month, payments volumes go through the roof and for the rest of the month, there may be next to no volume flowing through the system. Traditionally, a bank would be considering how to manage this within their own data centre, ensuring there was enough processing capability and flexibility to cover those peak moments and process in a timely manner. This creates an oversizing of environments that cannot be removed because of preexisting obligations to business clients.

Modern PaaS solutions can help resolve this issue by outsourcing these processing needs to third party companies, and in turn, streamlining operations, enhancing experiences, and unlocking new opportunities. However, to implement modern PaaS, the strategy needs to shift towards leveraging cloud-based solutions that offer flexibility and fast time to market – a significant upgrade from what legacy systems can provide.

How does PaaS work and what problems can it solve?

PaaS providers have been operating for nearly 50 years, so this model works. There are no ifs, buts, or maybes about it. However, traditional organisations in this space are now starting to face some of the same challenges that banks around the world are experiencing with their own payments infrastructure due to evolutionary spaghetti and embedded technology debt. The challenges can be categorised into a few groups, the first of which is the ever-growing list of regulations. This can be resolved with a flexible infrastructure to remain compliant easily and at a reasonable cost.

Despite existing systems being built in such a way that cost would be reduced through shared ownership such as banking centrals, this is no longer being achieved because of the increasing compliance burden. There are also a growing number of payment services that banks are starting to want to offer and clients are starting to demand. Proposals such as the European Payments Initiative (EPI), which was launched by 16 European banks and financial services companies, aims to establish a holistic and innovative pan-European payment solution that leverages SEPA Instant Credit Transfer (SCT Inst), aligning existing domestic services such as Ideal and Payconiq.

Banks must begin to leverage schemes like this to keep pace with client demand, or risk being disintermediated. Further to this, banks must ensure they are focusing on value-added client services and outsource tasks that do not bring them value. Much of banking is a commodity industry. No organisation has won a major contract because of their ability to deliver payments on time. It’s just an expectation. It’s like when you search for something on Amazon, you expect them to have it. Banks must deliver payments day-in-day-out – it’s their bread and butter, but it does not bring them real value.

Where can real value be derived from?

Tailoring payments services towards the specific needs of clients such as B2B payments, payroll, utility businesses and making sure that rewards from standards like ISO 20022 are being reaped. Banks are also under pressure to do more with less so that the margins of return are the best possible. However, if banks are continuing to invest in a legacy application, where keeping mainframe servers running come at a significant cost every few years, and the resources that enable this are becoming more and more expensive as they get older, this needs to be considered. Migrating to a modern infrastructure and application base is the solution.

If banks have the time and resource to focus on tailoring payments services from a client centric perspective, there is a tremendous opportunity for growth into new and niche markets. Every SME association in any country I’ve worked in has always complained that banks have failed them, and while I don’t know how true that is, the reality is that the services tailored to SMEs are typically generic. This gap needs to be bridged and in fact, what PaaS does is to reduce the work banks must do just to remain compliant and frees up their internal resources to resolve other problems such as those of the SME community.

According to Ron Shevlin at Cornerstone Advisors, the average spend on mandatory regulatory IT change is between 72% and 79%. Banks are spending huge chunks of their annual budgets on just keeping up with the dearth of regulation, but with PaaS, this workload is removed.  

What are the benefits of PaaS?

The benefits of PaaS for a bank are pretty clear:

1. Payments can be made promptly, and late receivables reduced,
2. Payments can be processed with zero-touch and reconciled automatically,
3. Payments can be completed at a lower cost with a subscription model,
4. Payments can be made with low maintenance, easy compliance, and enhanced security,
5. Revenue can be increased.

Through PaaS, many banks are now achieving near 100% straight through processing in traditionally low STP stream, and payments between different players have been standardised, facilitated by the systems that are in place. Alongside this, with the transition to ISO 20022, there is increased improvement in data quality, both from the input and output side and in turn, problem solving is also automated with advanced platforms incorporating machine learning and AI. One of the beauties of the PaaS offering is creating a pool of shared expertise because as different organisations are working together, a huge amount of experience is gathered which creates a centre of excellence where standardised workflows are aligned to industry best practices and those practices evolve.

Of course, the traditional workflows that banks have been leveraging challenge the success of straight through processing. Often, the issues we have in payments requires manual intervention, but by migrating and optimising processes, banks can place themselves at an advantage by leveraging the shared experience and access to the shared services providers, as opposed to trying to manage innovation with a small pool of people within their own organisation. This also helps to boost client growth, and the bridge between transactional growth and cost growth is removed. This was the original principle upon which collaborative bank centrals were built and remains true today. However, what changes is the technology and its ability to transform how things are achieved.

How is PaaS a catalyst for a bank’s rapid growth?

By using PaaS, banks can grow their business without growing their cost base. I lived in Belgium for several years and there is phrase in Flemish slang - 't sot genoegen – which can be translated as ‘when you have enough’, suggesting that you do not need to do more because things are good as they are. If there’s no real impetus for your bank to change, if you can do enough to stay in the market and keep ticking over, then there’s no real imperative to make processes better. This creates a non-changing market.

While a good way to live in times of plenty, this attitude is now having to change because of the plethora of incoming regulations and rapidly changing customer landscapes. Banks that take a ‘'t sot genoegen’ or ‘least I can get away with’ approach to modernisation, will find that they will quickly go out of business or get swallowed up by a larger rival. However, modern PaaS with its built-in flexibility and resiliency to change mean that ‘t sot genoegen can also mean letting a specialist get on with the commodity business so that you can focus on delighting your clients.