The evolution of the payment industry has been largely influenced by non-bank players such as retailers and technology companies. Over the past couple of years, the use of outsourcing has become a widely-used business strategy. Since banks typically have their non-core functions (such as data centre management, disaster management, and call support) outsourced, they have started using the brown label ATM model to expand their networks.
This new generation of players enables financial institutions (FIs) and other non-bank companies to expand and match customer expectations by providing payment products and services without having to make large upfront expenditures. This has aided businesses in outsourcing their payment services. Payments-as-a-Service refers to the outsourcing of parts of the payments value chain (PaaS) such as risk management, payment processing, transaction management and information technology and information security management. For the payments domain, PaaS is a combination of software as a service (SaaS) and infrastructure as a service (IaaS).
The importance of PaaS
There appear to be massive changes taking place in the payment ecosystem. Conventional payment industries face difficulties from strict laws and innovative technologies. Due to this, banks may consider the following two options:
- Handle customers and transactions in-house, with payment services outsourced to third-party service providers
- Form partnerships with FinTechs, allowing them to handle distribution and customer service while banks maintain control of product offers (neobank model). Updating the core system to be a market leader and adhering to regulatory standards takes time and upfront cost, which has an influence on company profitability.
The PaaS paradigm enables FIs and non-bank businesses to enhance their payment capabilities by allowing them to execute bigger transaction volumes faster and at reduced costs than older methods. This also aids businesses in increasing revenue and market share while remaining compliant and secure.
Important factors to consider
While PaaS is rising in prominence and offers a lot of benefits, there are some factors to take into account when a company decides to outsource payment services to PaaS providers. Organizations should analyze the requirement to outsource their important processes and operations and choose a PaaS provider based on a thorough risk analysis.
- Cost vs benefit analysis
When PaaS is used, the baggage carried by the service recipient is reduced because PaaS providers’ infrastructure and costs associated are distributed among multiple beneficiaries. As a result, organizations that outsource tasks to PaaS providers must incur revenue expenditures over time rather than capital expenditures at the start of the project. However, before deciding to outsource services, users should consider the PaaS pricing model (cost per transaction/annual fees) as well as the predicted growth in transactions.
- Decision-making in the context of outsourcing
The general recommendation is to outsource the activities to a PaaS provider if you are a small organisation since payments will be made on a pay-per-use basis instead of investing large amounts upfront. Payment-related frauds make up the majority of financial services frauds. The FIs need to ensure that PaaS service providers take care of security and fraud concerns, as well as regulatory compliance.
- Regulatory compliance
Globally, several countries have published specific instructions for open banking, data access and privacy, and payment standards. Domestic and international rules increase the complexity of cross-border payments as well. To avoid regulatory penalties and fines, banks and non-bank entities engaged in payments should be cautious.
Whenever these companies use PaaS to outsource payment services, they must ensure that the PaaS providers follow all applicable requirements. Furthermore, operations that are outsourced to PaaS providers may be subject to regulatory constraints.
It is critical for businesses to establish a clear structure and guarantee that outsourcing operations are effectively managed with clear roles & responsibilities.
By offering PaaS solutions, banks and other FIs are able to deliver cutting-edge products and services without dedicating many internal resources towards developing them. PAAS providers such as Radar Payments in particular offer best-of-breed products through cloud-based third-party platforms, letting banks and other institutions shift toward a more flexible and adaptive model. Successful implementation of PaaS could be achieved by outsourcing according to business requirements and regulatory requirements.