Payments as a service - a new normal future of payments?

Banks are increasingly outsourcing their core payments platform technology and operations. What seemed in past years far fetched even to consider has become a viable option. Is Payments as a Service (PaaS) on the brink of becoming the new normal for banks as technology-focused payments service providers are winning more and larger in scope mandates not only from small but also from large institutions? 

Recent deals pave the way

Unicredit has recently decided for its German business to process its payment transactions via Equens Worldline, who has won a similar mandate from Commerzbank not long ago in 2018. As reported by news outlets, Unicredit’s German subsidiary Hypovereinsbank (HVB) could transfer its payment transaction business to Equens Worldline as early as summer of 2020. Currently, a shared services center called Betriebs-Center für Banken (BCB) handles payment transactions for HVB, which is today owned by Deutsche Bank through its earlier acquisition of Postbank in 2008. BCB used to process yearly approx. 7 billion payments also serving Deutsche Bank, Postbank as well as Hamburg Commercial Bank. Since such outsourcing deals a long term based, HVB had terminated its contract with BCB already in 2018 - to then take its time in search of a new provider - or potentially look into a group-wide internal solution. As part of the deal, some of the BCB staff related to the HVB business will be taken over by Equens with the change of provider. Commerzbank has taken its decision towards Equens already in 2018 for outsourcing large parts of its payments technology and transactions which is a multiyear roadmap exercise to be finished until 2023. The Dutch payment processor will then execute most of Commerzbank’s SEPA, real-time, cross-currency and domestic payments - approx. 4 billion payments. What will be the future of BCB with it’s own legacy payments technology stack based on SAP Payments Engine will remain an open question and for Deutsche Bank to sort out along with many other challenges. 

Addressing grown legacy complexity 

Many banks are facing major challenges in payments driven by changes in regulatory regime such as the implementation of the Payment Services Directive PSD2 and its aftermath of many remediation activities of becoming passively supportive across various markets where impacted banks operate today. Implemented or bespoke built payment technology stacks were not designed for lots of flexibility and continuous change(s) but for efficiency, speed and processing of massive volumes and effective exception management. But starting with the introduction of SEPA which in finally got a push towards „get it done“ with final end date announcements, many banks choose to built "payment islands" per country or chose „band-aid“ solutions to enable required processing of ISO20022 formats, local country-specific SEPA standards (e.g. for payroll) and flexibility for corporate-specific requirements (e.g. Oracle Paymul, SAP IDoc, Edifact, …). 

All of this comes at a cost. And with given need of the European banking industry to dramatically reduce their bottom line all of the non-differentiating services have become natural targets for review to ask the question „Do we really need to do this ourselves?“ as economies of scale for keeping are out of question when doing the math and not lying to yourself - or flagging it as strategically important and thereby excluded as no one can do this better than us - being a bank. But to date we have seen many failures in payment processing by banks - some of these  have hit the news (Helaba, Commerzbank, RBS, …) but likewise many have never seen light of day and being dealt with bilaterally (e.g. double booking of thousands of payments when a payment file has been accidentally processed twice. So instead of continuing investing into a bank’s own payment infrastructure and operations it seems common sense to use specialized payments providers in the future, better suited to manage technology, operations, and optimization thereof to provide a disruption-less service to the market and its participants. The advantages of exploiting economies of scale and for bank’s to focus on their core business are simply too obvious.  

Will PaaS be the ultimate endgame for payments?

What would a bank be looking for its payments endgame? A seamless, single payments service that is managing  and „hiding“ related process, product and transaction complexity by design and architecture  –  securely connecting with the banks backbone services through secure, performant and managed APIs, executing all payment types like domestic, regional and global cross-border payments through a „single pipe“. Such a PaaS layer would additionally providing related services like AML & Sanctions Screening, Ledger reconciliation, Transaction Status Monitoring and Exception Management, Client APIs and UIs (e.g. dashboards for transaction status management and exceptions).

Would it be on premise or directly a pure cloud solution? And which function of the value chain would be kept and which would go? Many questions that require flexibility for any bank for going such a path. Certainly „standard“, bank-grade NFR’s (non-functional requirements) and adherence to cloud, cyber security standards, regulatory compliance can be mutualized through a PaaS provider more effectively with its focused scope and ability to connect to clearing systems, and provide real-time services at scale.

Lastly the impact for a bank on future avoidance of significant CapEx spent through PaaS by moving to a „rent what you need now“ approach with the flexibility to add new functions, payment schemes, clearing access, and so on as business needs evolve or change over time with predictable OpEx for payments services. A PaaS provider may well be best placed to mutualize these needs across its participants at shared, lower OpEx than anyone else could. This new thinking, whereby banks move away from heavy upfront, multi-year in-house payment platform investments with uncertain delivery outcomes and weak business case returns will be a individual journey of enlightenment, different for each institution. But also some banks will choose to continue in a hamster wheel type mode and replace when time is due their legacy tech with better, but „soon to be“ legacy tech. The bigger the organisation, the more likely this will happen. We may see if use of PaaS solutions grows over time with more participants joining, that all banks - sooner or later - may find their own moment of truth for their payments endgame.