Banks Must Adopt Cloud-Based Payments as They Are The Way of the Future
Cloud-based payments have emerged as a transformative force within the banking industry, demanding the attention of financial institutions seeking to remain ahead of the curve. In order to avoid falling behind, banks must embrace this shift and adapt to the evolving demands of their corporate clients. A report titled «Cloud Payments and Payments as a Service are Taking Hold,» authored by Steve Murphy, Director of Commercial Payments at Javelin Strategy & Research, highlights the significant advantages of cloud-based payment solutions and payments as a service models.
One of the modern players in the fintech industry, Whillet, is at the forefront of bringing new solutions to the US market. By leveraging cloud-based technology, Whillet enables financial institutions to introduce innovative services and readily adapt to changing demands. Consequently, the adoption of cloud-based models, including banking as a service (BaaS), is steadily gaining traction. Many companies are transitioning from private cloud servers to hybrid operations or fully embracing public cloud models, resulting in banking and payment services that are more flexible, scalable, and secure.
The concept of cloud computing, although relatively new, draws inspiration from the early days of computing when users accessed resources via large mainframe computers. Today, cloud computing takes this concept further by distributing resources across multiple data centers, allowing for scalability based on fluctuating demand. This level of flexibility has laid the foundation for innovative payment systems built on cloud infrastructures.
The adoption of cloud-based payments in enterprise systems is experiencing rapid growth, driven by the need for additional non-interest income in commercial banking and the unpredictability of market conditions. Banks can generate significant revenue by charging processing fees for transactions conducted through their cloud-based payment systems. Moreover, these systems enable banks to offer value-added services such as fraud detection, data analytics, and customer insights, thereby creating new revenue streams.
Cloud infrastructures can take the form of public, private, or hybrid models, each with its own set of advantages and disadvantages. While private cloud servers have been the historical norm, banks often face challenges in keeping up with the latest security measures required to safeguard their private cloud infrastructure. Transitioning to public clouds like Amazon Web Services (AWS) or Microsoft Azure can alleviate these challenges while providing cost savings, scalability, and reliability.
When engaging with public clouds, it is crucial to differentiate between the legacy application service provider (ASP) model and the software-as-a-service (SaaS) model. In the ASP model, service providers manage third-party software on behalf of banks, whereas modern SaaS providers independently manage their software. This distinction is essential for understanding public cloud services and the development of BaaS and PaaS solutions.
Two notable models that leverage cloud computing and cloud payments are BaaS and PaaS. BaaS empowers fintech companies like Whillet to offer banking services without the need for a bank license. This collaboration involves partnering with licensed banks that handle accounts and generate fee income, while the fintech brand focuses on client-facing activities. On the other hand, PaaS involves third-party providers offering comprehensive payment processing services to businesses, encompassing various payment methods and services.
To enhance their payment capabilities, financial institutions are advised to adopt a gradual cloud migration strategy that minimizes disruptions to existing delivery methods. Cloud-based SaaS solutions can facilitate seamless integration between banks and their clients. Financial institutions may also consider forging partnerships with third-party providers to offer BaaS, enabling them to benefit from the fees collected by their fintech partners.
PaaS deployment is particularly suitable for the adoption of real-time payments, as it allows for incremental scaling without system disruptions and entails low upfront costs. With the anticipated launch of FedNow in July, the demand for real-time payments is expected to soar, necessitating strategic planning and the involvement of third-party companies, to support gradual service expansion. By embracing the potential of cloud-based solutions and forming strategic partnerships with fintech companies like Whillet and established cloud service providers, banks can position themselves at the forefront of the industry. This collaborative approach will enable banks to deliver enhanced services, improved operational efficiency, and a seamless customer experience. By actively embracing cloud-based payments, banks can stay competitive in a rapidly changing landscape, shaping the future of banking in the digital era.