Cloud-Based Payments: The Future Banks Must Embrace

In the realm of corporate banking, adapting to change is essential. The rapidly evolving demands from corporate clients necessitate that banks stay at the forefront of innovation, identifying potential success factors to move in the right direction. Failing to do so risks being left behind. While technology such as cloud-enabled platform banking or software-as-a-service (SaaS) solutions aids banks in meeting their objectives, these innovations must align with customer demand.

Adopting the solutions such as cloud-based payment solutions and payments-as-a-service models allows banks to introduce new services more easily and adapt swiftly to changing demands. Major players such as Amazon and Microsoft, with their robust cybersecurity measures, satisfy regulatory requirements, making banks more comfortable partnering with them. Although private cloud servers have traditionally been the norm, many companies are shifting to hybrid operations or entirely public models, making Banking as a Service (BaaS) and Payments as a Service (PaaS) increasingly common.

Cloud computing represents a return to an earlier computing architecture.

In the early days of computing, users accessed resources through terminals connected to mainframe computers. Today, cloud computing allows users to access distributed resources via the internet, offering greater flexibility and scalability. This is particularly useful for driving innovation in payment systems.

The adoption of cloud-based payments is rapidly growing. This shift is driven by the need for more non-interest income in commercial bank models amid unpredictable market conditions. Banks can charge processing fees for transactions processed through their cloud-based systems, providing significant non-interest income. Additionally, banks can offer value-added services such as fraud detection, data analytics, and customer insights, creating new revenue streams.

Clouds can be public, private, or hybrid, each with distinct advantages. Banks often struggle to maintain the latest security measures for private clouds. Switching to public clouds like AWS or Azure can alleviate this burden, offering cost-effective, scalable, and reliable solutions.

In public cloud usage, it is important to differentiate between the legacy Application Service Provider (ASP) model and the SaaS model. In the ASP model, third-party software is managed on behalf of banks, whereas in the SaaS model, providers manage their own software for their customers. This distinction underlies public cloud services and the development of BaaS and PaaS solutions.

BaaS allows fintech companies to offer banking services without obtaining a bank license by partnering with a licensed bank, which manages accounts and earns fee income. For instance, Stripe Treasury, launched in partnership with Goldman Sachs, exemplifies an API-first transaction banking business built entirely in the cloud.

PaaS, where a third-party provider offers payment processing to businesses, encompasses various payment methods, including electronic funds transfers, automated clearing house payments, wire transfers, and virtual credit cards. 

When upgrading payments capabilities, financial institutions should approach cloud migration gradually to avoid disrupting existing methods. Cloud-based SaaS solutions can integrate banks with their clients seamlessly. Partnering with third parties for BaaS allows banks to earn a share of the fees collected by fintech partners. Real-time payments adoption is well-suited for PaaS deployment, with low upfront costs and potential for growth over time.

As banks, fintechs, and cloud services companies intertwine, they create a dynamic, flexible ecosystem that will serve well as the financial system evolves. Success for banks will involve reimagining banking as a collaborative effort.