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Payments-as-a-Service (PaaS): The New Path to Profitability

April 12, 2023

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Profitability Through Payments-as-a-Service

Payments as a Service (PaaS) is at the forefront of the revolution in the financial sector, with banks increasingly outsourcing both core and non-core functions to meet the demands of the digital age.

Rapid technology adoption has permeated all sectors, including banking. A survey of companies from around the globe showed that 86% have plans to adopt digital platforms and apps between 2023 and 2027, while around 75% are likely to adopt various modern technologies, including big data analytics, cloud computing, and AI over the same time period.

For the banking sector, offering digital solutions to customers is no longer just a good to have. Legacy banks can collaborate with service providers to outsource a significant portion of their operations, with PaaS accounting for a substantial share.

Banks need to ensure both the speed and security of their digital platforms. Adopting the “as a service” business model offered banks huge cost and time benefits. In time, financial institutions extended this model even to their core functions.

Navigating the Changing Landscape in the Payment Industry

Rapid advancements in technology have increased the focus on security and fraud prevention in the financial sector. Banking regulations change frequently, making PaaS an ideal solution to stay compliant, while adapting to changing requirements. Banks can approach PaaS in two ways:

  • Banks can maintain internally owned customer and transaction management solutions, while outsourcing payment functions to third-party providers.
  • Banks can collaborate with FinTechs, outsourcing customer and transaction management solutions to third-party providers, while internally owning payment functions.

Understanding Payments as a Service (PaaS)

PaaS emerged in response to the high demand for speed, security, and cost-efficiency in the payment sector. It combines elements of Software as a Service (SaaS) and Infrastructure as a Service (IaaS) and involves outsourcing various aspects of the payments value chain. PaaS is a cloud-based service that enables banks to accept and process payments through a cloud-based platform, eliminating the need to build and maintain their payment processing systems. The global PaaS sector reached an estimated $13.88 billion in 2022 and is expected to grow at a CAGR of 15.2% from 2023 to 2030. This model allows banks to expand their payment services with minimal financial risk, and high scalability, customization, and revenue generation.

Benefits of the Payments-as-a-Service (PaaS) Model

PaaS offers numerous advantages across the payment value chain, including:

Cost Optimization: PaaS reduces costs by eliminating the need for in-house specialized teams and technology management, resulting in lower management and technology optimization costs.

Flexible Pricing: PaaS providers offer customizable pricing structures based on product types, transaction volumes, and business size.

Faster Rollout: PaaS accelerates the deployment of new functionalities, ensuring faster time-to-market.

Reliability and Scalability: Cloud-based PaaS platforms are highly scalable and reliable, designed to grow and shrink as per usage.

Enhanced Security: PaaS platforms bolster security measures, aiding in fraud prevention and customer protection.

Compliance Management: PaaS providers manage compliance with various standards, reducing the regulatory burden on financial institutions.

Access to New Payment Methods: PaaS facilitates access to a wide range of payment methods and innovative functionalities.

Third-party Integration: PaaS platforms seamlessly integrate new payment methods in real-time, offering a variety of innovative payment options.

Improved Straight-Through-Processing (STP): PaaS eliminates coordination and maintenance challenges, ensuring uninterrupted data flow.

The PaaS Business Model

Payment service providers leveraging PaaS offer two main categories of services:

  1. Technology Implementation Services: Covering essential functions like issuing and acquiring switches and compliance management.
  2. Payment Operations and Product Support: Encompassing reconciliation, dispute management, transaction monitoring, merchant support, customer complaint management, analysis, statistics, user management, and security.

The Rise of Neobanks

Neobanks are new-age, digital-only banks, which means they have no physical location. This segment has gained traction especially among the digital-native generation. The US alone is expected to see a 46.4% increase in neo-bank account holders by 2026.

Neobanks need to collaborate with legacy banks due to industry regulations. Traditional banks can leverage the PaaS model to partner with neobanks and provide payment services tailored to younger consumers. The neo-banking industry is expected to reach 376.9 million users by 2027.

Why Opus is the Right Partner for Your PaaS Journey

The global financial market is evolving rapidly, and banks are adapting by embracing Payments as a Service (PaaS). This approach enables banks to enhance their payment services, improve security, and enjoy various benefits, including cost and time saving. As technology continues to shape the banking landscape, PaaS remains a critical strategy for both traditional and neo banks.

At Opus, we understand the intricacies of the modern banking landscape, and are leaders in Payments as a Service (PaaS). With a proven track record of innovation and excellence, we offer a partnership that goes beyond technology – it’s a partnership built on trust, expertise, and a shared vision for success.

For tailored business solutions in payments innovation, contact us today.

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