The following was produced by Tearsheet Studios. We worked with payment as a service provider Volante Technologies to produce a two part series on banks transforming their payments to the cloud and the road to streamlining the customer journey.
The payments space is changing. Technology providers are stepping up and offering FIs the ability to modernize their existing payment processes. Through their cloud-based platforms, Payments as a Service providers make it possible for banks to provide digital services that modern customers desire and expect.
The move to partnering with a PaaS provider means that FIs can reap the benefits of moving to the forefront of digital transformation -- but what does that really mean?
John Farrell, Volante Technologies: The payments landscape within a bank has been somewhat inflexible for a lot of banks. PaaS allows you to focus on what's next while we manage that infrastructure for you: scale it for you, certify it for you, deal with your endpoints, help onboard customers, and help onboard ecosystem partners that can add value to the payments processing lifecycle.
Whether choosing to work with a PaaS provider or a traditional on-prem vendor, the procurement process begins with the same questions: what does the product do? How does it work? And how is one type of payment managed over another? But when it comes to PaaS technologies, there’s more.
John Farrell: It gets a lot more in depth because you start trusting somebody, like Volante, to deliver a service that's always on, has world class resiliency, world class recovery, and is scalable on an as-needed basis. These are things that traditionally, the bank would have to do.
In the procurement process, outside of the core capabilities of the platform itself, there's a massive amount of due diligence that's typically done to make sure that the trust factor is there. We haven't done a deployment yet where the PaaS platform hasn't had to make call outs somewhere in the process to two other platforms within the bank that are resident in their private data centers. So feature functions are really important, but it's a lot more than that in the procurement process.
Moving to PaaS really requires getting comfortable with cloud technology first, and banks run the gamut in terms of that. While some are new to the cloud based service model, others, like digital banks, are already familiar with running banking software in the cloud.
John Farrell: We've run into some fairly large global institutions that have a good amount of experience with cloud, and they know what they're looking for. But conversely, we've run into some really large organizations that are doing this for the first time.
As for the smaller banks -- in some ways they're used to buying a platform and having it managed by somebody else (not necessarily on the cloud). They're a little bit of a trailblazer in that; in the US, there's typically four or five vendors that they deal with, and we're the new entry, bringing in the latest and greatest technology. So those folks are way off the starting line, but they're not at the finish line yet.
We're meeting every flavor you could imagine in this space, but it's becoming more common -- what was super novel two years ago is less so today.
Customers for PaaS providers differ greatly -- in their legacy, backgrounds, sizes, and use case needs.
John Farrell: If we’re brought in to solve a problem, or an opportunity, where a bank wants to add something new, that's typically more straightforward than if they need to replace something old. Obviously, the bank has more experience with the system that they're using today, and typically there's a lot more legacy in there that you've kind of got to peel apart in order to really understand how to onboard that.
For a financial institution to reach and remain at the forefront of digital transformation, it has to be willing to do more than replatforming. It has to be open and willing to reimagine its processes.
John Farrell: As a PaaS provider, the more we can standardize, the more we can innovate. If we have to customize each and every step along the line to onboard a customer, we’re not in as flexible of a spot as we'd like to be. We try to be fairly strong on that, but there are always going to be edge cases where we have to do some work like that.
It's about the bank being open to change, and thinking about this as an opportunity to change, not just an opportunity to replatform their current processes. When that happens, things typically move a lot faster in the onboarding process, questions get answered a lot faster, and you effectively take a lot of friction out of it. So that's an important piece -- banks really need to have those two things in mind: replatform and re-architect the whole processing flow. You really want to take it as an opportunity to drive more value into the processes, take out some of the legacy processes, and focus on streamlining both your organization and the flow of payments.
An institution that runs on well streamlined processes is one that’s ready to adjust quickly, scale up effectively, and expand its reach across territory over time. For such FIs, the important thing to gain from a PaaS provider is reach.
John Farrell: If you're bringing in Volante to solve a problem, and we solve it for you, chances are you're gonna have another problem down the road. And if we're the right guys to solve that also -- that takes a lot of friction out of the system. We're not just the Fedwire player, we're not just an ACH player, we're not just a real time payments player -- onboarding with us for one product gets you 70% to 80% there, and that matters when you want to bring on the next product and the next product after that. You can really expand your business with us as you grow, and as we grow the reach of the product.
‘Cloud native’ is a little bit of a buzzword, but what it means is that you're taking advantage of all those world class services and features that these massive cloud providers deliver to you in a native way. And that means that monitoring your system, your ability to auto scale the system on an as-needed basis, and your ability to work across regions become much cleaner activities.
A bank in the United States that's got reach -- one of the big national banks -- might have data centers in three or four places in the country, and there's good reason for that. And you will want to be able to look at a provider that says, ‘I can run your platform with data centers on the east coast, midwest, and the west coast if you want.’ With the way we've designed our product, we're able to do that; that's just part and parcel of the way we've chosen to build it and deploy it. There's some real technical reasons for why that matters. Especially as the United States starts to really embrace real time payments, there are SLAs that you have to be able to meet. Seeing as we've not figured out how to travel data at the speed of light yet, it does matter.
Besides reach, what a PaaS provider can offer an FI is time. By providing its own roadmap, Volante takes care of the industry standards and regulations, allowing a company’s internal resources to focus on pushing their products to the next level.
John Farrell: A traditional company would have done a roadmap based effectively on a couple different buckets. First is what they have to do; typically, that's based on the clearing and settlement, regulation, and on new payment types coming in -- that's kind of the table stakes side of it. Then it’s about asking, ‘Where do I want to add innovation? Where do I think I can differentiate?’
When you look at a PaaS provider, the table stakes stuff comes with it. That's really important, because for a lot of banks those annual things aren't necessarily value additions -- they're just things you have to do. Your technology team and payments would probably spend a better part of three to six months a year just dealing with those kinds of things. And that’s time not spent thinking about how to make the product better, how to make a more seamless experience for customers, or looking for any value services that are worth adding.
With a PaaS provider like Volante you end up freeing up those key resources, who can then start focusing on how to take what a lot of customers view as commodity service and put enough value around it so that it becomes even more of a profit center than it might be today.
As financial platforms become more modular, it’s important to consider not only the platform’s value proposition, but the ecosystem built around it too.
John Farrell: To use an analogy, we’re like a buffet. We have clients that say, ‘I don't need everything, but I really like what you do with your corporate pre-processing. I want that piece of the service, because that's a problem I'm having today. Let's go live with that piece of the service, then we'll start talking about what we can do next, and what we can do after that.’
That's the interesting thing about the way our product is architected and delivered: you can look at pieces of our functionality, and choose to onboard just what you need first as you're solving a near-term problem -- that's really important.
We also embrace bringing in third party value added partners. The interesting thing about that in a PaaS platform is that we make sure that integration is there, the bank doesn't have to worry about it -- even if it changes on an annual basis or if there are upgrade implications, we can take care of that for them. So again, you're freeing up those core resources within the bank to look at other value added ideas to enhance the payments business.
You have the ecosystem within our service that you can pick and choose from, as well as the ecosystem from either third party software providers or in many cases, third party endpoints.
PaaS changes the delivery model of financial services. Through modular technology that offers a full spectrum of features, FIs can adopt and roll out new features to better service their customers.
John Farrell: For a lot of banks outside the tier one banks, having those types of world class features is typically out of reach. With a platform like ours, it just comes with it.
Nobody likes to have customers calling because their mortgage payment didn't go out, or their paycheck didn't come in; and any number of other issues you can imagine when there's an issue in the payments processing space. So that's one of the big things that this consumption model provides. We also have folks 24/7 monitoring all aspects of the system, in two or three different continents.
On the functionality side, if you're coming from a legacy system, you're really going to get a lot more opportunity to improve your straight-through processing by leveraging these newer technologies -- whether it's machine learning on payments repair, or having the ability to leverage a new sanctions filter. That might not be something that you could afford to do on your own, and you can do that through us.
There are lots of other things, outside of the core problem you initially engage us to solve, that consuming this platform can really help with as the relationship grows.
In this episode and the previous one with Volante’s John Farrell, we mentioned many different advantages for FIs partnering with a PaaS provider -- what are the most important benefits, and are they worth the cost?
John Farrell: Maintenance. A lot of providers today are sending a new release on an annual basis that the bank then has to consume and test its integration -- that's not a small undertaking. Sometimes a bank could ignore that, but the second and third year you ignore it, it becomes an even bigger issue, because now they're delivering something that may not be backwards compatible to what you're running today; and that can end up feeling like a brand new implementation in some cases. Just staying current is a big piece of that.
Standards compliance. Whether you're using us for Swift, Fed, or real time payments, those standards change. Sometimes they change a lot, sometimes they change a little, sometimes they all change at once, sometimes just one has huge changes for the year.
The other piece of it is that we're continually improving the platform. As you said earlier, we do engage an ecosystem, but we do have our roadmap, and all of the items that we deliver into that platform are readily consumable by any client that happens to be on it. It takes the friction out of it, and a lot of the cost, and that's a big deal for any customer.
The non-functional side of it is a big deal; we have some clients that are facing this today. Because of the continual updating by Volante on the platform, you're not going to get a letter from us in two, three, four, or five years that says, ‘Hey, just let you know, in 18 months your product is end-of-life, here's my new product, let's start thinking about how you can buy this new product from me and implement it.’ That's not going to happen. Any product we have in three to five years is going to be the evolution of the one we're working with today. So the clients are going to get that constant improvement, and none of those surprises in the mail.
Instead of simply re-platforming, Volante places importance on the consolidation and streamlining of all processes -- which frees up precious internal resources, and makes continuous innovation easier down the line.
John Farrell: A large part of our annual development budget is about innovating on the product. The one nice thing about the payment space is that there are lots of add-on services that orbit around the payment space which we're looking to bring into our platform, either through our own development, or potentially by bringing in a world class partner that we think does it really well.
Your costs are expensed -- they're not capitalized. We’re the ones on the hook for keeping the kit up to spec. All of that is then built into the pricing. So it typically works out to be cheaper than anything they're doing today, with a ton more flexibility and a guarantee that you're going to continually be improving the platform.
At the beginning of a partnership between an FI and PaaS provider, the FI usually comes to the first step with a laundry list of everything that’s wrong or could be made better, and try to fit the PaaS product to their existing legacy technology.
John Farrell: We designed this system with our 20 plus years of payments DNA to be efficient in how we process payments. Oftentimes, we're having discussions where we're comparing a process in today's world with a process that was created 20 years ago and tweaked. Initially, we made that mistake too, of having that kind of to and fro conversation.
What we like to do now is go in and say, ‘Let's not talk about your process yet -- let's talk about how we will do it, because it's in your best interest to take advantage of the platform as it is -- it creates much more flexibility in the future.’ So I think that's the piece of advice I’ve given.
The nice thing, Zack, we're doing programs with executives now who are saying that; they're telling their team, ‘Let's look at the product as it is, let's make sure we're not boiling the ocean to fit this 20 year old process that nobody's quite sure why it is the way it is.’ That's probably the single biggest deterministic factor of how to get the value the quickest: by embracing those capabilities.
The adoption of cloud-based payment services may stand to change the banking ecosystem, but it’s far from being there just yet. So what is the future for PaaS?
John Farrell: The boulder’s rolling down the hill -- it’s still at the top but it's starting to roll down the hill and pick up momentum. Whereas this was something that was once relegated to the trailblazers of the industry, the fast followers are in now, and the rest of the industry is getting pulled along with them.
We're at the beginning. We're at the lower end of a hockey stick, and we've got multiple more years of adoption before we're even halfway up that hockey stick.
But from our perspective, the growth exceeded our expectations and surprised us. Large banks that are now actively exploring this space -- we would have thought two years ago that it would have taken longer, but it has really exploded in space right now. And it's not just us, it's not just payments -- we're seeing that all around the whole banking ecosystem.
While most of the road remains unknown, we’ve already seen remarkable transformations in the payment space. Much of the simplification of payments today is thanks to technology automated decision making, that makes it easier for money to move most optimally.
John Farrell: With cross border, it used to be accepted, for instance, that it takes what it takes to get there -- might be two days, might be five days, we'll let you know (actually, we won't let you know, you'll get a phone call from the person receiving the money and they'll tell you they got it).
That's changed dramatically -- the expectations of both the originator and the beneficiary of a payment. They're expecting complete transparency, they're expecting speed, they're expecting to know every step of the way where that money is. That’s the future of payments and PaaS platforms is that they can offer you that transparency, and they can offer you those endpoints.
The payments ecosystem within a bank is very self segregated: this area over here does wire payments, this area over here does ACH, these guys do cross border, my card payments guys are in another building (I've never met them), and we're not sure where these new real time payment guys are gonna sit but they're gonna be here, too. What the platform does is an opportunity to consolidate that.
It's always bothered me that the originator had to be an expert in payments. Let's say I'm a corporate and I want to pay you; there are only a couple questions I want to answer: do I want to get it to you as fast as possible, or as cheap as possible?
One of the things we bring to the table is we're not an ACH system, we're not an RTGS system, we're not a real time payment system -- we take care of all of those. Part of that is the way we architected the system and the ability to manage these flows in the platform. But it also gives the bank the opportunity to look holistically at their flows, and those flows produce a lot of data that can then be leveraged -- whether it's to introduce new products or to segment your customers differently.
I don't think we scratched the iceberg on what people can do with payments data, that's still a wide open space.
The rate of change in the payments industry is an order of magnitude faster than it’s ever been. And keeping up with it alone can be really tough. Getting what Farrell calls “the crowdsource effect” can help.
John Farrell: If I've got 50 clients on the platform, all 50 of them are getting the benefit of all the effort. There's revenue coming into us with which we can improve the platform, keep up with the standards, do the maintenance. If you had to do it individually across 50 platforms, the cost would be significantly more, and this is the piece that drives the cost down as you're effectively crowdsourcing that across banks.
If you have 50 banks doing their UAT at the same time on the same platform for the Swift changes or the new FedNow stuff, all of a sudden when everybody goes live, you're talking about a system that's bulletproof.