Payments-as-a-Service

The payments ecosystem keeps growing more complex. With a proliferation of alternative payment methods, an ever-increasing need for more effective cybersecurity measures, and consumer expectations for a fast and seamless experience, many banks and payments processors are looking for ways to operate more efficiently.

Some are opting to outsource the management of their payment systems to a payments-as-a-service (PaaS) provider. Merchants, whether they’re working with PaaS providers directly or through their acquirers, could find their operations affected by this trend. How do payments-as-a-service solutions work, and what benefits can they provide to merchants?

In an interconnected global marketplace, there’s no practical way to make payments simple. Banks from different countries need to be able to communicate and exchange different currencies.

Customers have different payment methods they want to use, some of them new and emerging. Fraud, of course, is rampant, and security checks must take place at multiple key points when negotiations a transaction.

When banks, payment processors, and other enterprises need to develop, upgrade, or scale up a payments hub that can handle all of these tasks (and more), it can cost millions.

Updated regulations and technological advances have made it possible for third-party providers to create scalable, affordable payment platforms that can function just as effectively as internal payment hubs.

By taking on the role of dealing with the card networks and other upstream entities in the payments ecosystem, PaaS providers can offer additional benefits and services to make life easier for their clients. Over the next five years, PaaS is projected to become a $25 billion industry as more companies opt for lean, affordable, and adaptable payment systems.

What Is Payments-as-a-Service?

PaaS refers to outsourcing any of the higher-level payment management activities that would traditionally be handled in-house by banks or payment processors. Most PaaS providers offer cloud-based platforms that use open API technology to allow their clients to easily integrate their solutions. Typical PaaS services include the following:

• Card issuance
• Clearing and settlement
• Cross-border payments
• Disbursement
• Payment gateways

There are various factors that explain the recent rise of PaaS. One is the adoption of open banking initiatives in various markets, which requires banks to expand access to their data in order to allow independent financial technology companies to enter the market and develop competitive consumer products. Another factor is the COVID-19 pandemic, which increased the demand for real-time digital payments in various contexts.

Even for companies with significant investments sunk into an internal payments hub, it’s easy to see the advantages of a scalable third-party solution in this environment.

Recent trends indicate that the future of payments will continue in this direction, and there’s no realistic scenario under which payments become simpler and consumers demand fewer options. As time goes on, merchants should expect to see more of their upstream providers utilizing payment infrastructure from PaaS platforms.

What Payment Challenges Can PaaS Solve?

The advantage of maintaining an in-house payments technology stack is that you have total control over what goes into it, what it can do, and how it evolves. This requires not only a substantial initial investment but also a lot of ongoing review and support.

By switching to a PaaS solution, companies give up some of that direct control, but PaaS compensates by addressing some of the toughest challenges in the world of payments:

• High costs. Keeping things in-house isn’t cheap. Costs include software licensing, hardware upgrades, support and maintenance, and administration. Updates will be periodically required in order to keep up with consumer demand, regulations, and other external factors. Costs that area already high at the maintenance level can quickly balloon when growth or increased demand necessitates scaling up. PaaS solutions offer comparatively low-cost rates at any scale.

• Regulatory compliance. Many regions have implemented new regulations designed to protect privacy, expand consumer choice, and prevent cybercrime. Maintaining compliance with all of these regulations can be tricky, especially when dealing with multiple jurisdictions. In addition, big industry players like the card networks have their own regulatory frameworks that must be followed. PaaS can handle all of this on their clients’ behalf.

• Fraud prevention. Fraud is a constant problem in the digital payments sphere, causing billions of dollars in economic damage each year. Much of that cost is borne by merchants, who ultimately end up liable for most forms of fraud. PaaS providers can implement integrated anti-fraud technologies at the most vulnerable points in the process, leveraging their position to provide better security to all of their downstream providers and merchants.

• Keeping up with technology. Any time a provider wants to add new technologies or expanded capability to their payments hub, they need to invest not just in the technology itself but in testing, training, documentation, and other necessary resources. When PaaS providers implement these innovative technologies, they can easily offer them as optional add-on services, giving their clients access to things like embedded finance, automation, big data analytics, and smart payment routing at a fraction of the cost.
  

How Can PaaS Solutions Insulate Merchants from Chargebacks?

One way that PaaS can benefit merchants is by helping to reduce their exposure to chargebacks. There are several mechanisms through which this can be achieved. The first, as mentioned above, is by implementing the most effective, state-of-the-art internal fraud prevention technology.

By detecting and blocking fraudulent transactions before they can be completed, PaaS can reduce the number of fraud attempts that result in cardholder disputes and chargebacks.

PaaS can also reduce chargeback rates by making it easier for customers to choose alternative payment methods. PaaS providers can make it easier and cheaper for acquirers and merchants to accept these methods, resulting in fewer customers paying with credit cards and therefore fewer opportunities for chargebacks.

Lastly, some PaaS platforms may be able to offer merchants a more user-friendly and equitable payment dispute process that minimizes friendly fraud and facilitates effective chargeback representment. Consumer-facing payment platforms often prioritize the end customer at the expense of the merchant, but PaaS providers who serve acquirers and payment processors have good incentives to create a process that feels fairer to merchants.

Conclusion

The last few years have brought a lot of changes to the payments industry, and more are sure to come. Merchants have choices about who they partner with to process their payments and manage their merchant account, and PaaS can play an important role by lowering costs, encouraging competition, and bringing new payment innovations to the marketplace.

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