Cloud computing services are on the rise across the business landscape. The promise of low-cost, easily scalable solutions and improved operational efficiency has attracted big and small business interests alike. According to Gartner, the public cloud services market is forecast to grow 18.5% in 2013 to total $131 billion worldwide, up from $111 billion in 2012. Meanwhile, IDC estimates that by 2020, nearly 40% of the information in the digital universe will be in the cloud in some capacity.
Payments: Why They’re Already In The Cloud
As banks tentatively look to move more functions to hosted environments, perhaps one of the most natural to bring to the cloud is payments. After all, notes Celent senior analyst Gareth Lodge, banks are already doing some payments processing in the cloud, even if they don’t realize it. Lodge says several vendors already offer services run virtually that involve payments, such as hosted online banking and card processing, to which many banks already subscribe.
“We talk to banks and often hear them say, ‘We will never, ever use the cloud,’ and I tell them, ’You already are,’ ” he explains. “It’s more a lack of understanding of what the cloud actually is.”
However, Lodge acknowledges that there’s a big difference between doing some things in the cloud and performing all payments processing virtually. Part of the reason banks are hesitant to pursue cloud-based payments — and cloud services in general — is because the legacy architecture present in most institutions “makes it difficult to do,” he says. Regulatory and security concerns, and the generally risk-averse nature of financial services, also play a role.
But while it would be a bold leap, Lodge says there are many incentives for a bank to wholeheartedly embrace payments in the cloud. First, there’s a significant cost-savings aspect, he says, adding that about one-third of bank IT spend is on payments. Pointing to one channel, he adds, ”the ACH network has really not changed for decades, and banks are all looking to see how they can make changes in that cost base.” Further, Lodge says processing payments in the cloud would allow banks to conduct real-time analysis of customer payments, which would be a “game changer.”
“Real-time payments analytics can really influence and change a bank’s interaction with their customer,” he says. “But that requires single-message [processing], not batch, and high levels of availability — all things current bank systems, however good they are, weren’t designed to do in the first place.”
Another reason for banks to embrace cloud payments is to stave off the threat of disintermediation. Payments is perhaps the one area where a startup tech outfit can jump in and compete with banks right away. And they can often do payments better, says Mike Laven, CEO of cloud-based payments processing company The Currency Cloud.
“In a noncloud world, payments is owned by the bank or one or two vendors,” he says. “In a cloud world, you can have many different firms and disaggregation of the value chain. Similar to what’s happened in music and other industries, specialized vendors can take individual pieces of the supply chain and optimize it, and because those services are all hosted remotely, they can do them in ways superior [to how it was handled] in the past.”
Laven says that while it’s highly unlikely banks will ever be cut entirely out of the payments picture, they can be marginalized in the process and risk losing major revenue. “Ultimately funds flow into and out of bank accounts, and you need banks for certain things, like having reserve currencies, but there are other, more consumer-facing things that big banks can’t do as good a job of and can’t be as nimble and flexible,” he says. “Banks own the rails the financial system runs on, but the trains, cars and the food served on them can be run by smaller companies.”
But Celent’s Lodge believes banks eventually will adopt cloud-based payments, and cloud systems in general, industry-wide eventually because of the great promise of cost savings, efficiency and agility. He doesn’t venture a guess, however, as to when that will happen, given the notoriously cautious nature of financial services.
“As we’re seeing even more and more cloud-based core systems solutions being offered, it’s only a matter of time,” Lodge adds. “But banks are typically the last adopters of new technology.” – Bryan Yurcan