Cloud: The Engine of Innovation

Here’s why payments providers can no longer afford to ignore or misunderstand cloud technology.

Cloud is a key factor in the expected growth of the digital-payment gateway market to $416 billion by 2024. Non-bank players, from big tech to e-commerce giants to fintech startups, are leveraging the fearsome capabilities of cloud to lead payment innovation. Apple Pay, Amazon Pay, Stripe, and Chime lead a long list of services that are disrupting this space.

Three digital payment niches dominated by next-gen providers are microfinance, mobile money, and buy now, pay later, where frictionless user experience, accessibility, and affordability are driving rapid consumer adoption. Mobile money has evolved tremendously from the time of M-Pesa’s revolutionary text-based banking into cloud-based real-time payments, which are taking the world by storm.

Apple Pay is accepted at more than 85% of U.S. retailers, whereas Google Pay and Walmart-owned PhonePe carry 80% of India’s United Payments Interface (UPI)-based real-time payments. And in the United States, cloud-based buy now, pay later services from the likes of PayPal, Affirm, Klarna, and AfterPay saw the total market user base grow by 81% in 2021.

All these payment innovations are chipping away at the business of incumbents. Outside the United States, Google Pay, Klarna, and AfterPay are even offering “core” banking products such as fixed deposits, credit cards, and bank accounts. So far, incumbent banks have not really come back with a strong enough cloud-based counterattack.

Apart from the loss of revenue, banks run a real risk of missing out on the business of next-gen customers who have grown up on innovative digital-consumption, and therefore payment, experiences. In a recent survey, 60% of U.S. consumers said they would probably use point-of-sale financing (such as BNPL) within six months to a year. If traditional banks continue to rely on slow and expensive traditional payment methods, they risk losing their competitive edge before long.

Big Upside

My view is that banks, which upped their digital-transformation plans to cope with the pandemic, are nicely positioned to explore cloud-based payments. The upside is considerable. It includes:

Scalability: Customer adoption, open banking, and embedded finance are some of the trends behind soaring digital-payment transaction volumes. On “special” days, like Black Friday or Singles’ Day, a bank may need to serve several million payments. Banks’ on-premise infrastructures do not have the capacity, scalability, or resilience to accommodate such numbers. But cloud has it all.

Innovation: Open banking has opened the doors to data exchange and collaboration with partners and third parties in a financial ecosystem. Cloud offers a platform for APIs that developers and partners can use to create further innovations. Innovators can also access a huge variety of tools and software solutions, as a service, as and when required.

Analytics: Cloud is where massive computation, elastic storage, and a plethora of applications come together. This is why it is the first choice of data-driven organizations. Apart from payments innovation, banks can leverage the data-and-analytics power of cloud to improve every aspect of payments, from business processes to customer experiences.

Speed and security: When it comes to speed, earlier methods of money transfer, such as correspondent banking, are totally outclassed by cloud-based payments, which occur in real-time. This is why even the SWIFT payments network has embraced cloud technology. An organization like SWIFT, which processes more than 40 million transactions per day across 200 countries, was able to make the shift because today’s cloud infrastructure is more secure than on-premise data centers.

Banks have often embraced an incremental approach when it comes to cloud. Many times they run a finite number of experiments to target a small set of applications—especially ones that are easier or “less risky” to migrate—and it is all understandable. After all, this slow-roll approach, marked by ‘early-wins,’ is great for creating momentum.

However, if not substantiated by a well-defined overall strategy, with plans to make the right investments and commitments that build the right foundational capabilities, these firms could end up leaving value from the cloud on the table.

This myopia also limits the scalability of initiatives and restricts the harvesting of the future value potential. The economic reality of this situation is that every successive capability continues to cost at least as much, if not more, to migrate to the cloud or build on the cloud.

This happens because critical underlying capabilities like security and governance processes have simply been transferred to the cloud along with all the operational issues that they bring. This unfortunately accelerates the “tech debt” the cloud is creating within the IT landscape, instead of delivering valuable solutions for the business.

Mature And Proven

Progressive organizations understand this only too well. They see that the competition in payments continues to be relentless, driven by the swelling ranks of non-traditional players. Conventional bank payments are feeling the heat from innovations in microfinance, point-of-sale financing, and mobile money, which are leveraging cloud to run their massive transactions in real-time, at affordable cost, and with great experiences.

Incumbent banks recognize the need to take their own payments to cloud, but are hanging back for various reasons. While cloud adoption has its challenges, the conditions for migration have never been better. Most banks have a foundation in place thanks to their recent transformation efforts. Also, cloud technology is mature and proven, and the emergence of multi-cloud/hybrid cloud has made vendor lock-in a thing of the past.

Banks can even work with “rivals,” such as payment processors and gateways, that offer cloud-ready solutions to help make the shift.

—Dennis Gada is industry head, financial services at Infosys.