Waiting for Go: The Move to Cloud-Based Payments

 Waiting for Go: The Move to Cloud-Based Payments

Waiting for Go: The Move to Cloud-Based Payments

Charles Keenan

Charles Keenan

Charles Keenan has written about payments since joining the American Banker as a staff reporter in 1997, a time when automated teller machines were appearing just about everywhere but people's living rooms thanks to the relaxation of surcharging rules.

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While the thought of payments and banking in the cloud may evoke security and privacy concerns, providers eventually won't really have a choice. The increased flexibility and lower cost will drive them to make the move.

Practically speaking, the digitization of payments demands a cloud-based infrastructure. "Payments makes sense in the cloud because you are no longer going from one POS terminal to another," says Brett King, the founder and chief executive officer of Moven, a mobile banking provider based in New York. "You are going from one internet node to another. That's how payments are being engineered now."

Industries certainly are rapidly moving to the cloud, given its lower costs, flexibility and scalability. The global market for public cloud services, where a provider makes services such as applications and storage available to the general public over the Internet, will grow 18 percent to $247 billion in 2017 over the previous year, estimates Gartner Inc.

As part of the wave, banks have started shifting general administration software to the cloud. For top-tier global banks, cloud adoption could reduce infrastructure by $15 billion by 2019, a 25 percent reduction according to IDC Research Inc.

In payments, popular providers such as PayPal, Venmo, Apple Pay and Samsung Pay use the cloud. Stripe and other online payments startups are completely in the cloud. Processors such as TSYS are also laying the groundwork; the company in June went into production in the cloud with a card issuing and acquiring platform for Enfuce Financial Services, a Finnish-based payments services provider.

Whether it's Bitcoin, trade finance on the blockchain or person-to-person transactions, the cloud makes this all happen, King notes. The ubiquitous use of mobile devices makes the cloud a business imperative. "The reality is payments are now more digital-based than they ever have been," King says. "As a result, they fit better on an IP infrastructure than a physical-based infrastructure that we used to do payments with, like the knuckle busters or in a bank branch."

Settlement remains the challenge

Settlement remains an obstacle for a total shift to the cloud for payments. With PayPal, for example, a payment sent is registered nearly instantaneously, yet the debit transaction can take two to three days to clear, since it travels via the rails of the Automated Clearing House (ACH). "The holdup in payments has always been settlement," says Paul Schaus, president and chief executive officer of Catalyst Consulting Group, a consulting firm based in Phoenix. "The cloud will allow the instantaneous settlement of these transactions."

When it comes to core processing and settlement in the cloud, banks are in a wait-and-see mode. Thus far, they have only moved non-core applications to the cloud. Capital One uses Amazon Web Services (AWS) to run some of its systems, such as its mobile banking app. JP Morgan Chase in March moved applications for wholesale trading and risk-modeling to the cloud. UBS is using Microsoft’s Azure, a major competitor to Amazon, for its risk management platform.

Waiting for the go-ahead

What United States banks need is a green light from regulators, similar to what has happened in the United Kingdom. The UK’s Financial Conduct Authority issued guidelines last year for lenders to move to the cloud. OakNorth, a UK startup, is the first bank to have its core system in the cloud, using AWS.

Here at home, banks are still waiting on guidance to move forward, given industry regulations around security and data privacy, which are slowing the migration to publicly hosted platforms. "The regulators haven't come out against it and they haven't come out specifically supporting the cloud either," King says. "So the bankers are sitting there saying, 'Well, we’re not going in the cloud because the regulators haven't said we can.'"

Federal regulators early this year solicited input on proposed guidelines to enhance cyber risk management standards. In comments to the agencies — which includes the Federal Reserve, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency — cloud providers such as Amazon and Microsoft pressed regulators to not put too many rules in place that would quash innovative technologies introduced by third party providers. The privacy concerns of regulators will also need to be addressed to move forward.

Cloud computing

Regardless of pace, the long-term survival of payments providers and banks will require cloud computing. One reason is cost. Clients can reduce hardware and operating costs by as much as 50 percent and energy costs by as much as 80 percent, resulting in more than a savings of $3,000 per year per virtualized server workload, according to VMware Inc., a cloud provider. For computation and processing, VMware charges 3.4 cents per gigabyte per hour and 6 cents per gigabyte per month for basic storage, according to its website. Those kinds of low costs will be hard for banks to match internally once regulators give them the okay.

Cloud providers can also lure the best talent, which will make it hard for banks to remain specialists, says Bashar Chalabi, chief enterprise architect at TSYS. "There is no reason to believe that the bank's data center is more secure than an Amazon data center," he says. "There is not enough information security talent to go around to all the banks."

Microsoft, in its comments to regulators in February, said as much: "Best-in-class security, infrastructure redundancy, data replication and low latency are typically difficult for individual institutions to obtain and manage within a reasonable cost structure in their on-premise solutions," the company wrote.

Chalabi likens the spread of the cloud to the adoption of the electricity grid by companies a century or more ago. Before factories connected, they ran their own power generation and had difficulty when they had peak demand. The same goes today with computing and the need for the cloud. "It's not a question of 'if,'" Chalabi says. "It's really question of when and how."

The statements and opinions of the writer do not necessarily reflect those of TSYS.

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Charles Keenan

Charles Keenan has written about payments since joining the American Banker as a staff reporter in 1997, a time when automated teller machines were appearing just about everywhere but people’s living rooms thanks to the relaxation of surcharging rules.

His work at the American Banker included writing about credit and debit cards, merchant processing, and bank stocks. He later freelanced for the Banker and industry publications such as Banking Strategies, Bank Director, Community Banker, and U.S. Banker. He also writes about investing, insurance and health care, and is based in Los Angeles.

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