Common Questions: Cloud Migration and Service Models Take Different Paths for Banking

In the fast-evolving world of payments, agility is crucial. In banking, software-as-a-service payment solutions offer the flexibility and security necessary to stay competitive without the heavy overhead of traditional systems. With the API economy carrying a full head of steam, understanding the ins and outs of these models is more important than ever. We came up with a series of questions and answers to address issues about the cloud ranging from basic to expert levels.

What is the difference between a cloud-based infrastructure service model and a more traditional software model for payments and banking?  

Regardless of the business vertical, a traditional software model requires a one-time product purchase installed on the company's servers or individual computers. The cloud-based “as a service” model (software-as-a-service, or SaaS) is a license in which software is accessed online via a subscription. Because business applications are “in the cloud” rather than stored on a physical server, users can access them from any location. For banks, a service model offers lower cost of ownership, improved security, easier regulation compliance, access to new services, quicker processing and deployment times. Over time, SaaS might be cost-effective considering costs associated with upgrades, maintenance, and the need for highly skilled personnel in the traditional model.

Is there any advantage for banks in sticking to a traditional “on-premise” infrastructure?

There are two schools of thought here. One says that because banks deal with highly sensitive financial data, an on-premise solution provides them complete control over their infrastructure, meaning they can customize their security protocols, access controls, and encryption methods according to their unique needs. The other school of thought – and one that has become dominant since the pandemic forced banks to do at least some of their business remotely – is that security and access can be controlled just as effectively within the cloud. 

What percentage of banks currently use SaaS models?

Research from Accenture’s Banking Cloud Rotation Index found that 12 percent of the industry’s workloads have been pushed to the cloud in North America. North American banking is significantly ahead of the UK and EU in this regard, which has seen just 5 percent of workloads brought into cloud infrastructure. 

Have SaaS-based models gained momentum in banking since the pandemic? 

Anecdotal evidence suggests that it has, but it was well on its way before the pandemic took hold. SaaS models started to gain traction in 2019 as banks discovered they could have a flexible, innovative infrastructure without “ripping and replacing” current systems. But during the pandemic, SaaS models became central to delivering front as well as back-end solutions quickly and efficiently in the face of a tidal wave of IT issues. 

Now SaaS models are being embraced for the sake of innovation and competition. As Eugene Danilkis, co-founder of SaaS cloud banking platform Mambu, told McKinsey Quarterly: “With the most recent developments in artificial intelligence and everything that’s happening around payments and open banking, there are fundamentally different ways to reimagine creating products for different types of customers, whether they are retail or commercial banking customers. You have so much opportunity to take all these different technologies, combine them, and then continuously recombine them to keep creating better financial products and services. And given the speed at which new technology is coming out, that’s only going to continue to accelerate. You have to almost rethink your operating model and technology to be able to keep up.”

What pain points does the cloud address for banks?

We could fill an entire post with these, but some of the most important ones are: Complying with new regulations and payment initiatives; the need to meet customer expectations for new services, with improved user experience; dealing with fragmentation in a stressed geopolitical environment with its multiple regimes and requirements; visibility on costs for the service bought overriding the need to build something with uncertain cost control.

What is banking-as-a-service (BaaS), and how does it differ from traditional banking models?

In Banking as a Service (BaaS), banks provide their financial products and services via APIs to third parties who integrate the bank's functionality into their own applications, platforms, or systems. It can include services like payment processing, know your customer (KYC) checks, credit scoring, card issuing, and account management. Compliance with banking and financial regulations is a core aspect of BaaS, and a key differentiator between BaaS and other service models.

Can SaaS models affect revenue? 

Mambu’s 2023 Benchmarking Survey showed that companies who had partnered with hybrid integration models or a SaaS platform over the course of 2020 and 2021 fared remarkably better than those who hadn’t. Adopters averaged an improved annual revenue growth during the trying year of 2020 of 14 per cent, versus one per cent for the rest of the market. They also recorded a bounce-back rate in 2021 of 34 per cent, compared to 10 per cent for those unaided by SaaS.

How does AI play in SaaS models for banking? 

AI models can analyze transactional data in real-time to detect patterns indicative of fraudulent activity. For instance, if a U.S.-based customer's card is suddenly used in multiple overseas locations within a short timeframe, the system can flag it for review. Cloud infrastructure ensures these models can access and process the data swiftly, offering real-time or near-real-time alerts. It can also work in the context of credit scoring. Traditional credit scoring models are being supplemented or replaced with AI-driven models that consider a broader range of data points, from social media activity to online behavior. 

The Bottom Line: Ultimately, SaaS models allow banks the flexibility to compete and continue to meet the needs of the business customer. As the reliance on digital banking continues, demands on IT teams and existing infrastructure will continue apace. Banks that still lean entirely on legacy systems will need to embrace the SaaS mindset to innovate and compete, relieving pressure on heavily strained resources.