Conclusion Payments White Paper 1 White Paper Payments Key trends in payments and banking infrastructure The modernization of banking Introduction and payment systems is seeing the The future of banking and payments is instant, open deployment of hybrid public and and everywhere. These trends have evolved based private cloud architectures, often on the developments of newer business models and backed by technical infrastructure that increasingly linked back to the old legacy systems, features greater connectivity, responsiveness, reliability dispensing with which is just too hard and security. This can be seen in industry use cases in many cases. This paper looks at six such as emergence of: use cases for these newly architected § Banking as a Service systems and how they can bring § Core banking modernization efficiency, security, speed and cost § Local processing of banking and payments savings to financial services companies § Real-time domestic payments and their customers. § Open banking § Cross-border payment rails Each of these is explored in more detail below. Digital infrastructure is a hybrid-distributed architecture Legacy payments infrastructure Modernized payment infrastructure § Centralized § Distributed at the edge § Siloed § Interconnected to ecosystems § Rigid and slow § Agile and elastic Equinix.com Confidential The emergence of Banking as a Service Payments White Paper 2 Key Trends Payments/Banking Local payment processing Open banking/apps and as a Service or digital banking platform ecosystem Core banking and Real-time and domestic Payment rails hybrid IT modernization payment schemes credit/debit & cross border Infrastructure Edge Exchange Infrastructure that is Infrastructure that needs to Infrastructure that benefits by increasingly dependent upon be in a particular country or being adjacent to a large number cloud service providers with region due to local partnerships, of ecosystem participants that robust choices of low-latency data sovereignty or latency share standardized messaging connections to cloud providers. requirements. formats and protocols. The emergence of jurisdictions in which it operates and to ensure that all prudential regulatory requirements are met. Banking as a Service Sitting above this layer is the technical banking Banking has traditionally been a hard industry for new platform. This includes the core banking systems, entrants. To operate and legally call yourself a “bank” payment hubs, customer and account management in many jurisdictions requires holding some form of tools, risk management systems and other banking banking license issued by the prudential regulators infrastructure, which together allow a bank to take within that locale. Regulators have required a certain deposits, originate credit and facilitate payments. level of trustworthiness and governance that are supported by significant amounts of capital held The final part is the front-end interface. This is the most as reserves, as well as significant investment in the prominent part of the BaaS bank, and is where the end technical infrastructure to ensure reliable and stable customer interacts with their banking products. Front- operation. In many countries, these requirements are end companies include tech companies and non-bank important to protect tax payers’ funds, as often the financial services institutions, but also other companies first tranche of dollars (AUD250,000 in Australia; that are not traditionally finance related (and non- GBP85,000 in the U.K.) in each consumer deposit holders of banking licenses). The integration between account is government guaranteed—regardless of the front-end and platform layers is achieved through the bank’s eventual capability to repay it. APIs, which connect the user interface with the API- driven banking platform. Between the platform and With Banking as a Service (BaaS), a new alternative front-end layers is where third-party providers reside. business model has emerged which, in theory, offers These look to offer value-added services that are new companies an easier, faster and cheaper (mainly ancillary to the banking experience for either or both in terms of up-front capital investments) route to offer the bank and the end customer. bank-like services to the market. This integration requires a fast, but robust, level of The BaaS business model consists of three main parts. connectivity between the various systems in the At the very base of the model sits the bank. This is the BaaS value chain. Part or all of the BaaS stack may entity that holds all of the relevant licenses that enable be deployed in the cloud, as seen with the general it to carry out and offer banking services within the modernization trends of core banking platforms. Fast, Equinix.com Confidential The emergence ofBanking as a Service Payments White Paper 3 because consumers expect low latency between taking Modernization of core action on their banking apps and the time that the banking platforms underlying banking platform takes to respond to those actions. Such connections need to be reliable and Traditional banking systems have relied, and been secure to ensure maximum availability and resilience. developed, on large, mainframe systems that have dated back to machines developed in the 1960s. It is interesting to note that many digital neo banks These computers were cutting edge for their time, around the world have chosen not to adopt the BaaS and banks wholeheartedly adopted them due to the model, despite the time and cost involved in gaining significant increase in capability offered over older a full banking license (or even a restricted license). As systems. Furthermore, these systems were monolithic, a key proposition of neobanks tends to be their front were expected to encompass all of the core functions end, delivering a more user-friendly interface to their required by a bank to operate, and were hosted within customers, one might have thought that focussing their a bank’s own IT data centers. investment efforts solely on this piece of the banking infrastructure might have lowered risk and cost. Today, however, the picture is very different. As time has progressed, it is now clear that many of these Implications: traditional core banking systems have left incumbent banks with a technological debt. § Banking as a Service provides a new revenue opportunity for fully licensed banking institutions. § Banking as a Service has the potential to grow as it becomes easier to separate the component parts of a bank, allowing new entrants to pick and choose the Around 85% of IT budgets at banks are services that they need. aimed at maintaining the status quo. § Gaining a full banking license in many jurisdictions Ciaran Chu, Head of Cloud at ACI can be an onerous and costly exercise. Banking as a Service allows neo banks to focus their investments on their key differentiator, the customer interface, and not licensing obligations. Equinix.com Confidential The emergence ofBanking as a Service Payments White Paper 4 In October 2020 in Australia, Westpac announced a partnership with Afterpay, one of the world’s leading Buy Now, Pay Later brands, to provide deposit accounts as part of its new Banking as a Service strategy, commencing in Q1 2021. The agreement makes Afterpay the first third-party fintech to be launched on Westpac’s cloud-native “10X” digital banking platform, which is provided by Future Technologies. The move is part of Westpac’s new digital strategy to engage and work with fintech partners through the 10X platform, a system that is operated separately from the main Westpac banking system. As part of the agreement, Afterpay’s 3.3 million Australian customers will be able to open transaction and savings accounts with Afterpay and undertake transactions without needing an external bank. Afterpay would then have access to all of the spending data from the deposit accounts, from which it plans “to assist them [their deposit account holders] in budgeting more effectively and avoiding debt traps” through the provision of budgeting and spending tools. The data could also potentially be used in the credit-decisioning process for future Afterpay credit/loan products. Although Afterpay does not hold a banking license in Australia, it is able to use Westpac’s own license as part of the BaaS arrangement. Therefore, Afterpay deposit account holders would be covered for up to AUD250,000 as part of the Australian Government’s deposit guarantee scheme. According to Ciaran Chu, Head of Cloud at ACI, around not as robust as the security found in traditional data 85% of IT budgets at banks are aimed at maintaining centers. This idea is beginning to change as more banks the status quo. All in all, the main disadvantages of firstly adopt the cloud for less critical systems. A 2017 these legacy systems are that they burden their banks IDC survey found that 60% of U.S. banks had already with increased costs, slow down the deployment deployed some form of cloud-based software.2 of new banking products and features, hamper regulatory compliance (which is occurring at an Smaller banks, and especially the new wave of increasing frequency) and are not suited to neobanks, have been the most enthusiastic about the integration with external third-party providers, who adoption of cloud-based core banking systems such as provide access to digital marketplaces that are Mambu, 10X and FinXact; while traditional core banking becoming increasingly important. system vendors like Oracle, SAP and Temenos also now offer