What’s in the Cloud for Payments?

When we speak of “payments in the cloud” we are using the term in a broader sense than it is usually used in the information technology world.

Cloud computing simply refers to accessing software and hardware over the internet. In a sense we’ve all been doing that since the commercial internet started 15 years or so ago. Just consider search. Google stores massive amounts of data on web pages on server farms and updates these data regularly. It has devised complex and sophisticated software that searches those web pages for information. We obtain access to that software and hardware using just our browsers (and possibly some code that is stored on our computers if we have installed a toolbar).

As the web economy has grown, more businesses have started offering services that reside in the cloud. To take a few examples, Flickr helps consumers store and manage your photos in the cloud; Salesforce.com provides customer relationship management software in the cloud. Google Docs helps consumers and enterprises do word processing, spreadsheets, and other applications in the cloud and Microsoft’s soon to be released Office 10 will do so as well.

Several things have happened that have led to cloud computing becoming the next big thing.

(1) Accessing things over the internet has become much faster and more reliable in many parts of the world as a result of the spread of broadband.

(2) Software development has moved from local devices to the internet so there are more languages, tools, and code to leverage.

(3) There’s been a lot of progress in developing inexpensive, efficient, and massively large computer systems. Of necessity Google and other companies had to figure these kinds of things out.

(4) The companies that have invested in massive and scalable server farms have realized that they can sell others access to it. Many of the obvious suspects have gotten into offering cloud-based services including Amazon, Google, IBM, and Microsoft.

Cloud computing is also associated with a change in the traditional business model. Consumers and enterprises typically bought (technically they licensed, but usually in perpetuity) software packages which they installed on their computers. Expanding information-technology resources meant front capital expenditures for hardware and software. In contrast, cloud computing is usually sold in bite sizes under what is known as the “software as a service” model. In fact it is even better than that. In a typical situation consumers and enterprises are paying monthly or annual fees to obtain access to hardware including storage as well as software.

Amazon Merchant Services provides a good example of what cloud computing is all about and one that is relevant for the payments industry. Suppose you are a retailer who wants to start selling over the internet. If you wanted to stay on earth, you would hire someone to build an e-commerce site for you, line up someone to host it, and get a processor to enable you to take payment cards on line. If you wanted to go to the clouds, you could rely on the software that Amazon has created for quickly building a store on line, have them host it at one of their server farms, and use their payments system.

Amazon Merchant Services also illustrates how cloud computing has resulting in innovation moving to the cloud. Amazon has developed a payment services product that relies on the payment systems back down on the ground. They connect to one or more processors that in turn connect to the rest of the payments system. Amazon’s innovative product stays in the cloud where everyone down on earth can connect to it. PayPal, Apple, and other companies are also engaging in this sort of innovation in the cloud. A later entry will discuss them in more detail.

Cloud computing also unleashes innovation from hardware. For most of its history the payments business has been tied to devices that pretty much have the software hard wired in. Maybe the supplier of the hardware could modify the software but the merchant really couldn’t nor could other players in the ecosystem. And since these devices were closed systems a clever entrepreneur couldn’t develop applications that could provide extra value to the merchant or to members of the payments value-chain. That’s can and will change. Software will come down to the devices from the cloud and APIs will enable entrepreneur/developers to add value.

There are other opportunities for moving innovation off the ground in payments that don’t necessarily involve using internet connections to software residing on remote hardware. At the moment the payments system consists of a number of highly secure private networks that companies can plug into. A point of sale terminal at a retailer plugs into several private networks. It does that by connecting to a switch which then routes transactions across the debit or credit rails to the relevant clearing and settlement system and so forth. One doesn’t have to rely on the internet necessarily to move innovation off the ground. Companies could provide remote services over private networks.

One way to do this would involve developing a software platform that enables third parties to write applications that would work with the payments system. That could happen in a couple of ways.

(1) The major processors currently operate software platforms that provide services to banks. They could potentially open up portions of these platforms to developers to build applications that use some of the features and functionality of these platforms. The same is true for networks. Obviously, there are security issues that would have to be dealt with to ensure the safety and integrity of the platforms.

(2) A third party could build an uber-software platform that sits on top of all of the various software programs that lie on the payment rails. That uber-software platform would connect into these software programs. Then developers could plug into the uber-software platform to write applications. In both of these cases it becomes possible for innovation to take place outside of the software and hardware that currently comprises the payments systems. The resulting innovative applications then also sit outside.

When we talk about payments in the cloud for the rest of this series we will use this term to refer to the development of applications that sit outside of the traditional payments system and link to the traditional payments system through APIs on software programs that sit somewhere on the rails of the traditional system.

One thing is for sure in my view: innovation in payments will move to the cloud and anything who wants to be a player will need to be there as well or work with someone or is.


David S. Evans is an economist and a business advisor to payment companies around the world. His recent work has focused on helping companies create, ignite and profit from payments innovation. He is the originator of the Innovation Ignition Framework® , a tool provides a systematic way for companies to evaluate and implement innovative ideas and achieve critical mass.


Invisible Engines Series


I. The Invisible Engines that Drive Innovation and Transform Industries

II. How the iPhone Invisible Engine Provided a Catalyst for the Mobile Phone Industry

III. The New Age of Invisible Engines: How Software Platforms Will Drive Growth in the Next Decade

V. Why the Payments Industry Needs a Catalyst to Drive Payments Innovation

VI. Can IP Commerce Create the Apps Store for Payments?

VII. PayPal X’s Global Payments Development Platform