It's time for banks to do something radical — give up some control of their payments infrastructure by outsourcing processing services in the cloud.

As banks continue to stabilize after dealing with the credit crisis and the ensuing recession, they must relinquish control of payments functions in an effort to cut costs and strengthen operations, a new Celent study says.

Banks face a major psychological barrier against outsourcing payments services, the industry research firm states in a May report by analyst Gareth Lodge. The report is based on surveys of nearly 30 banks serving global clients.

Cloud computing represents the best option for banks considering outsourcing their payments services, Lodge says in the report.

A significant shift to cloud services would allow banks more control of their budgets, Lodge says. The shift would also let them keep pace with technology spending to provide more services and products customers are requesting.

In the Celent survey, 78% of banks indicated their organization had changed since 2010. The main drivers of change were achieving a more comprehensive product/service menu, strengthening operations and building up cross-border capabilities.

Without a budget to do so, those tasks would be difficult to achieve, Lodge says.

"Even with the budget, executing these goals will still be challenging, because many banks still use technology that is often dated, or had the excess fat removed from it already," Lodge says.

Payment services hubs address the issue of replacing older systems with a single, locally architected system. But many banks are unwilling or unable to face such a significant task because of the risks and high costs, the report states.

An alternative gaining favor among banks is to leverage existing systems. But if banks go with this "smart renovation" route, Celent says banks must also consider outsourcing.

"Isolating each service element makes outsourcing elements much simpler, yet retains the elements where the bank is less comfortable ceding control," Lodge says.

What banks increasingly need in payments processing is likely to be delivered by a cloud-based approach, Lodge adds.

"Cloud suffers even more in terms of misconceptions and misunderstandings than outsourcing," Lodge says.

Cloud-based services offer significantly lower costs and access to flexibility, such as infinite scale on demand, he adds.

Larger banks have the most opportunities with cloud-based outsourcing. Smaller banks can benefit, but the larger banks enjoy the most savings because they carry a more complex payments infrastructure.

Still, outsourcing is considered "taboo" in parts of the payments industry, Lodge says.

"Unless banks do something, though, the challenges they face today are likely to only grow larger and more complex," Lodge says. "Banks need to take more radical action now to avoid more difficult actions later."

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