As digital innovation accelerates, banks are coming under increasing pressure to modernize their payments technology. With merchants demanding more advanced digital payments solutions, the banking sector risks falling behind nimble fintech companies in the development of new payment technologies. To stay competitive, many industry experts are advising banks to consider setting up startups dedicated to building new payment technology.
Why Modernization is Crucial
The payments industry is evolving rapidly, with increased automation and new forms of digital payments reshaping the sector. This calls for banks to modernize their operations, particularly those that are still reliant on older systems. According to Andy Schmidt, the global banking lead at CGI, outdated technology is a major barrier preventing banks from participating in embedded finance, real-time payments networks, and digital asset platforms.
The Risks of Falling Behind
Failure to keep pace with these technological developments can have serious consequences for banks. “Falling behind doesn’t just limit today’s products — it limits the bank’s ability to respond to whatever comes next,” warns Petru Metzger, CEO of Payforge. If banks fail to address their outdated technology, customers may start looking for alternatives, often without the bank even realizing until it’s too late.
Modernization Strategies
Schmidt recommends a multi-pronged approach to modernization. This includes adopting real-time, data-driven architecture, moving towards modular, API-first frameworks, embracing ISO 20022 and structured data standards, and applying artificial intelligence and automation to payment operations.
Considerations for Banks
For banks embarking on a modernization journey, here are seven key considerations:
Think Big Picture
Banks need to view their payments business holistically and define a broader strategic direction for generating revenue and implementing necessary improvements. As Jeroen Hölscher, global head of payment services at Capgemini, explains, “Banks shouldn’t be thinking of one-offs. They need to think about the bigger picture and define their direction.”
Take an Inventory
It’s important for banks to have a clear understanding of their current payments technology landscape. This involves mapping out every integration, vendor dependency, and workaround.
Allocate Resources Appropriately
According to Metzger, banks often spend too much on maintaining existing systems rather than investing in new ones. “It’s a misallocation problem, not a spending problem,” he notes.
Focus on Real-Time Payments
With the share of global transaction volume accounted for by instant payments and e-money wallets projected to reach 32% by 2029, banks need to pay more attention to real-time payments.
Think Futuristically
Banks should anticipate future trends and demands, even if they’re not seeing the use cases yet. Fintech companies, for example, are actively exploring opportunities in areas like buy now/pay later, smaller consumer loans, and gambling sites.
Follow the Leaders
Some banks, such as Cross River Bank, have made payments infrastructure a core strategic bet and have seen success in doing so. Banks can learn from such leaders in the payments space.
Consider a Sidecar Approach
Another option is for banks to create a startup to experiment with new technologies, similar to what NatWest Group did with its digital bank account, Mettle.
In conclusion, the need for modernization in the banking sector is pressing. By taking a strategic, forward-looking approach, banks can ensure they remain competitive in the rapidly evolving payments industry. For further information on this topic, visit Here.
