Why payments providers should modernize their payments infrastructure

Payments industry innovators share leading practices and lessons learned while undergoing transformational efforts in a post-pandemic world.

Key takeaways

Key trends driving payments modernization:

Customers

Today’s customers are more sophisticated and, as a result, expect speed, convenience and seamless end-to-end user experiences across channels. The global pandemic has only accelerated the shift toward a cashless environment and has encouraged customers to try contactless technology for the first time. Once these customers experience the time and cost savings offered by digital payments, they are unlikely to return to legacy or paper-based processes. 36.7% of webcast participants noted new digital capabilities, a key trend, as having the biggest impact on their organization, while 36.8% also cited faster payments as being a key driver in the push toward payments modernization. Building consistent, secure and scalable capabilities across corporate, commercial and consumer channels is a key focus in order to enable agile delivery and achieve discrete, achievable payments modernization goals.

Regulators

The new level playing field for FinTech firms is fast-tracking customer-centric banking. At the same time, regulators are scrutinizing payments systems for privacy, security, resiliency, resolution planning and compliance of end-to-end reporting.

Innovation

36.2% of webcast participants distinguished technology transformation as a key driver toward payment modernization at their organization. As the market moves toward an open-banking model, sharing and integrating via application program interfaces (APIs) demands flexible, real-time and easy-to-integrate solution architectures. Traditional players must invest to compete in future phases of payments, such as banking-as-a-service (BaaS), to provide end-to-end consistency and a seamless customer experience.

Legacy payments architecture — pain points:

It’s complicated

Legacy payments architecture, constrained by application fragmentation, high cost of ownership and inability to scale, has made it increasingly challenging to meet evolving client expectations with speed.

Fragmentation

The disparate number of systems and applications leads to inconsistencies in data and customer experience. More than half of webcast participants noted having greater than 6 applications in their current payment ecosystem, with over 20% having greater than 10 applications. This fragmented landscape can lead to issues such as a lack of data standardization, which can make it challenging to track and trace transactions.

Slow, cumbersome and expensive

The monolithic architecture that characterizes most legacy systems does not allow for agile responses to changing market conditions, regulatory mandates or cybersecurity threats. Transitioning from these complex legacy systems to a modern, dynamic architecture can come with a big price tag that can be hard to justify without a detailed business case.

Features of modern payments architecture:

Orchestrated payment capability

The use of APIs to connect vendor and customized in-house components can eliminate build-vs.-buy friction and improve platform adaptability by deploying processes outside of vendor packages. While only 21.7% of webcast participants said their organizations presently have an orchestrated payment capability, panelists Irene Katen and Stacy Rosenthal cited orchestration as a key to a successful transformation, with Katen adding, “While we have a workflow engine as part of our middleware, we have built in-house the orchestration layer and associated components because there’s not a vendor that’s going to be able to deliver exactly what every bank needs.” Katen emphasized the importance of having that centralized data store for all the payment activity across the channels, types and clearing mechanisms so that the channels would consume services and can pull the transactions from one source vs. multiple applications.

Vendor integration

It’s important to partner with a strategic vendor that provides industry-standard payment formats (ISO 20022) and processing while maintaining a flexible payments ecosystem that does not solely rely on the vendor for all changes. 45% percent of webcast participants said they already employ vendor integration strategies. By necessity, most payments architectures will involve both vendors and customized in-house solutions. Putting these pieces together effectively is crucial to success. “It was critical to have a provider that could be the centralized payments processing hub across all payment types”, panelist Rosenthal commented. “We really wanted to have the vendor focused on the processing and some of the core routing capabilities, but had some tenets around the program to focus on configuration and really have the customization in-house.”

Microservices

Breaking the payments value chain into distinct components allows for each piece to have its own workflow orchestration and rules. Modular services can be turned on and off easily, and can be integrated quickly into new platforms, bolstering resiliency and ensuring consistency across the engine.

Cloud-based

The shift to cloud-based architecture allows organizations to scale and provision instantly based on shifting business needs. This provides significant flexibility and operational efficiency.

Benefits of modern payments architecture:

Decreased costs

The creation of common services allows providers to reuse solutions across different payment channels. Standardization limits the need for costly vendor customization requirements. Greater agility allows the organization to implement modifications to the ecosystem more effectively. Rosenthal goes on to explain, “Very tangibly, a customer can see when you launch a service, but they often aren’t aware of things that are happening in-house that allow an organization to lower the total cost of ownership, mitigate risk and improve the value.”

Enhanced resiliency

Creating modular components that can work independently and can be plugged into an orchestration engine allows for flexible deployments and greater resiliency.

Speed to market

Common services make it easier to test individual components and integrate them into an orchestration. This allows for faster deployments of capabilities to channel partners — and their customers. Rosenthal shared as part of Santander’s journey, “Some of the benefits of working with a modern infrastructure is definitely the speed to market. The faster deployment does give you the value that you can then create to deliver capabilities to your channel partners who are looking to offer more fields of information to their customers.”

Strategy and implementation considerations:

Institutional needs

When it comes to the payment life cycle, moderator Ritesh Kirad, Managing Director, Ernst & Young LLP emphasized that modernization is a journey, not a destination. He recommended stepping back and thinking about unique business needs and requirements. One may ask: do you want capabilities to lie inside the processing platform or hub, as part of middleware, or an integration layer? The architecture specifics will likely depend on existing in-house capabilities and resources, as well as the organization’s priorities. As panelist Katen put it, “There is no out-of-the-box vendor solution that is going to meet the organization’s requirements, so you want to limit vendor customization and anticipate building that yourself to meet the needs of your organization.”