6 minute read 19 Mar 2020
Woman depositing check by phone in the cafe

Three forces pushing banks to modernize payments infrastructure

Authors
Rodrigo Dantas e Silva

EY Americas Payments Leader

Decisive leader. Skilled strategist. Passionate about transparency in the payments industry. Especially interested in technology’s effects on industry traditions.

Jennifer Lucas

EY Americas Payments Consulting Leader

Industry veteran. Payments trailblazer. Visionary strategist. Driven innovator who holds several patents. Passionate about the future of payments and a globally connected ecosystem.

6 minute read 19 Mar 2020

Customer expectations, technology and regulations demand that financial organizations update payments systems before the next wave of disruption.

Payments systems have always been complex and a critical part of the banking world. But over the past decade, dynamic changes within payments have created even greater challenges for financial organizations and driven the need for payments transformation. In particular, more complex regulation, advancing technology and demands from customers to create a consistent, seamless experience across multiple channels are pushing banks, FinTechs and payment processors to invest heavily in payments modernization. Upgrading infrastructure to address these challenges, while keeping costs under control, requires financial organizations to first understand the drivers of change.

1. Technology

The legacy payments architecture of most financial institutions is inflexible, partly because of dependence on multiple vendors. This both increases the total cost of ownership and creates several challenges for institutions:

  • Platforms and applications are fragmented.
  • Monolithic architecture does not allow for nimble changes.
  • Bringing changed or new products and services to market takes a long time.
  • Financial organizations depend on multiple vendors, all with aging systems.
  • There is high risk of systems inability to respond to regulatory mandates and cybersecurity and environmental threats.

Legacy monolithic payments architecture

Legacy monotheistic payments architecture

In essence, legacy systems simply lack the agility and scalability required to respond quickly to changing customer demands. Modernizing payments infrastructure to meet these demands is fast becoming a competitive imperative for financial organizations, particularly as new payment channels emerge and gain traction. Unless these organizations can quickly and seamlessly integrate these new channels, they will struggle to retain and grow their customer base.

2. Customer experience

Today’s consumers demand convenience in almost every aspect of their lives. The rise of on-demand services across mobility, entertainment, food and beyond means payments must also evolve to enable these real-time transactions. Customers want to make and receive payments at any time and via any channel, and they expect funds to be transferred in real time.

But they aren’t ready to sacrifice security for seamless experiences. Customers have increasingly high expectations around strong authentication measures across payment channels, and they expect all fraud, risk management and exception management activities to be in place. They also value consistency of experience and information across channels.

Innovation 

Innovation is reshaping payments on a scale and at a speed seen in few other sectors. Within just a few years, advancing technology has not only changed how we pay, but also expanded the pool of payment players far beyond the financial sector. Many new providers bring superior understanding of the customer experience deployed in sectors such as retail, technology and entertainment.

The innovation transforming payments is also increasing the complexity of the payments environment. Systems must be able to layer in multiple vendors to facilitate certain payment capabilities. And nimble, modern and scalable architecture is needed to provide the “plug-and-play” experience required as the move to open banking and the emergence of the banking-as-a-service (BaaS) model drive further sector disruption.

Modern payments architecture

Modern payments architecture

3. Regulation

Following the financial crisis of 2008, regulators have held financial organizations to a new, higher level of accountability. Recently, key regulators have appeared to indicate that financial organizations not only need to provide end-to-end payments reporting, but also must demonstrate end-to-end payments operations that treat critical functions as a business.

At the same time, the growing adoption of open banking and implementation of  the Revised Payment Services Directive in Europe are driving a move toward  standardization to govern the consistent use of application program interface (API).  In the EU, the Berlin Groupa collection of more than 40 financial organizations, associations and payment service providersis leading the creation of interoperability technical standards and harmonization initiatives, and we expect to see similar activity in the US and other markets.

For financial organizations, meeting these obligations will require payments systems with the ability to track transactions to provide the consistency and transparency regulators demand and the options customers expect.

Customer experience regulation innovation

An end-to-end business perspective drives successful transformation

Customer demands, innovation and regulation have been reshaping payments since the very first transaction was made. But the impending disruption of BaaS is creating a new urgency for financial organizations to modernize architecture at speed to take advantage of emerging trends while controlling costs. With both existing and new rails requiring maintenance and updates, now is the time to build payments infrastructure with scalability and flexibility fit for the future.

But investing in new systems and processes before optimizing those already in place is a waste of time and budget. Modernizing payments starts with optimization of legacy systems through an end-to-end system analysis that identifies key metrics, including costs, transaction volumes, processing times and other key requirements that may vary across segments.

These costs and metrics will highlight priorities for improvement, and ultimately enable each bank to understand customers’ requirements along the entire payment journey and across every channel. This can allow financial organizations to develop shared infrastructure and processes to exploit commonalities across these paths and channels while building in flexibility to accommodate key differences. A proven framework that outlines how to modernize legacy systems can help financial organizations make improvements now and be ready to embrace the enhancements and technologies that help build truly differentiating customer experience.                                                                                                               

The primary authors for this article are Mike Chamas, Manager; Ritesh Kirad, Payments Technology Leader; and Patricia Partelow, Managing Director.

Summary

Customer expectations, technology and regulations are driving financial organizations to modernize architecture with the scalability and flexibility fit for the future. Driving successful transformation starts with optimizing legacy systems through to an end-to-end business system analysis.

About this article

Authors
Rodrigo Dantas e Silva

EY Americas Payments Leader

Decisive leader. Skilled strategist. Passionate about transparency in the payments industry. Especially interested in technology’s effects on industry traditions.

Jennifer Lucas

EY Americas Payments Consulting Leader

Industry veteran. Payments trailblazer. Visionary strategist. Driven innovator who holds several patents. Passionate about the future of payments and a globally connected ecosystem.