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Enabling innovation through payments platform transformation

Today, global trends including changing customer demands, new entrants, innovative technologies, regulatory pressure, higher costs and lower profit margins are driving significant changes to the financial services market. Regulations are tightened and compliance costs for financial institutions are increasing, while initiatives like PSD2 have opened up the financial market to innovative competition. In the wake of rapidly evolving customer expectations, new digital standards for financial services are now increasingly being met by a wave of agile fintech companies which leverage technological advances to enhance customer experiences.

How to adapt to the new digital era of banking?

Navigating these uncharted waters, banks are challenged on their traditional value chain by two driving forces: 1) the struggle for banks to retain customer relations through innovative front-end services in an environment where both challenger banks and tech giants are vying for the end-users’ attention, and 2) the demand for increased efficiency and scalability as a way of lowering costs of non-differentiating operations in the back-end.

However, expenditures for maintaining and upgrading existing IT infrastructure are limiting the resources banks can devote to innovation and investments in new digital technologies – effectively driving the need for banks to pursue alternative options.

To thrive, banks need a clearly defined strategy that focuses either on front-end initiatives or back-end operations for leveraging scale and volume, as maintaining both at par and excelling in one is difficult to achieve on their own.

Against this backdrop, many banks are still trying to understand how to best adapt to a new digital era of banking. What strategy should they use to address the key challenges of the industry – and where should they begin the modernization process? Is a new front-end what is needed or should banks consider even more fundamental changes to their back-end operations?

Outdated legacy systems: a core concern

In an effort to balance short-term growth with long-term strategic transformation, banks grapple with a multitude of challenges, including: complex regulations, margin pressures, increased competition, innovative technologies, and the demand for instant payments and more efficient cross-border payments. And on top of this all, banks are challenged by monolithic and inflexible, outdated legacy systems that impede their ability to adapt to the requirements of the new financial era.

To stay competitive and relevant, rather than ‘just compliant’, banks need to find a way to ‘refresh and extend’ these backbone systems so that new digital platforms and technologies can connect to and utilize the immense value in transactional data they possess.

Payments platform transformation: considering the options

As legacy systems appear to have reached their limit when it comes to delivering the flexibility and speed needed to keep up with business requirements, and banks assess their traditional front- and back-end platform architecture, they are faced with the question of what to do next. Should they adopt a ‘build-and-adapt’ approach, buy a ready-made solution ‘off-the-shelf’, outsource the solution to an external party, or opt for a combination of the aforementioned options? Whatever approach they choose, in the end, banks definitely need to act to transform their core systems.

There are a number of different approaches with various pros and cons to consider, ranging from upgrading existing systems, building in-house, buying off-the-shelf, partnering to invent or outsourcing to third party.

Outsourcing could be a viable option

Choosing outsourcing as an approach will help the bank to develop a more service-oriented banking IT infrastructure. It enables them to add new channels and services, phase out old core systems, and it can support their overall strategies. That said, outsourcing comes with some of the same challenges as off-the-shelf products as it requires a certain degree of streamlining of current processes to fit those of the supplier (and other banks on the same platform). Without a structured assessment of current systems and processes, an outsourcing exercise could easily be limited to the idiomatic “your mess, for less” approach.

When properly utilized, outsourcing back-end systems can help a bank to streamline its business operations significantly. It can deliver a new degree of flexibility to the bank, where the bank is free to pick-and-choose new functions and services it wishes to integrate into the payments platform. In addition, transferring the payments processing functions – or part of them – to a specialized third-party provider will help to minimize the complexity, costs and risk related to non-differentiating operations.

Outsourcing back-office payments processing will enable banks to free up resources to focus on core competencies and differentiating activities like customer relationships, advisory services, client acquisition, and value-added services. This is the reason why more and more banks are considering outsourcing as a viable strategic solution to their challenges.

Selecting the right partner – and solution

Core banking functionalities are often referred to as the heart of a bank’s business as they sustain mission-critical operations. As a consequence, entrusting a core function as payment processing to a third-party provider can provoke strong feelings within a bank’s own ranks as well as a sense of losing control of the business. When facing these valid concerns, it is imperative for a bank to understand that outsourcing payments is by no means an ’all or nothing‘ procedure. It is often provided as modular solutions, which means that a bank can choose to be just compliant or it can commit to a holistic end-to-end solutions portfolio. Or anything in-between.

Interested? Download whitepaper

This blog is based on a whitepaper, which examines how a rapidly changing financial environment is urging banks to rethink their business strategies and back-end operations. The whitepaper also presents a string of key elements and options for banks to consider when driving the necessary change to their payments platforms.

Download whitepaper: Enabling innovation through payments platform transformation.

This article was posted in Business developments, Industry insights, Innovation, Regulation & Compliance and tagged as , , , , , .

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