Banks can no longer afford legacy payment systems
Beyond support to individual consumers and companies, huge structural shifts must be addressed to manage the coronavirus recovery. The ability to respond quickly and on a massive scale is the key to protecting lives and livelihoods. Payments are an integral part of this response.
We are therefore seeing unprecedented government intervention. The U.S. is sending $1,200 to every citizen. But welfare systems are simply not designed for this scale, and urgent support is needed to help distribute funds and relief to those who need it.
Real-time payments enable the distribution of urgent funds, such as aid, immediately rather than in a week. Value-added services built on RTP rails, such as Request to Pay, will enable data-driven action and could prove powerful.
Global supply chains have also been decimated. Protectionist instincts alongside practical necessity have taken root as governments come under increasing scrutiny. With ongoing supply constraints due to social distancing the need to source closer to home is likely to drive lower intercontinental trade.
Banks have a crucial role in supporting a rapid shift toward domestic production, whether it be food, medical supplies or PPE. For example, Singapore (which produces only 10% of its food locally) has launched a $30 million fund to incentivize innovation.
It is a brave person who predicts what comes next. But what we do know is that bank profitability, already a significant pain point, will be placed under unprecedented strain from reduced transaction volume, historically low interest rates and increasing default rates.
Reducing costs, and quickly, is essential. With the stakes now higher than ever, we can expect to see a marked acceleration in payments transformation initiatives. Outdated, fragmented and expensive legacy systems are a burden that banks can no longer afford. As McKinsey noted, "banks will need to reflect on how to organize themselves for change, possibly by running some of their payments businesses in a completely different way."
Establishing a clear strategy and target architecture, outsourcing non-strategic elements of the payments value chain and leveraging cloud-based open source technology provide opportunities to reduce costs and increase resiliency, while laying a foundation to adapt to the uncertain times that lie ahead and support consumers and businesses through them.