Instant payments isn't a destination in and of itself
Payments transformation has emerged as perhaps the single biggest opportunity for banks. But getting payments transformation right is no easy task.
With only 9% of banks nearing completion in their transformation efforts, many organizations are reporting a lack of information across strategy and best practices. Myths and misconceptions about payments transformation can stall progress and hamper innovation. There are common pitfalls, but there are ways to avoid them and seize new opportunities.
Myth: Instant payments are the end goal for payments transformation. While the first wave of instant payments adoption was largely concerned with the implementation of the system itself, the focus is now on leveraging instant payment rails to deliver value-added services to customers at speed.
Request to pay, or R2P, is potentially the most valuable of the new services, promising to deliver the autonomy, convenience and flexibility increasingly demanded from financial products. Similarly, QR code solutions built on real-time payment rails have the potential to revolutionize physical, online and bill payments. The potential of leveraging the ISO 20022 data standard to deliver data-driven products and services is also huge.
But to differentiate themselves from the competition, banks must do more than patch up legacy infrastructure to keep the lights on. Expect future banking leaders to build a foundation for innovation now to enable them to seize new opportunities to their full extent in the future.
Myth: Payments can’t be profitable. Payments profitability is undoubtedly challenging, but not impossible.
First things first. Banks must dramatically reduce the ever-increasing total cost of ownership (TCO) by upgrading legacy platforms. Streamlining back-end systems using cloud and open source, to create more responsive and cost-effective platforms, should be a cornerstone of any transformation strategy.
In the long term, this will only take banks so far and it is true that the days of making money just processing payments have gone. With traditional transactional-based revenue model under existential threat, data-driven approaches must be considered.
Banks must also assess the strategic role of payments to their own organization beyond "just" processing. Outsourcing may be an appealing short-term proposition to boost overall profitability, but the long-term importance of payments should not be underestimated.
Myth: The cloud is too risky for payments. With outages making the headlines all too regularly, cloud platforms have come under regulatory scrutiny as a source of systemic risk. This is something of a fallacy. Operational resiliency issues are mainly caused by creaking legacy infrastructure, not cloud systems. And when banks look to upgrade, poor change management has often led to high-risk migrations.
In contrast, cloud providers’ business models are dependent on maintaining security and resilience. Consequently, they dedicate significantly more time, money and brain power than banks ever could.
Of course, due diligence is required to deliver the necessary resilience, security and agility. Repurposing on-premise solutions for the cloud has limitations, in contrast to cloud-native solutions which are specifically built for the environment. In parallel, multi-cloud models are preferable to mitigate damaging dependencies and guard against a single point of failure.
Myth: The only choice is in-house or outsourced. When working on mission-critical infrastructure, building in-house can seem like the "safer" option. Meeting the demands of payments transformation is a daunting task, however, and can lead to exposure and high risks, spiralling costs and interminable delays.
Yet, outsourcing also creates challenges. Under pressure to move quickly, monolithic solutions from a single vendor can leave banks reliant on expensive and rigid approaches that cannot deliver the independence, long-term flexibility and customization demanded by modern bank customers.
Rather than think solely in the binary terms of in-house and outsourcing, hybrid "smart sourcing" approaches can deliver control and flexibility. Collaborative platforms that leverage best-of-breed products and services can help expand offerings, reduce costs and accelerate time-to-market.
Ultimately, myth-busting payments transformation means simplifying complexity. Financial services organizations armed with simple and practical transformation plans that get to the heart of their own business strategy are perfectly positioned for success. With the right expertise, they can enable innovative new customer experiences, at lower costs and with reduced risk, to get ahead of the competition.