Among their multiple digital initiatives, in the recent decade, banks and financial institutions have looked to modernize their payment system or infrastructure. Needless to say, a modern payment system can directly improve their cash flow and win long-term customer loyalty.
Hence, it comes as no surprise that the banking sector is relying heavily on digital technologies to modernize the payment system. While “traditional” or legacy system-based payment clearing and settlement systems are no longer equipped to meet the growing customer expectations, the digitalized payment structure is both fast and cost-efficient, thus providing instant gratification to its customers.
Through this article, we shall look at what is driving the new age of modernized payment infrastructure. So, let us get started.
What is Driving Payment Modernization?
In this digital age, financial institutions can no longer keep handling payments the way it was in the past. Branch-based banking or the use of ATMs could have been “normal” in the last decade – but not anymore!
Real-time payments with faster turnarounds are the order of the day. Younger banking customers are looking at multiple channels including mobile apps and websites to complete their payments. These factors have made the payment system a key and critical part of the banking ecosystem.
To meet these challenges, banks and financial institutions can no longer depend on outdated legacy systems and applications. Adding to that, the Fintech sector has severely disrupted payment systems using innovative technologies. We have identified three main factors that are driving the move towards a modernized payment infrastructure, namely:
- Customer experience (CX)
- Technology & innovation
- Industry regulations
Let us discuss each of these three drivers in detail.
The Main Drivers behind Payments Modernization
How are the following three factors driving the move towards modernization?
- Customer Experience (CX) :Without any doubt, CX is the most critical factor that is driving payment modernization initiatives. With banking convenience emerging as the ruling factor, customers are expecting real-time payment-related services from service providers. Additionally, today’s customers are more accustomed to payment transactions using multiple methods including credit/ debit cards, online portals, payment apps, and text-based payments. As more payment methods become mainstream, financial institutions would be expected to include more of the “new” channels (for example, digital wallets) quickly to grow their customer base. Besides its convenience, consumers also expect fast and secure payments across all channels with proper authentication methods. With changing customer expectations, banks require a modern agile and flexible payment architecture that can also offer better security and risk management.
- Technology & innovation :The modernization of any payment infrastructure can only be driven by cutting-edge technology and cost-effective innovations. Payment processing firms can no longer rely on legacy-based infrastructure that is expensive to maintain and scale. A product-centric or “siloed” approach towards payments can lead to an inefficient or inconsistent CX. Additionally, distributed (or fragmented) applications and platforms are slow to respond to changing market needs and in delivering innovative products or services. The future payment ecosystem will be all about real-time and flexible technology solutions that are easy to integrate. Among the latest industry trends, the Open Banking model is transforming payment systems by integrating applications using API connectors. As a result, Open Banking is leading the industry innovation towards the Banking-as-a-Service model (or BaaS).
- Industry regulations : Following the 2008 global financial crisis, financial institutions are facing higher regulatory standards and financial accountability. For instance, the Payment Service Directive 2 (or PSD2) regulation was designed to making safer online payments, protecting customer information, and addressing any payment-related frauds. As open banking becomes more prevalent, payment processing firms are looking to provide more consistent and transparent services to meet their regulatory obligations. Further, industry regulations are driving the shift towards customer-centric payments system and is creating a level playing field for new Fintech companies entering this domain. Thanks to the growing “democratization” of customer data, payment firms need API-based tools and technology to effectively collect, process, and analyze this data for better decision-making. With stricter regulations, financial companies need a payment infrastructure that provides an end-to-end reporting of payment transactions and looks at payment operations as a critical business function. Now that we have learned about what drives the modern payment infrastructure, let us next look at how financial service providers can build this infrastructure.
How Banks Can Modernize the Payment infrastructure?
For a smooth and successful transformation of the payment infrastructure, banks need to have a broader view of the end-to-end business – rather than having a functional or market view. A short or sudden move to the technology path can often make organizations miss their business objectives. An end-to-end business perspective must include all considerations about:
- The existing legacy system infrastructure
- All manual processes
- Regulatory compliance practices
These challenges can be addressed through a two-fold approach that includes:
- Optimizing the payments process
- Building a future-ready payment platform
For optimizing the payments process, a customer-centric payment model is required to take care of the complete customer requirements including:
- Initiating the payment transaction
- Authorizing the transaction
- Clearing or settling the due payment
- Managing any exception
- Tracking the payment transaction
The second part of the modernization process is developing a payment platform that can consolidate multiple systems including the payment channels and the office back-end systems. To support open banking or the BaaS platform, the payment platform needs to have clear points for API integration. Finally, any payment modernization approach should be executed with the following key components:
- Vendor integration that comprises of:
- Ownership of the end-to-end payment-related activities
- Integration of individual business process components
- Development of a buffered architecture between the internal legacy system and the external vendor system
- Microservices that comprises of:
- Plugging in the service-driven payment chain into the overall payment engine
- Integration of independent components that are more resilient than monolithic systems
- Orchestrated payment that comprises of:
- Connecting in-house and vendor components using APIs
- Modeling and deploying various business processes for better platform adaptability
- Cloud architecture that comprises of:
- Modular deployment of microservices
- Scaling and provisioning requirements
Connect with us, and we will help you define the most appropriate payment infrastructure modernization approach for your specific needs.