Six trends impacting payments modernization in 2023

The evolving payments landscape in commercial banking is a continued area of focus for financial institutions (FIs) and vendors. Broadly described as infrastructure modernization efforts, FIs in particular are being challenged to keep up with payments volume and data integration needs, technical innovations, and the growing need for real-time capabilities.

Commercial clients increasingly demand market-leading payments solutions and products and are willing to switch or even bypass FIs by engaging directly with fintech startups to attain them. All of this has meant greater competition and FIs needing to seek go-to-market solutions they can bring to clients as quickly as possible. Legacy underlying infrastructure is one of the biggest hurdles in accomplishing this goal.

Aite-Novarica Group and Finastra have partnered to survey over 100 leading global banks to determine the key forces impacting payments modernization efforts. The six trends outlined below provide a high-level overview of the challenges FIs are encountering, technical innovations most critical to disruptions in payments infrastructures, and solutions for maintaining competitiveness in a demanding market.

Disintermediation

FIs are increasingly concerned about corporate clients seeking payment products and services with third parties, which ultimately means disintermediating banks for critical business processes. An alarming percentage of payments have already moved to fintech firms. Almost half of banks report that they believe that 10% or more of their payments volume has already moved to a fintech provider. A primary driver of this trend is that corporate end users need more robust services, but banks are having trouble updating legacy systems to accommodate new technologies and capabilities. Corporate clients are demanding more from FIs are choosing providers that better suit their needs when their FI cannot.

Client Demands

Half of banks believe that their lack of robust services is preventing acquisition of new clients. 40% of banks report technical challenges integrating with legacy systems to be a major obstacle in introducing new products and services. Additionally, half of banks say that system scalability is lacking. Meanwhile, corporate clients continue to become more demanding in terms of wanting payment choices, automated processes, and data messaging capabilities. Increased client demands coupled with technical challenges associated with legacy systems pose a significant challenge for FIs.

Real-Time

The demand for real-time capabilities continues to grow, and most banks project volumes to increase beyond current levels. Yet, legacy infrastructure continues to plague modernization efforts: 57% of banks report it is extremely or very challenging to enable real-time payments through legacy systems. Many banks have had difficulty navigating the technical innovation required for real-time processing and settlement or have had difficulty securing the investments required to make real-time payments possible.

Investing in New Technology

A majority of banks expect their significant investments in payment modernization to stay the same over the next several years. In many cases, banks are increasing these critical investments since the modernization journey is a complex, multi-year process with no finite end. Modernization must be broken into smaller parts to be successful, requiring prolonged and consistent investment through the entire process. With the demand for better payment capabilities continuing to increase, many FIs recognize the urgency to invest in payments technology. Those banks that are not investing will fall behind.

Cloud Technology

Unlike several years ago, cloud technology has become normalized and is top of mind for most banks, with 91% of banks already completing a transition of payments processing to the cloud or reporting plans to do so. Much of this comes down to Payments-as-a-Service (PaaS) offerings that focus on moving away from owning to consuming the payments processing software and the underlining IT technology on which it is running. Many banks see PaaS offerings and other cloud-based payments solutions as a means to more efficient and cost-effective payments modernization.

Partnerships

And finally, given the stakes, required investment, and time, there are significant risks associated with modernizing payments products and solutions. Cost hurdles and technical complexities, among other challenges, can hinder modernization efforts, furthering risk of disintermediation or losing clients to other FIs. Payment solutions vendors can provide experience and the technical expertise necessary to streamline the process and ensure continued investment. By adopting vendors’ recommended best practice workflows and business rules, FIs can significantly improve their operational efficiency and reduce complexities. As a result, vendor partnerships play a critical role in the payments modernization landscape.

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