John Barber, VP Europe, Infosys Finacle
Change is on the horizon within the banking sector, particularly when it comes to payments. There are a number of factors driving disruption and pushing banks to modernise their payment systems.
One of these is the rise of cashless economies. Countries all over are moving from cash-based transactions to becoming cashless. Urbanisation and technological advancements, along with the widespread use of mobile devices and smart applications, have fuelled the surge in online and digital payments. Cash is gradually giving way to alternatives like cards, e-wallets, tap-to-pay, and mobile-based methods as payments become increasingly digital and instantaneous.
Fintech firms are also introducing innovative payment products, capitalising on their digital expertise and unique business models. At the same time, major technology companies with vast global user bases are entering the payment landscape with disruptive models, intensifying competition in this space.
These developments are in response to evolving customer preferences and expectations, which are toward fast, seamless, contactless, one-click, and effortless payments. Studies suggest that by 2025, over half of the global population will use mobile wallets. This shift is being driven by millennials, who are quite accustomed to this digital lifestyle and expect banking transactions to be as smooth and frictionless. When dissatisfied, these customers are much more likely to switch to a different bank that offers hassle-free onboarding.
Corporates are also rapidly digitising their operations, adopting digital commerce and incorporating digital payments into their value proposition. Unsurprisingly, the transaction value of the global digital commerce market is projected to surpass $8.9 trillion by 2027.
Geopolitical power shifts are reshaping the digital payments landscape, moving it from country-specific silos to alliances aimed at facilitating seamless payment corridors and transfer mechanisms. Initiatives by regulatory bodies and industry leaders seek to modernise payment systems, reduce risks, enhance security, and standardise processes through the adoption of ISO 20022 as an industry-wide standard. The increasing interest in digital currencies foreshadows the future of digital payments, with reports indicating that 86% of central banks are contemplating central bank digital currency (CBDC) adoption. Countries like Sweden and Norway have been testing CBDC prototypes, while others, including members of the Euro Area and the UK, are still in the research phase.
Lastly, emerging technologies such as cloud computing, Open APIs, and distributed ledger technology are laying the groundwork for novel business models in payments, facilitating the transition to cashless transactions.
The modernisation of payments is an ongoing journey. In the last few years, the pace of change has accelerated, and it does not seem to be slowing down. This has kept the payments business engaged in adopting new technologies. However, it is a highly complex and sensitive process. One misstep can jeopardise a bank’s reputation and result in broader consequences, such as regulatory penalties. As well as this, most banks refrain from extensive modernisation efforts, often resorting to quick fixes.
To succeed in the digital economy, banks must reimagine their payment strategies and establish the necessary technological foundations, which should possess the following attributes:
- Open architecture powered by a range of APIs to encourage collaboration and participation in an open payment ecosystem, fostering innovation.
- A payment processing engine capable of handling transactions at a population scale, as more regions and countries support digital initiatives, leading to exponential growth in digital payments.
- Enterprise-class processing capability to seamlessly manage payments across multiple business divisions, including retail, corporate, private banking, and wealth management, encompassing the entire payment lifecycle.
- Comprehensive real-time processing capabilities with seamless connectivity to enable real-time payment processing and settlements.
- A cloud-native and innovation-centric approach to process data and gain real-time insights, enabling banks to understand their customers and drive innovation deeper into their banking services.
Implementing a payments technology framework with these considerations in mind will allow banks to improve control over their payments operations on multiple fronts. This will help lead to frictionless customer experiences, efficient management of compliance costs in a highly regulated environment, improved scalability, and rapid innovation within the expanding realm of real-time payments.
This can be achieved at lower technology maintenance costs while establishing a solid foundation for banks to seamlessly integrate their services into the customer’s primary journey.
