What does it take to win the payments transformation race?

The new report “The Payments Transformation Race: Criteria for Success” from Aite and Icon Solutions identified that banks that have a clear and robust payments transformation plan are more profitable than their competitors – effectively widening the gap between the winners and losers in the transformation race. So how does a bank become one of the winners?

The current challenges

Payments transformation is being driven by the need to leverage real-time payments, deliver new products and services quickly and to significantly reduce costs. However, given the complexity of existing bank architectures and the prevalence of aged legacy platforms, payments transformation will be one of the biggest challenges facing banks over the next five years. With that said, the risks of inaction are clear. 68% of banks feel that not modernising payments would lead to the loss of clients, prospects and data.

One of the most startling statistics underlining the need to transform is that 63% of top tier banks are reporting that they are either close to or below profitability levels. Only 18% of banks report that they are still able to charge at a level they expect to. Banks need to make significant changes to help them recoup lost margin, while identifying fresh avenues to generate new revenue.

Embrace technology that can drive down TCO

Looking deeper into the costs associated with payments, 95% of banks identified hardware (infrastructure) as part of the payments TCO calculation but also as the biggest area of expense. Investing in new transformative technology and hardware agnostic payments platforms can simultaneously reduce TCO and provide the tools to drive new sources of revenue growth.

Many banks are already seeking to offset this by gradually moving to cloud. Cloud computing infrastructure is ideal for payments where volumes can vary wildly, and resiliency in a 24/7/365 world is key to both customers and regulators. Open source technology coupled with an agile development approach also enables banks to develop more quickly and more cheaply than ever before - with much less reliance on external vendors.

Leverage the ‘true’ value of payments

What is clear, is that banks can no longer rely on a revenue model driven just by transactions. In today’s world, it is the data accompanying a payment that holds the real value. Using this data will enable banks to improve their services, deliver more appealing products and identify cross-selling opportunities. In fact, research by the McKinsey Global Institute shows that Payment Services Providers can use Machine Learning to increase revenue from existing customers by as much as 10-15%.

However, while the need to shift towards a data driven model was recognised within the researched group, only 18% of banks are actively doing so. While GDPR regulation prevents banks from being too creative with payments data, the information gained by simply analysing the spending patterns can provide deep insights in consumer behaviour and merchant preferences coupled with partnership opportunities.

Collaborate with partners

Almost all the top-tier banks recognised the value of collaborating with partners. These partnerships can not only relieve some of the demands on internal resources but can also bring expertise and perspective to help banks execute more effectively on their transformation efforts.

What was also evident from the research was the link between the banks who prioritised payments transformation and the value they perceived from partners. Their collaborations were with partners who could provide strategic benefits, especially when it came to payments strategy and roadmap development. These banks have the potential to realise a much quicker ROI on their payments transformation investments.

Self-assess and benchmark

In collaboration with Aite, Icon has also produced a Payments Transformation Scorecard. This online tool is a great way of assessing where your organisation is on the transformation journey. It helps banks recognise opportunities for further development and enables them to start developing a more focused roadmap of priorities, perhaps starting with identifying the gaps between payments architecture and or target models, or transforming incrementally to deliver value quickly at a lower cost and a lower risk

Buckle in for the ride

The approach needs to be considered carefully and strategically. Decisions made now will have a long-term impact on the success of a bank. Let’s not forget that payments, both retail and corporate, are at the heart of a bank’s relationship with customers. ‘Quick fixes’ like out-sourcing need to be considered carefully. While this may be the right answer for some, for most, simply outsourcing a problem to another provider because, for example, their solution runs on the cloud is not always the right strategic response.

Success in payments transformation cannot and will not be effectively measured over the short term. While there are some important short-term gains, success will be determined by how the payments infrastructure and capabilities hold up over time, and whether they provide a path for revenue and growth over the next decade. The good news is that, as the report shows, those who succeed are those that will reap the greatest rewards.