This article was co-written by Venugopal PSV, senior director of global cards and payments practice, and Jeroen Holscher, head global payments and cards practice at Capgemini.
We have seen a dramatic change in the way people choose to pay. There has been substantial growth in the digital payments markets over the last few years, which only promises to continue. However, as global payments grow, the underlying fault lines will
become bigger. For the payments business to remain sustainable, a more holistic approach should be taken to make improvements and achieve success.
According to the World Bank, over
two-thirds of adults are now making or receiving digital payments, in part driven by the Covid-19 pandemic. Capgemini, projects that these developments in payments will continue, largely fuelled by significant growth in Asia-Pacific. The region will contribute
to more than 50% of global non-cash transactions by 2026.
On the surface, this proliferation of digital payments can be seen as a net positive as its size continues to increase. However, the current payments business systems are proving to be unprofitable for payment providers and, therefore, are unsustainable.
A more holistic view is needed to see and address the fault lines.
Legacy systems are difficult to change
An initial challenge for those in payments is coping with legacy systems, many times decades old. In our report,
‘Winning with SMBs: Optimizing Technology and Data to Drive Deep Engagement’, we found that the continued reliance on outdated systems is stifling digital transformation. More than 80% of payment executives agree
that significant retooling is needed to integrate and interoperate new technologies with platforms of varying ages and formats.
The challenge comes down to one of the greatest roadblocks to innovation in the current landscape:
technology spend management. We have seen payments technology upended in recent years, with increasing moves towards hubs, RPA, cloud, APIs, AI, and DLT. All of these and others offer a variety of options to the consumer. On the other hand, the renewal
of payment systems to access and leverage these technologies presents a significant expense for service providers.
Profits are under pressure as there is a need to adopt these tools to keep pace with competitors. However, each new piece of technology comes with up-front costs, and the need to ensure it is compliant with the stringent regulations of the payments business
which can take time and is costly. Although, it should be noted that upfront investments can be outweighed by the long-term benefits.
Embedding fintech offerings into overall payments propositions is being looked at as one of the solutions to cost management. They can offer value added services to banks when they are unable to build their own system from scratch - examples of these technologies
are APIs, embedded payments and BNPL. This can often make financial sense for banks as it can be less costly at first while using fintechs expertise on this specialised area.
Data quality: getting the right blocks
A composable payment hub’s effectiveness depends on quality data. Costs often stem from accommodating corrections, third-party confirmations, and cleaning up the aftermath of poor decisions. Today, payments firms work with numerous messaging standards that
include several formats not built for the digital age.
Today’s financial regulations require banks to use more exacting, data-rich, quickly-tracked messaging to comply with regulatory requirements. ISO 20022 will harmonise data-driven platforms and connect payments ecosystems, enabling companies to take advantage
of change-as-you-go payment formats or plug-and-play third-party offerings – all necessary to sustain and future-proof business.
The timing is right for payment firms to select and assemble building blocks in various combinations to satisfy customer requirements via layers of services and capabilities on a composable, API-powered platform.
Compliance remains an issue
An obstacle in the use of external firms is compliance. The onus still falls on the banks, meaning there are extra costs associated with ensuring any services used conforms to the more rigorous regulatory expectations.
Banks will still want to be able to work with fintech firms as they could offer a more convenient solution than building themselves. However, as part of the proposition, orchestration not only from a technology perspective, but also from a value and a commercial
propositions are needed.
Compliance costs also pose a challenge to technology upgrading. Regulators and scheme operators continue to drive standardisation, and pursue stability, leading to continued regulatory addressing - for example, to meet PSD2 and ISO 20022. In addition to
this, budgets must reflect any new technology meets regulatory standards and multi-market nuances.
Cost cutting: bringing payment spend management down
While spending on keeping pace, you leave yourself less room to invest in future technology. This means more money is spent on ‘run’ and little is left for ‘change’. This stunting of innovation compounds and perpetuates some of the above challenges. It is
essential to be able to manage the investment and focus on payment technology to remain competitive.
The cost of payments is often still high, and yet the attractive nature of this market means that bringing it down is paramount to remain sustainable. For many financial institutions, this means that the profit margin for payments is shrinking, putting the
product under profit and loss pressure.
Given all these challenges, the business case for significant investment and resources becomes less clear. To remain competitive, and with future technologies like quantum computing on the horizon, solutions to the current payment structure need to be available.
The benefits of platformication and leveraging data
Banks still have the opportunity to change their approach for a more sustainable future. When considering the best ways to solve this, it is important to take a step back and assess the overarching state of the system. Rather than examining one aspect of
payments, adopting a wider scope allows firms to create a more cohesive and connected approach to their internal architecture and its place in the broader landscape.
The first step is to envision what is wanted from payments, and then take a wide look at how it currently is. From there, financial institutions will be able to look at individual sections with an understanding of where they fit in the wider picture and
make improvements from there.
A further step to lower the overall cost of payments is to develop a utility model. This approach deploys efficiency as a primary principle to funnel resultant savings into value-added propositions.
This exercise should address key aspects such as proposition, product, market price, platform, people, partners, and plans needed to achieve goals.
A more connected payments system needs players to:
- define their payments strategy;
- identify their scope of play in the market;
- identify any outlying impediments within the system and address these;
- adopt a utility perspective on payments to drive down their cost;
- Identify external partner options and fine-tune role share.
Only through looking at payments as a whole will we be able to fix its individual parts – creating an enduring composable system for a more fluid future of connected payments.