# Banking on the Future: Why Payments Transformation is the Key to Success
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2020-12-02
Category: FINANCE
Category URL: https://financedigest.com/category/finance
Meta Title: Banks facing urgent need for payments transformation
Meta Description: Discover why banks must urgently transform their payment systems amidst a surge of competition, digitalisation and changing consumer behaviours.
URL: https://financedigest.com/banking-on-the-future-why-payments-transformation-is-the-key-to-successhtml

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_By **Simon Wilson,** Co-Head, Payments at Icon Solutions_

Standardisation, regulation and technological innovation means payments are well on the way to becoming instant, invisible and free. This is good news for everybody.

Well, not quite everybody. [Banks are now faced with the significant challenge of transforming business models and legacy technology](https://www.financedigest.com/transforming-the-retail-banking-ecosystem-its-all-about-technological-innovation.html "TRANSFORMING THE RETAIL BANKING ECOSYSTEM: IT’S ALL ABOUT TECHNOLOGICAL INNOVATION") systems to meet the demands of a new era in payments.

[Banking is historically a conservative and risk-averse industry](https://www.financedigest.com/the-survival-of-the-banking-industry.html "THE SURVIVAL OF THE BANKING INDUSTRY") where the pace of change varies between sedate and glacial. But now is not the [time to ‘wait and see’ and finding the right approach](https://www.financedigest.com/anti-money-laundering-time-to-take-a-new-approach.html "ANTI-MONEY LAUNDERING: TIME TO TAKE A NEW APPROACH?") to payments transformation must be the immediate and fundamental priority for banks.

**Understanding the need to transform**

Firstly, we [must ask:](https://www.financedigest.com/10-questions-cfos-must-ask-themselves-about-privacy.html "10 questions CFOs must ask themselves about privacy") Why has payments transformation become an urgent priority?

For one thing, increased competition has seen banks’ market share of the global banking and payments industry [reduce from 96% in 2010 to 72% today](https://www.economist.com/finance-and-economics/2020/10/08/how-the-digital-surge-will-reshape-finance). Fintechs, challengers, payments companies and [big tech](https://www.financedigest.com/startups-spring-from-ashes-of-big-tech-purge.html "Startups spring from ashes of Big Tech purge") have entered the playground and started taking banks’ lunch money, demonstrating a level of innovation and agility that incumbent banks are struggling to keep up with.

And of course, [there is Covid-19](https://iconsolutions.com/blog/strange-new-world-what-next-for-banks/?utm_source=iseepr&utm_medium=blog&utm_campaign=FutureBanking). We have seen years, if not decades, of change in a matter of months. The crisis has torpedoed traditional and reliable revenue streams such as cross-border payments to accelerate margin pressure, while driving a rapid shift to online [banking channels and a massive uplift in digital](https://www.financedigest.com/standard-chartered-rolls-out-digital-bank-in-hot-singapore-market.html "Standard Chartered rolls out digital bank in hot Singapore market") volumes.

**Breaking the shackles**

In the context of increased competition and unprecedented digitalisation, the [banking industry](https://www.financedigest.com/are-banks-destined-to-merely-become-infrastructure-providers-in-the-banking-industry-of-the-future.html "Are banks destined to merely become infrastructure providers in the banking industry of the future?") is waking up to the fact that payments are about adding value, not just processing. There is increasing recognition that capitalising on the potential of emerging payment rails, monetising the standardised datasets unlocked by ISO 20022 and launching new external services are [huge opportunities](https://www.financedigest.com/microbial-lipase-market-huge-growth-opportunity-between-2019-2029.html "Microbial Lipase Market Huge Growth Opportunity between 2019-2029") to diversify and retain relevance. The introduction of overlay services such as Request to Pay or the European Payments Initiative are also poised to spur on the move to [digital](https://www.financedigest.com/why-anti-spoofing-fingerprint-technology-is-essential-for-the-continued-growth-of-digital-payments.html "Why anti-spoofing fingerprint technology is essential for the continued growth of digital payments") payments.

Decades of inaction on legacy infrastructure, however, is limiting options. Banks across the globe find themselves lumbered with expensive, inflexible and unreliable technology estates. The ability to respond to marketplace innovation, let alone lead it, is constrained by the need to devote massive amounts of cash, time and ever-dwindling internal resource to simply [keep the lights](https://www.financedigest.com/take-five-keeping-the-lights-on.html "Take Five: Keeping the lights on") on.

It is apparent that doing nothing is no longer an option, but transformation is a nebulous concept. There is no one single [way to effectively transform](https://www.financedigest.com/four-ways-data-and-ai-can-transform-financial-services.html "Four ways data and AI can transform Financial Services"). Different organisations have unique considerations based on their technology, capabilities, resource and culture, and there are various routes to take.

**‘Don’t outsource your heart, your soul…and your spinal cord’**

One option is to make payments someone else’s problem and outsource them. This can be an appealing proposition to get a seemingly perennial cost centre off the books, particularly in the current climate. But [speaking at Sibos](https://www.fintechfutures.com/2020/10/sibos-2020-jp-morgan-ceo-tells-banks-dont-outsource-your-soul/), J.P. Morgan [CEO Jamie Dimon cautioned against the risk](https://www.financedigest.com/senior-leaders-more-at-risk-of-burnout-than-ceos-according-to-new-research.html "Senior leaders more at risk of burnout than CEOs, according to new research") of inadvertently “outsourcing your heart, your soul and your spinal cord.”

For it is true that payments are the beating heart and soul of an organisation. Payments represent [80% of all interactions](https://www.mckinsey.com/industries/financial-services/our-insights/the-digital-battle-that-banks-must-win), providing critical customer touchpoints, data and service opportunities. As for the spinal cord, not much can happen when mission-critical [payment systems](https://www.financedigest.com/covid-19-putting-a-spotlight-on-mea-payment-systems.html "COVID-19: Putting a spotlight on MEA payment systems") go down.

The [big problem](https://www.financedigest.com/with-big-bets-on-musk-these-funds-may-have-a-tesla-problem-in-23.html "With big bets on Musk, these funds may have a Tesla problem in ’23"), as Dimon notes, is that a lot of companies who have outsourced “have no idea what they are doing.”

Banks can find themselves stuck with equally costly, complex and cumbersome alternatives, falling even further behind the innovation curve and [losing control](https://www.financedigest.com/back-to-basics-for-cost-control-as-the-usual-levers-lose-value.html "Back to basics for cost control as the usual levers lose value") in the process. “You [end up paying too much money](https://www.financedigest.com/with-the-end-of-easy-money-there-are-still-serious-opportunities-in-africa.html "With the end of ‘easy money’ there are still serious opportunities in Africa") and then you’re beholden to costs that are going up.” But most importantly, “you’re not even doing a better job serving your client.”  Outsourcing a commodity execution service may well be the right strategic approach for some, but you need to ensure you have the other pieces of the payment process running smoothly and that you really are not leaving money on the table or  developing risk longer term by constraining future choice.

Still, the alternative is not necessarily better. Modernisation needs to happen now, so it is not surprising that enthusiasm for years-long, ruinously expensive and inherently risky in-house transformation projects has dimmed somewhat.

**Best of both worlds**

Yet it is wrong to [say that the only choice is buy](https://www.financedigest.com/sega-sammy-says-it-is-considering-buying-angry-birds-maker-rovio.html "Sega Sammy says it is considering buying Angry Birds maker Rovio") or build. There is a middle-ground. A collaborative approach to payments transformation that allows banks to move quickly to seize opportunities, while retaining control, [significantly reducing](https://www.financedigest.com/white-bullets-collaboration-with-polands-sygnal-association-significantly-reduces-ad-funded-piracy-in-key-european-market.html "White Bullet’s collaboration with Poland’s Sygnał Association significantly reduces ad-funded piracy in key European market") costs and adding value.

This begins with banks understanding their starting point, defining a crystal-clear strategic vision for the role that payments play within the organisation and identifying [market opportunities](https://www.financedigest.com/new-report-of-fuel-conditioning-system-market-with-size-growth-drivers-market-opportunities-business-trends-and-forecast-to-2028.html "New Report Of Fuel Conditioning System Market With Size, Growth Drivers, Market Opportunities, Business Trends And Forecast To 2028"). Indeed, as [McKinsey notes](https://www.mckinsey.com/~/media/mckinsey/industries/financial%20services/our%20insights/accelerating%20winds%20of%20change%20in%20global%20payments/2020-mckinsey-global-payments-report-vf.pdf), “success for banks will depend on thoughtfully assessing capabilities \[and\] determining the role of payments in [market](https://www.financedigest.com/how-to-create-a-pr-plan-and-link-it-to-your-business-marketing-strategy.html "How to create a PR plan and link it to your business marketing strategy") strategies.”

Banks should then consider low-risk and lightweight options for upgrading legacy infrastructure to meet their strategic objectives, while minimising [business impact](https://www.financedigest.com/how-technology-consultants-impact-business-growth.html "How Technology Consultants Impact Business Growth"). Payment platforms based on Cloud-native, [open source technology](https://www.financedigest.com/how-open-source-technology-is-securing-the-future-of-financial-services.html "How open-source technology is securing the future of financial services") promote flexibility, scalability and independence, rather than restrictive and expensive vendor dependencies.

Collaboration also [plays a critical role](https://www.financedigest.com/what-role-does-cyber-security-play-in-digital-transformation.html "What role does cyber security play in digital transformation?"). Finding the right fintech and [service provider](https://www.financedigest.com/can-companies-minimise-their-dependency-on-cloud-service-providers.html "Can companies minimise their dependency on cloud service providers?") partners can allow banks to simplify complexity, reduce manual heavy-lifting and lower their cost base, driving efficiencies that enable resource to be focused on delivering for customers. As Dimon explains, “If I can’t build it better than you can, I’m better off just using yours.”

This combination of strategy, enabling [technologies and true collaboration provides](https://www.financedigest.com/is-your-technology-provider-holding-you-back.html "Is your technology provider holding you back?") a foundation for innovation. It can help drive new revenues, further develop existing business lines and, by moving [payments from cost to profit](https://www.financedigest.com/improving-customer-experience-and-profits-with-embedded-payments.html "Improving customer experience and profits with embedded payments") centre, help banks thrive rather than survive.


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