Financial institutions have been hesitant to embrace the array of payment types now available, from instant payments to stablecoins. However, these technologies offer more than just a faster means to an end—the operational efficiencies they deliver can have a significant impact across an organization.
In a PaymentsJournal webinar, Nick Botha, Global Payments Sales Manager at AutoRek, Michel Vaja, Head of GTM Europe Cards & Payments Practice at Capgemini, and James Wester, Co-Head of Payments at Javelin Strategy & Research, discussed the state of the payments industry, the benefits of emerging payments, and the approaches financial institutions can take to transform their organization.
The Overall Objective
The payments industry has flourished over the last two decades, and 2024 was no exception. According to Capgemini’s World Payments report, 1.6 trillion digital payments were exchanged globally. Digital transactions saw double-digit growth across all regions, with Asia leading the way.
“It’s quite a dynamic and interesting market, both in transaction volumes but also in value,” Vaja said. “What is stimulating the market is instant payments—we’ve seen more than eighty countries across the world adopting instant payment schemes. Of course, that introduces a number of new use cases for corporate consumers. There has also been the rise of open banking, where there has been strong growth over the last 12 to 18 months.”
The overarching goal is to build a global real-time payments economy, and last year saw significant progress toward that objective. Emerging technologies, like cloud platforms, are becoming integral to the infrastructure that supports the vast transaction volumes processed by organizations.
Another key trend is the integration of artificial intelligence and machine learning into the payments space. AI is making an impact in areas ranging from fraud prevention to data management. This new technology is also closely tied to various regulatory initiatives, which has shifted the broader conversation about the industry.
“Payments regulation over the last 10 years or so has been about encouraging competition, encouraging growth, and bringing new entrants to the market,” Botha said. “In today’s world, the regulators are trying to understand what needs to be in place to put control frameworks around certain types of payments, and especially the technologies that are being introduced to payments.”
A Technology Deficit
The technologies driving the acceleration of payments have created more opportunities than ever for financial institutions, but they have also introduced complexity and uncertainty in many cases.
“It’s exciting on one end to know that the world is getting smaller and smaller from a payment standpoint,” Wester said. “But on the other side, what does that mean in terms of where our products are going to go? What can our companies do? What can financial institutions do? That’s a bit more daunting simply because we are opening so many possibilities.”
The rapid pace of technological innovations means that, despite investing in tech solutions for decades, many organizations still find themselves operating at a technological deficit. In Capgemini’s report, European banking payment leaders were interviewed about their readiness to support SEPA Instant, an EU instant payment rail. The study found that only 7% of these leaders felt their organizations were prepared to comply with the regulations.
“They looked at readiness just from a compliance standpoint, while many in the industry are massively investing in those initiatives to generate more value,” Vaja said. “If (the institutions) are not ready to comply, it tells a lot in terms of how much they are ready to leverage some of those initiatives to enhance their payments customer propositions. A lot of work still needs to happen there.”
A Tough Sell
Shifting to a new payments paradigm can be a tough task because traditional banking systems are reliable and well-established in many countries.
“It’s an expensive, time-consuming exercise to keep up with the times,” Botha said. “For many, it’s this thought process of, if it’s worked until now so it should continue to work. When we speak to businesses that have been around for a long time, they’re very heavy on the head counts that are required to run these processes. It’s hugely expensive, and the reason is they’re running off these legacy tech stacks.”
While the current model may be effective, it will become increasingly difficult for institutions to shift to new payments protocols, such as ISO 20022. The standard offers significant benefits, like richer transaction data, but adoption is not as simple as flipping a switch. Many of the current systems aren’t equipped to handle the extensive data that the format provides.
When it comes to instant payments adoption, the reliability of the U.S. traditional financial system has been a significant barrier. The financial services space has traditionally been risk-averse, which means that tried-and-true payment systems are often valued over innovative systems that could invite risk.
“Financial institutions want to run a cost-benefit analysis and some of the stuff that we talk about in terms of benefit versus cost is a little iffy,” Wester said. “Sometimes we have to estimate and say, ‘We know this is going to be good for you.’ The idea of these financial institutions implementing some of the technological advancements, even though we know they are going to come with benefits from efficiency, it becomes a very tough sell.”
Walking the Transformation Path
The efficiency benefits from payments modernization can unlock significant revenue. However, even as organizations begin to recognize these benefits, they may still be unsure how to proceed. Transformation is often viewed as an expensive, multi-year program fraught with risk.
“The risk aversity of organizations can be a barrier to walking the transformation path,” Vaja said. “Where we’ve seen organizations be successful is when they accept that they need to be in an ongoing incremental transformation state. A key consideration for your bank is to define your organization’s transformation trajectory and your quick wins. Having a clear road map is a key aspect with which we’ve seen many organizations be successful.”
As many companies undertake modernization projects, they tend to focus heavily on the front office, particularly in improving customer acquisition or user interfaces. While these aspects are important, the most dramatic impacts are often achieved by transforming middle- and back-office systems and processes.
“Organizations operate on thin margins, and it becomes a diseconomy of scale if you’re not utilizing automation and the newest technologies to help your business increase margins and generate more revenue,” Botha said. “It’s fundamental to understand what your teams are doing to make sure that your payments are settling, you’re driving up liquidity, and you’re reducing settlement times to generate more revenue.”
Technology Interplay
The payments industry is soaring, driven by a growing number of enablers, including open banking initiatives, instant payments rails, digital currencies, and new payment formats. However, for organizations, navigating this complexity can be challenging, as they must balance innovation with the need to combat fraud and maintain compliance.
“I would strongly encourage bank executives to look at those initiatives and regulations as opportunities,” Vaja said. “More importantly, I would encourage executives to look at how to combine some of those capabilities together to generate value, because combining richer data, real-time money movement, and the payment services offered by non-banks presents a major opportunity.”
As financial institutions undergo payments transformations, they should focus on understanding the interplay of technologies within the organization, rather than searching for a magic bullet.
“You can have the greatest system doing reconciliations, the greatest system processing payments, the best ledger technologies, and the best front-facing applications, but if they are not effectively communicating with each other in real time to allow for the effectiveness of the payment product that you’re offering, it becomes null and void,” Botha said.
To achieve this interoperability, many organizations will have to lean on partners—especially those providers who can lighten the lift on some of the middle- and back-office processes that often seem like a chore.
“Someone told me at a conference that reconciliations were not a very sexy part of the process and I disagreed with him,” Botha said. “What we do is play a part in that process of unlocking the potential for increasing your margins and generating further revenue. AutoRek is helping some of the biggest organizations around the globe with their data difficulties, and showing them how to reconcile effectively.”
