FIs Need To Think Like Tech Firms With Banking Licenses

Digital payments are, in a way, overwriting legacy systems with new “code” for these connected, touchless times. It’s what the people want, but transformation introduces complexity that must be well-managed. Systems choices and related variables help determine that success.

“The ongoing COVID-19 pandemic is dramatically affecting the digital payments industry,” according to PYMNTS latest FI’s Guide To Modernizing Digital Payments, done in collaboration with Red Hat. “Mobile payment company Square reported that only one-third of its transactions were conducted via cash in August even though cash made up 41 percent of transactions during the same month last year. Digital payments made up the difference. It also reported that 5.4 percent of its merchant partners were cashless in February but that the share rose to 13.4 percent by August, a stunning example of the global shift to digital and contactless payment options.”

Making appropriate choices and streamlining integrations then become the mission, and financial institutions (FIs) are partnering with FinTech left and right to get it done.

Reimaging The Tech Perspective

In the first place, what we often refer to as “traditional” banks and FIs are getting harder to find as digital tools from artificial intelligence (AI) to cloud-based processing take root. That’s the way things are headed, not just in banking but in the wider world of human experience.

Heavily invested now in the mobile revolution, banks should start thinking like tech firms, too.

“Incumbent banks … need to reimagine their perspective on technology. Traditionally, technology has been viewed as an operational matter and disconnected from the products and services offered by the bank. Increasingly, challenger banks view themselves as technology companies with banking licenses,” Ramon Villarreal, global architect, financial services at Red Hat, told PYMNTS.

Villarreal noted that “[Technology] is how value is delivered to their customers. This is reflected in the distribution model. Banking services are delivered primarily in the digital channel. This reduces the number of systems required to run the bank. If incumbent banks want to compete, they need to think about who they hire and simplify both the services they offer and the channels that they distribute them through. Invariably, this will reduce complexity in the overall technology estate for the bank and free it to make the necessary investments in the people and systems that remain.”

And because digital payments face obstacles of their own, like slow compliance checks and processing times, plus the added cost of lost opportunities, the November FI’s Guide To Modernizing Digital Payments states that, “It is … imperative that banks, credit unions and other FIs modernize their payments infrastructures to provide quicker, cheaper payments experiences, [exploring] the various hurdles obstructing payments as well as how automation and cloud-based systems can help FIs overcome them.”

Legacy Not Worth The Upkeep

Banks and FIs need to prioritize now more than ever, and there’s wide agreement that it should begin in with automation and cloud-based systems made for today’s financial flows.

“Banks can spend up to 80 percent of their entire IT budgets on maintaining legacy technology,” the new Guide states, adding that “large banks can spend up to $300 million a year on updating this software to meet regulatory requirements.”

That can’t go on, and it won’t. The digital transformation train departed early in 2020 for good, and banks that refuse to think and act more like tech firms may miss it altogether. For a majority of FIs, however, they’ve gotten the message and are moving in the right direction.

“The decision to upgrade is ultimately one that every bank will have to make for itself. The payoffs of cloud banking,” per the Guide, “along with automation of compliance and dispute resolutions, could ultimately make the entire modernization initiative worth it.”