- Key insights: Merchants are increasingly demanding digital payments tech.
- What's at stake: Fintechs are often faster to develop this tech than banks, according to Capgemini.
- Forward look: Payment experts suggest banks form a startup to build new payment technology.
As the
Outdated technology is a major factor limiting a bank's ability to participate in embedded finance, real-time payments networks, digital asset platforms, and other emerging payments capabilities, according to Andy Schmidt, global banking lead at business and IT consultancy CGI.
"Falling behind doesn't just limit today's products — it limits the bank's ability to respond to whatever comes next," Petru Metzger, chief executive of Payforge, wrote in an email. "Left unaddressed, customers quietly start looking for alternatives, and by the time a bank notices, the relationship is already moving."
The solution, however, is multifaceted and includes efforts such as adopting real-time,
Here are seven considerations for banks as they seek to modernize payments:
Think big picture
Banks need to think more holistically about what the payments business looks like for them, Jeroen Hölscher, global head of payment services at Capgemini, told American Banker.
This includes setting a strategy for generating revenue and implementing necessary improvements and upgrades to the architecture. Too many banks are taking a single-minded approach as new payment methods materialize, Hölscher told American Banker. "Banks shouldn't be thinking of one-offs. They need to think about the bigger picture and define their direction," he said.
Take an inventory
Many banks don't have a good sense of their current state of affairs when it comes to payments technology. To solve this, banks should map every integration, every vendor dependency, and every workaround, according to Metzger. "In our experience, most banks underestimate how much institutional knowledge has been lost through outsourcing and attrition. You can't sequence a modernization program without that baseline," he wrote.
Allocate resources appropriately
Most banks aren't short on budget, according to Metzger. The problem is that the money is spent maintaining existing systems rather than funding their replacement. "It's a misallocation problem, not a spending problem," he wrote.
The more banks try to accommodate legacy systems, the more expensive it will be, Dave Scola, U.S. chief executive of Form3, a payments platform, told American Banker.
Focus more effort on real-time payments
Real-time payments are a sticking point for many U.S. banks, where adoption has been slower. Greater attention to real-time payments is especially important given their projected growth trajectory. Instant payments and e-money wallets accounted for just 13% of global transaction volume. But by 2024, that share increased to 25%, and it's projected to reach 32% by 2029, a Capgemini
Even if banks can send and receive instant payments, it's often just for bank-to-bank services, Hölscher told American Banker. Many aren't fully offering the service to clients, so businesses can't pay retail customers and vice versa, for example. In addition to inertia, there's no regulatory push to make instant payments a priority, so many banks aren't, he said.
The problem with this approach is that "if you're not moving, somebody else is," Hölscher said.
Think futuristically
Many banks haven't been so quick to modernize their systems, particularly with real-time payments, because they're not seeing the use cases yet. "This is where a lot of banks struggle; they're not seeing the demand coming from their clients yet," Scola told American Banker.
Fintechs, however, are looking for opportunities in areas like buy now/pay later, smaller consumer loans and gambling sites. Auto dealers are also partnering with fintechs like Dealer Pay, REPAY and PayJunction.
There are a few savvy banks moving into the space. U.S. Bank, for example, uses The Clearing House's Real-Time Payment network to deliver funds to over 6,000 auto and RV dealers instantly. The service is available 24-hours a day, seven days a week, eliminating the days-long delay of traditional ACH payments. However, the auto dealer space remains heavily fintech-driven.
Follow the leaders
Banks that are leaders in the payments space have made payments infrastructure a core strategic bet early and built from there, according to Payforge's Metzger. He offers the example of Cross River Bank, which built an API-driven banking core in-house and used it to power embedded payments, card issuing, and lending for fintechs at scale. The bank, an early adopter of RTP, added FedNow and push-to-card, and recently launched request-for-payment with Plaid as the first partner. Cross River moves more than $1 billion monthly in real-time disbursements across RTP and FedNow alone, he wrote.
Consider a sidecar approach
One option is for banks to create a startup to experiment with new technologies, similar to what NatWest Group did with Mettle, Scola told American Banker. Mettle is a digital bank account by NatWest built for self-employed individuals and small businesses.
Mettle is built on separate systems with different technology from NatWest. That means account holders can't go into a NatWest branch, but instead can call or use online banking to open or discuss their account. Even so, this type of approach can help banks avoid the issue of trying to retrofit outdated technology, Scola said.
