The payment landscape is constantly evolving around the
globe. For example, digital wallets have been adopted as much of the world
follows what has been taking place across Southeast Asia. Buy now, pay later
(BNPL) is growing rapidly and contactless payments continue to soar as we accelerate
the transition to mobile first and online payments. Governments worldwide are
even exploring the use cases for central bank digital currencies (CBDCs). China
may be the global CBDC pioneer, but central banks in the US, Norway and the UK
are exploring this concept as well.
Seize the opportunity
What’s classed as an ‘alternative payment’ method today is
likely to be mainstream soon. A recent survey by Cornerstone Advisors found
that a quarter of Gen Zers are crypto investors, and nearly three in ten plan
to invest in 2022.
By 2030, 60% of global consumers will have made a
transaction using an asset class other than fiat currency, according to IDC.
This suggests that eight years from now, hundreds of millions of consumers will
be actively using alternative digital payment methods such as crypto,
stablecoins and digital assets to make their day-to-day transactions.
Today’s market offers a great opportunity for banks,
fintechs and brands to support these newer payment methods. FIs are currently
competing with e-commerce, fintechs, brands, telcos and others for share of
wallet.
In order to win, incumbents must think differently and
respond rapidly to market demands and keep up with evolving end-user
behaviours. But with a growing number of asset classes such as the
aforementioned digital currencies, gaming currencies and even brand loyalty
points driving new digital commerce, how will traditional FIs’ payment
technology keep up and allow for the innovation needed to preserve market
share?
Breaking free from legacy tech
In 2020, 40% of global consumer payments were handled by FIs
and 60% by non-FIs. While the fintech disruptors of the world are speeding
ahead and taking a large share of the market, FIs are restrained by legacy
technology.
Payments workflows and technology design in legacy platforms
are steeped in traditional value definitions, which creates huge challenges
when pursuing innovative new payment methods. Often the new ways to pay may
require additional integrations and technology. Legacy tech often requires the
extensive use of piecemealed systems, wrappers and processes to create solution
sets and update products and services.
In fact, according to IDC, over 70% of traditional paytech
infrastructures aren’t built to handle payments of the future. In turn, these
traditional financial institutions are prevented from offering innovative
payment solutions that not only cover real-time payments schemes, but also
varied digital asset options.
Maintaining legacy systems is costly and often influences the
budgeting process away from new tech. Global FI spending on existing payments
technology is predicted to double to $80.3 billion in 2030, up from $39.7
billion in 2020. It’s clear that financial institutions are investing, but
they’re investing in maintaining their dated platforms – and it’s impacting
their ability to innovate and compete in an increasingly competitive industry.
All of this has led to a convergence between fintechs and
FIs. A convergence that is likely to continue, whether through partnerships or
acquisitions, until primary tech stacks allow for the innovation needed to
maintain and grow share.
Having the technological know-how
Technology platforms that deliver a flexible approach to
payments optimisation across a huge range of existing and future asset classes
are currently in demand. This includes platforms that can quickly configure new
payments products and harmoniously interact with other ecosystem services, such
as data and security, across any asset class. By updating their ecosystem, FIs
will be able to adapt and upgrade and hence allow for innovation that is
required to meet consumer demand.
Embedded finance is increasingly in demand and the industry
needs new tools and tech to provide the solutions that will allow businesses to
keep and gain share. Moving to a highly fluid and customisable payments
platform and working with innovative fintechs will allow institutions to create
payments propositions of the future.
Bridging the gap
If ‘traditional’ FIs are to effectively compete in the
financial services land grab we’re witnessing around the world, their payments
platforms will need to be value type-agnostic and bridge the gap between new
and old payment methods.
Offering interoperability and integrating capabilities is
key to the development of flexible payments products and an efficient payments
infrastructure. While non-FIs have taken a share of the current market,
incumbents, who are thoroughly regulated and compliant, have the critical
assets required to operate. Breaking free from legacy systems and adopting
future-ready paytech will allow these institutions to compete for a larger
market share and create rapid go-to-market offerings.
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