Rapid industry changes, fierce competition, and evolving customer needs have driven merchants, financial institutions, and payment providers to revamp systems, processes, and goals for the future. Modernization and digital transformation are both relevant options, but which is best?
The payments ecosystem — for merchants, financial institutions (FIs), and payment providers — continues to grow increasingly complex. Today’s organizations are up against rapidly evolving customer demands, regulatory changes, and emerging technology. Nearly 89% of Americans are now using some form of digital payment, as they are pre-occupied with these rapidly changing solutions in an emerging number of ways. While these drivers of change are largely positive, they do require organizations to keep up as the landscape changes or risk getting left behind.
Taking advantage of the opportunities that come with change and disruption requires organizations to ensure they have the infrastructure and processes in place to support current requirements and the agility to rapidly adapt to changing demands. From ensuring that payments happen securely to support real-time payments, IT teams focused on payments have their work cut out. As industry-wide adaptation occurs to sophisticated customer preferences and stringent regulatory requirements, many organizations are turning to modernization or digital transformation to support new payment systems, processes, and innovation. While the two approaches are related and even intertwined in some ways, they are also very different.
Payments modernization typically focuses on a left-to-right, bottom-up approach geared toward improving flexibility, reducing cost, speeding up systems, and impacting business results. It involves adopting new technology and automating the legacy environment. In payments, this means moving infrastructure and workloads to the flexible cloud and focusing on agile application development. Real-time payments in the major economies are expected to reach $117.5 billion by 2030, with a 30% CAGR due to increasing digitalization and innovation worldwide.
Upgrading systems, adopting new platforms, and standardizing and modernizing apps help organizations meet today’s needs while future-proofing for the changes that are sure to come. Modernization follows a spectrum and may include things as basic as implementing new software and hardware to automate tasks and processes to things as complex as moving infrastructure to the cloud while phasing out legacy systems. Payments modernization also takes security and compliance into account, ensuring the organization has a robust approach to both.
It also involves facilitating a strategic readiness process to help stakeholders within the organization better understand the impacts of modernization. This can serve as a starting point for larger digital transformation initiatives and provide a solid foundation for kicking those initiatives off in the future.
Digital transformation is a larger undertaking that involves an overall rethinking and potentially rebuilding of a company’s systems, processes, and customer experiences. The key word here is “transformation,” which aims to reverse engineer a business model to achieve specific goals and impacts, like improving business performance. This often results in new policies, values, and even revenue streams
Digital transformation is usually mandated by the C-suite and while it aims to keep costs under control, the end goal is to achieve a business impact or respond to competitive threats. To get there, IT must focus on a fast and agile approach to support the path to the end goal. Organizations choose digital transformation to adapt to new customer behaviors, capitalize on new growth and revenue opportunities, pivot in the face of new regulations and compliance mandates, and respond to disruptive technologies. Adopting a digital model can improve operational efficiency by 40%.
Where We Are
Payments modernization is sweeping the industry as many companies migrate infrastructure to the cloud and upgrade apps that are migrating from the data center to the cloud. Modernization also presents an opportunity for organizations to trim down their often massive portfolios of technologies and vendors that have become a drag on infrastructure, inhibiting change due to the overwhelming amount of dependencies.
As the industry evolves in many areas, the payments operations of merchants, FIs, payments providers, and other industries are leveraging digital transformation initiatives to keep up with the massive shifts happening. As digital payments gain momentum, this is becoming paramount to everything else. Digital natives and other customers who prefer the convenience of online payments and banking are being drawn to fintech and neo-banks that offer the same products and services as incumbents with a digital-first focus.
Where to Go
Determining the right approach for an organization requires answers to two main questions:
- What do our customers want and need?
Knowing the wants and needs of our customers is crucial to giving them the desired results and making them recurring clients. Due to the stiff competition in the market, customers can easily move to competitors if they are not delivered with their demanded work done with decent perfection.
- How do we pivot or create a business model to address those needs and future-proof for changes in this evolving landscape?
Businesses need to be pivoted into a different model or process to keep the business profitable. BLS data analyzed by LendingTree shows that approximately 18.4% of businesses fail within the first year of being open. One of the major reasons for this could be the lack of future-proofing and failure to adapt to the changing environment.
If an organization is in a position to prioritize business needs at any cost, digital transformation is likely the best route.
In the end, digital transformation requires an organization to sideline old ideas about ROI in favor of new ideas that facilitate creative solutions for industry pain points and meet customer needs. Both modernization and digital transformation require a budget, but the latter will focus more on the solution to the problems at hand than whether or not the project will fit cleanly into an expected ROI calculation. Both types of initiatives aim to ensure payment operations are resilient, agile, and customer-centric. Modernization can help bring an organization up to par with the technological, regulatory, and customer requirements of today, while digital transformation will revamp the organization holistically to spur a fundamental change in business results.
Contact us for assistance with modernizing and digitalizing your payment processes.