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Digital Transformation vs. Modernization: Which is the Right Approach for Payments?

May 29, 2023

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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?

Merchants, financial institutions (FIs), and payment providers continue to face an increasingly complex payments ecosystem. 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 and they expectations continue to grow with rapidly changing technology. While these drivers of change are largely positive, they do require organizations to keep up or risk getting left behind.

To take advantage of the opportunities that accompany change and disruption organizations need to 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 supporting real-time payments, IT teams have their work cut out. As the complete ecosystem adapts to customer preferences for more sophisticated solutions 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

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.

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 concepts as complex as moving infrastructure to the cloud and phasing out legacy systems. Payments modernization also takes security and compliance into account, ensuring the organization has a robust approach to both.

Modernization also involves facilitating a strategic readiness process to help stakeholders within the organization better understand how the changes impact them. This can serve as a starting point for larger digital transformation initiatives and provide a solid foundation for kicking off those initiatives in the future.

Digital Transformation

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, like improving business performance. This often results in new policies, values, and even revenue streams.

Digital transformation is usually mandated by the C-suite. 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 or 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 their infrastructure to the cloud and upgrade apps from the datacenter to the cloud. Modernization also presents an opportunity for organizations to trim down their often massive portfolio of technologies and vendors that have become a drag on infrastructure, inhibiting change due to the overwhelming extent 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 seismic shifts. As digital payments gain momentum, this is becoming more important than any other trend in the industry. 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 with a digital-first approach.

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 your customers is crucial to giving them the desired experience and making them recurring clients. Due to stiff competition, customers can easily move to competitors if they do not have a frictionless experience.
How do we pivot or create a business model to address those needs and future-proof for changes in this evolving landscape?
Companies need to change their business model or processes to keep operations profitable. BLS data analyzed by LendingTree shows that approximately 4% of businessesfail within the first year. One of the major reasons for this could be failure to adapt to a changing environment.

Key Takeaways

In the end, digital transformation requires an organization to abandon old ideas of ROI in favor of new ideas that present creative solutions for industry pain-points and meet customer needs. Both modernization and digital transformation require a budget, but the latter focuses on the solution to the problems at hand rather than whether 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.

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Digital Transformation vs. Modernization: Which is the Right Approach for Payments?

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