The need to operate digitally has become critically important over the past year, as consumers and companies have both had to function mostly online. With everyday activities moving into virtual settings, retail and other payments-related fields have seen exponential growth in their digital markets — Deloitte reported that 35% of customers increased their online banking usage during the pandemic.
Industry experts predict that this shift in consumer behavior is likely to continue, triggering companies to invest in their technology infrastructure so that they can keep up with demand. This is particularly critical for payments companies that may have delayed their original digitization plans if they want to stay competitive. Unless organizations commit to replacing the entire system at once (few do), digital transformation is an ongoing process, and learning how to address legacy problems is key for a successful transition.
The Challenges of Legacy Technology
Inconsistent Data Regimes
Many older systems simply aren’t designed to collect or analyze data properly. As a result, these companies are lagging behind their competitors, unable to gain deeper insights into their own operations, let alone from external parties’ data. There is also the risk of falling out of compliance with developing security regulations if there aren’t clear data regimes in place that can adapt to new usage constraints.
Disconnects in Transformation Approach
Whether a new technology will be successful is tightly coupled with whether or not that company embraces that change. Unfortunately, legacy systems were created with a more risk-averse attitude, particularly those that were set up in the aftermath of the financial crisis. In order to fully commit to a new way of doing things, companies must reject these conservative mindsets and be open to a new process.
Insufficient Available Resources
Investing in enterprise technology is expensive, simply put. For financial institutions and payments companies, the costs are higher, due to new regulations coming into effect on a consistent basis. According to the Baker Institute, compliance with the Dodd-Frank act in the U.S. increased the banking sector’s annual compliance and regulatory cost by more than $50 billion per year.
Strategies to Accelerate Transformation
Adopting a modernization strategy can be a daunting task for the finance sector. Fortunately, there are a few approaches that companies can take in order to minimize friction and accelerate implementation.
Leverage Cost-Efficient New Technologies
If available cash flow and investment capital are on the lower side, that doesn’t need to put a stop to digital transformation. Instead, companies should look to cost-efficient technologies in the market that can create the most impact for the smallest upfront investment; future expansion of digitization can then build on those successes.
One option is to create separate, ring-fenced entities within the company who function like a start-up and can invest wholly in innovation — but at a smaller, more manageable scale. Another solution is to take advantage of the public cloud and artificial intelligence, which may require an immediate fee to implement but will then alleviate the associated costs of long-run operations.
Integrate Technology into Existing Tech Stacks
Most companies will take a step-by-step approach to modernization so that they can remain fully operational throughout the process. While this takes longer than a “rip and replace” approach, it lets you leverage the existing tech stacks that do still hold value and minimize the disruption of the transition. Intelligent automation and alternative data can be applied to existing risk modeling processes, improving their effectiveness without much interference.
Leverage APIs
Payments platforms can — and should — take advantage of supplementary products created by industry third parties, in the form of API integrations. Rather than building interfaces entirely from scratch, companies can leverage already-popular tools developed by others and thus improve their accessibility and scale. This is cheaper than building an owned product and allows the payments platform to utilize the best-in-class in the market while focusing on its own product offering. Contactless and mobile banking integrations are two examples of consumer-centric solutions that APIs can support.
Create a Culture of Change
Digitization efforts can be held up if teams become siloed and the transformation doesn’t occur across the entire organization. In a study by Deloitte, 62% of chief innovation officers said culture is important for successful digital transformation, yet 46% said culture is holding them back. In order to see results, financial institutions must demonstrate buy-in from the top level down, while also setting up employees for success. Platforms might want to consider appointing a chief innovation officer, if they don’t have one at present or recruiting digital-savvy staff who can help guide a more traditional team through its digital transformation.
Build Collaborative Relationships
Digitizing payments platforms does not just impact the industry itself but also the surrounding fields, particularly regulation. While shifts in either area can create complications for all, collaborating on insights can aid both groups. Regulators are increasingly open to digital innovation and this dialogue can help both parties build complementary systems from the outset.
Partnerships between younger FinTech companies and larger banking institutions could also prove to be a valuable investment if done right. Finding the balance between institutional education and over-regulation can be tricky, so opening a dialogue early and maintaining open communication channels is important in order for both parties to benefit.
A digital transformation is an inevitable process for any payments company trying to stay relevant in the modern marketplace, however, there are good and bad ways to achieve this. Focusing on strategies that can optimize and accelerate your digital transition will save both money and time, while also reducing any disruption to operations.
