Modernization is an inevitability for any company trying to stay relevant in 2021. We look at the challenges, benefits, and strategies to consider this year and beyond.
Industries are opting for technological solutions at exponential rates in 2021, in order to keep up with consumers in a competitive corporate landscape — and payments platforms are no exception. Modernizing a payments platform is not just about embracing innovation for innovation’s sake. Instead, higher customer expectations are changing the stakes for success, while new financial and data standards require a fresh compliance outlook.
This period of change has caused substantial disruption to the payments market, but this has also created a window of opportunity. The companies that are able to adapt and modernize now will be able to carve out a valuable piece of the market for themselves; it is estimated that digital payments will be worth $6.7 trillion by the end of 2021. Those that choose to struggle forward with legacy systems, without making the necessary modifications, may find themselves quickly outmatched by more nimble competitors.
Choosing to modernize a currently functioning system is not without its challenges. Before embarking on a total overhaul of their infrastructure, companies should consider how much internal disruption will be caused by the implementation of a new system. In addition to any potential downtime of digital company resources, employees must be trained to use a new platform configuration and that will also slow operations. The costs of implementation can also be substantial, depending on the scope of the new technology.
Finally, each business must decide how they wish to approach the issue: is a complete replacement of an existing system the smarter long-term investment? Or do they want to target a few high-priority areas first, replacing additional elements over time? The right solution will vary, depending on the company’s cash flow needs and current setup. McKinsey reports that payments can represent as much as 30-40% of banks’ operating cost base “partly because of the high technology spend associated with providing payments services.” Making the right investment is therefore critical, but most will benefit from some modernization.
Today’s digital-first payments platforms require the ability to be agile in response to changing market needs. While no company can be expected to accurately predict what’s around the corner, they can invest in solutions that will make it easier to pivot quickly. Legacy systems can struggle to keep up with newer demands, such as increased data flow and real-time processing. Incorporating newer digital tools can improve visibility, provide access to information and support APIs, making it easier to react quickly.
Open infrastructure is also key in the modern marketplace, for companies to leverage third-party services most efficiently and cost-effectively. The introduction of the EU’s revised Payment Services Directive (PSD2) has made API support even more critical, enabling financial institutions to remain compliant with the new regulations. This also helps companies license the newest innovations in the field, without needing to develop everything in-house.
PSD2 also raised the standards of security for digital transactions, requiring banks and payment processors to provide greater authentication measures. Combined with Europe’s General Data Protection Regulation (GDPR) laws and the U.S.’s data protection laws, the security requirements for financial institutions are high — which is important, as cyber threats have only escalated in recent years. Having the technological support to comply with those regulations is not just a benefit, but a requirement.
Real-time processing is increasingly becoming table stakes but from a consumer standpoint rather than a regulation one. In financial services, access to accurate and immediate transfers can have severe impacts on consumer experience, particularly due to the sensitive nature of money; Visa found that 27 of 30 industry executives cited improved customer experience as the most important reason to introduce real-time payments. The companies that can provide that will have a huge advantage.
Any company still unsure about whether to take the step to modernize should consider the value of consolidating their applications. Legacy systems are likely to require an assembly of add-ons and other tools, which can impede operations and drain resources over time. The sooner a company migrates to newer software, the sooner they can create a fully integrated ecosystem.
Modernization is an inevitability for any company trying to stay relevant in 2021, but the companies that act now will gain the greatest rewards. Whether the payments platform jumps in and overhauls its entire system, or begins with a single area of innovation, taking that first start is critical to stay competitive.
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