5 predictions to help shape banks’ resolutions for 2023

11 January 2023

By all accounts, 2022 was difficult for just about everyone. Continuing economic fallout from the pandemic, geopolitical upheaval, soaring inflation, rising energy costs and a host of other pressures all underscored the fact that we’re all operating in a new reality.

At the same time, the dash toward digitalisation and consumer demand for new finance tools make it clear that that the old ways of doing things won’t cut it much longer.

So, if 2022 was a year of change, 2023 is shaping up to be the year of choice.

As the banking industry braces for a global recession, banks must adopt new strategies that enable them to focus on costs while adapting to new models and service opportunities.

We’ve put our heads together to come up with our top predictions for how the industry will evolve in 2023—and proactive steps banks can take to stay ahead of the curve.

1. Tier 1 banks will realise the true payments processing opportunity. Strategy Director – Toine van Beusekom

As we predicted last year, banks have started to do the maths on their true costs and are looking at alternative revenue streams like Banking as a Service (BaaS). This is backed up by Icon and Celent’s research, which that found 86% of Tier 1 banks are finding their margins more challenging to maintain. When we asked the same question in 2021, the answer was 59%. Yet, and somewhat astonishingly, 87% still see payments as a cost centre.

With the global economy slowing and inflation rates the highest we’ve seen in decades, 2023 will be the time to make choices: Do I run payments as a commodity? Or as a business where I can move processing from cost centre to revenue stream?

2. Banks embracing modern payments models and platforms will take back control. Head of Product Management – Arjeh van Oijen

Evolving customer demands, intensifying competition from fintechs and shifting regulatory requirements, are squeezing banks’ margins from all sides. As many banks begin to investigate how they can move payments from a cost centre to a revenue stream, they are realising the myriad of home-built and vendor provided applications they used for decades have left them with unsustainable ‘payments factories’. Unable to cope with modern-day challenges nor deliver the agility banks need to bring processing costs down, these legacy systems are part of the reason that banks are struggling to maintain profit margins.

But there is light at the end of the tunnel. We talked last year about the advent of ‘low code’ and many institutions are now realising the benefits of this approach. By moving to new generation framework-based solutions that use modern architectural principles in a cloud environment, banks are taking back control of their destiny, empowered with the flexibility to implement functionalities that meet the specific needs of their customers faster—and at a lower cost.

Although banks’ payments processing models will continue to be put to the test in 2023, innovation and growth are still very much within reach for those willing to embrace modern payments models and platforms that enable agility and control.

3. Instant becomes the ‘new normal’. Strategy Director – Toine van Beusekom

Spurred by regulation in the EU, in combination with initiatives in the UK, Nordics, Alps and other places across the across the Globe, instant payments have become the de facto standard for the payments processing ecosystem. Worldwide, instant payments volumes are expected to increase by a CAGR of over 30% by 2024[1], as more countries look to improve their payments infrastructure.

Refurbishing batch legacy environments (or “putting lipstick on the pig” as the saying goes) just won’t be enough to handle these volumes at a justifiable cost. 2023 will therefore see banks prioritise investments in ‘debulking’ at the source, and combining Request to Pay with instant payments over investments in traditional Credit Transfers and Direct Debit. It’s time to decommission.

 4. Banks will accelerate their approach to data monetisation. Head of Payment Consultancy – Esther Groen

 ISO 20022, open finance, ESG and the exponentially increasing data interactions of consumers, corporates and organisations, are significant forces compelling banks’ efforts to accelerate monetising their data. A key driver is still to restore margins and create much-needed efficiencies in processing payments, managing fraud prevention and complying with the stringent Anti Money Laundering (AML)/ Know Your Customer (KYC) regulations.

However, the ability for banks to monetise value-added services to consumers, SMEs or corporates, by consuming and exposing data via Application Programming Interfaces (APIs) is still very much lagging, even though banks do recognise the opportunity. Research conducted by Celent and Icon, shows that 79% of banks believe demand for data-led services among their corporate clients is increasing.

Banks need to take a holistic approach, ensuring the use cases defined are actually supported by a data-centric technology tech stack that is cloud-based, API-centric, scalable and agile. Banks must also ensure their operating, service and business models can support  different value propositions for different user groups.

The banks that will succeed in effectively monetising data will be the ones that view it not as a product or a service, or even a way to cut costs, but as a strategy involving all functions of the business.

5. ISO 20022 implementation will unlock the benefits of richer payments data. Head of Payment Consultancy – Esther Groen

 As the industry approaches key deadlines, the global adoption of ISO 20022 is ramping up in 2023. It will to a large extent dominate the change and compliance agenda of banks and other large Payment Service Providers (PSPs). Asia is leading, but UK and Europe are not far behind. With the clock ticking for banks to comply – it will remain to be seen whether the industry has learnt from mistakes of the past, and can avoid the pitfalls of a ‘bank specific approach’, that will only result in multiple interpretations of the standard that compound rather than overcome existing obstacles in place.

Banks and PSPs that take a more agnostic approach to ensuring their payment processing infrastructure is agile and flexible enough to process all the ISO 20022 ‘dialects’, will indeed benefit from the required efficiency, improved interoperability, and the business-value that richer payments can create.

Not only is ISO 20022 an opportunity for banks to optimise internal processes, but it is foremost an opportunity for the industry as a whole to start delivering on the promise of open banking and open finance.

[1] https://www.globaldata.com/store/report/instant-payments-market-analysis/

Icon Solutions