Can legacy solutions meet tomorrow’s payments demands?

A colleague summed it up perfectly when he described a ‘tsunami of payments’ heading the way of banks on account of changes in the payments landscape. The changes have been fuelled primarily by the introduction of PSD2 and instant payments, with most of the instant payment schemes across the globe seeing double digit growth in volumes in 2018. It is also predicted that consumers and businesses will make 841 billion noncash transactions globally in 2023, a 45% surge from 577 billion in 2018.

It’s not just instant payments that’s putting the pressure on banks, the rise of the subscription economy through players such as Netflix, ZipCar, Birchbox and Spotify has grown phenomenally – 200% annually since 2011 and in 2017 and in the US alone, subscription businesses attracted more than 11 million subscribers. This has resulted in a greater need for recurring micro payments across different methods (cards, DD, RTP, API initiated), payments which frequently cost more for banks to process. In addition, increased automation in B2B supply chains is turning infrequent high-value payments in to frequent low value payments, putting even more pressure on banks, their payment platforms and technology solutions.

Banks have already started to prepare for these forecasted volumes, but when revenue and margin generation is moving from execution to value added services, the choice of technology solutions to support their payments platform is critical.

Upsetting the apple cart

In a time when a bank needs to have more flexibility, cut costs by significant factors not single percentage points and drive new revenue streams, many are held back by legacy technology which is too complex and costly to change and is dependent on vendor support.

While there is clearly a desire from banks to move away from legacy solutions, the perceived risk is that this migration will tear apart a payments ecosystem which has been designed specifically around the legacy solution in the first place. The problem with this is, as the legacy solution gets closer to reaching its ‘end of life’, banks have to continuously develop temporary fixes and tweaks to extend its shelf life and keep the payments ecosystem running. It is a very reactive approach and one that does not naturally lend itself to responding quickly and innovatively to future business requirements.

Looking up to the Cloud

In addition, more and more banks are looking to move their payments to the cloud but for many of these existing solutions, vendors have no clear roadmap for this migration. And if they do, they restrict their clients to their own cloud platform – further binding their relationship for the future.

Could cloud computing help provide an answer?

The importance of cloud cannot be underestimated when we think of the potential payment volumes banks could be handling. To put this into context lets look to lessons learned from credit cards and the infamous ‘Black Friday’. It was only a few years ago that on one particular Black Friday, MasterCard had to provide for over a 25% increase of traffic, with up to 4 million transactions an hour in 2014. Another more recent example is China’s annual shopping bonanza Single’s Day, which generated $30.7bn (£23.6bn) in sales for internet giant Alibaba, and over 256,000 payment transactions per second. To manage that size of infrastructure – and only for one moment in time– is just plainly uneconomical, even for banks, and this is where cloud can play a key role. By moving their payments platform to the cloud, banks can enable the ability to scale at a moment’s notice, interfacing to the tried and tested backend systems in-house.

In the past there has always been hesitation from banks to adopt cloud-based offerings due to potential security concerns and risks associated with the migration. Today, there is a much stronger desire to make this move in order to leverage the benefits cloud can deliver in terms of cost reduction, scalability and reliance. But if banks are forced to use a vendor’s cloud, they will not have the control and flexibility they need and are at risk of the cost of the legacy vendor’s cloud services continuing to rise.

Developing the Wishlist

With this in mind, banks looking to find more modern solutions to tackle these changes, should be judging the technology against the following criteria:

• Is it flexible? – with the payments landscape changing at such pace, banks need to be able to respond quickly and proactively to meet the demands
• Does it empower? How dependant are you on third parties to support what you need today and tomorrow? …
• What is the speed time to market? With new market entrants coming on the scene on a regular basis, the need to differentiate and deliver new products and services is greater than ever. Speed is of the essence.
• Does it give the reliability needed? it may seem an obvious one to highlight, but with instant payments growing, there needs to be 24/7/365 assurance on service availability.
• Is it cloud native? Cloud solutions can easily address the scalability requirements while being highly cost effective.

Time for Action

It is understandable why the move away from legacy solutions is not always the easy choice. Payments is the ‘plumbing’ that joins many of the products and services within the bank and any potential changes pose a huge risk to the business. However, to remain competitive and be more in control of their future, banks need to overcome the risk barriers and positively embrace the opportunities new technology provides for growth and profitability. Adopting open source, modern technology and leveraging public cloud can provide the right foundation on which to not only defend but attack the new competition.