Payments worldwide are undergoing a revolution where digitisation, interoperability and modernisation are currently the key topics in every financial institution’s business and investment strategies. Ever increasing regulatory control, rapid technology advancement and highly competitive business environments dictate that financial institutions need to be more agile and scalable to meet both legislative and the modern customer’s requirements. As a result of this, the domestic and international payment environment has become a strategic business driver to most financial institutions. However, the ability to deliver ongoing, cost-effective, value-adding and sustainable changes to payments architecture without introducing major risk remains a key challenge.
As financial institutions grow, mature or even transform over time, systems and processes become more fragmented with business, technology and operational silos. As a result of this, financial institutions find themselves with multiple payment capabilities performing similar, or even the same functions across multiple channels and products. This invariably leads to business-critical issues such as high system maintenance costs, major outlay and risk to implement changes or new lines of business. Apart from this it leads to an inability to manage payment processing and risk efficiently across an institution as a whole and, in most cases, results in duplicate functionality throughout the value chain.
Modernisation is a relatively new concept to the payments environment, where in the past the focus has been primarily on regulation, stability and security with more traditional participants such as central banks, retail and/or corporate banks, clearing houses, mobile operators and other large financial institutions. The role of digitisation in the modernisation process introduces completely new and disruptive products and services that threaten the existing payment eco systems by reducing their relevance or by replacing them entirely. These are often driven by new market entrants, Fintechs and other payment solution providers that were never previously the drivers that determined the strategic direction of national and international payment systems. This has created a significant change in focus for regulators, competition and ultimately the value and service delivery to the users.
In order to fully understand the landscape, the drivers of this revolution need to be understood, why this trend has started and where it is ultimately heading.
Drivers of Change
There are many parts that make up the whole in the sense that there is no single driver, but rather a number of drivers that co-exist to create the desire to change. These can be loosely categorised by the outcomes being pursued as well as the levels of impact experienced as a result of the modernisation agenda.
Regulation and Policy Drivers
- Implementation of updated or new legislation and policies to support modernisation goals such as flexibility, cooperability, interoperability and inclusivity.
- Introduction of regulatory controls into existing and new payments systems in order to manage risk and compliance of participants.
- Implementation of policies that drive innovation and efficiencies that promote key benefits such as increased competition, new growth opportunities and overall access to payment systems.
- Alignment with domestic and international best practice to better identify and respond to fraud, money-laundering, and other criminal activities.
International Standards
- Adoption of the ISO 20022 standard that promotes interoperability and scalability to extend the standardisation of payment systems across the entire value chain.
- Implementation of regional modernisation and integration programmes.
- Implementation of Open Banking standards that allow for the introduction of new participants, products, and services into markets.
Legacy Systems and Technology Advancement
- Payment modernisation trends driven by disruptive technologies and Fintechs.
- The global need to enhance and promote digitisation to respond to the COVID-19 pandemic.
- The rapid adoption of digital solutions due to exposure to new and different technologies as well as generational differences in both knowledge and needs.
- Decommissioning, replacement or retirement of legacy systems that are expensive to change and struggle to meet regulatory requirements.
- The introduction of real-time payment solutions that fundamentally impact the payments ecosystem and offer 24/7/365 processing opportunities.
The Modern Competitor and Customer
- Greater autonomy needs of the end customer who has a greater desire to own their finances and be able to manage their cash flow with fewer constraints or dependencies on financial institutions.
- Demands of the modern customer for more consistent and predictable payment services that offer more product features and benefits.
- Introduction of international competition into domestic markets with advanced product capability.
- Access to information and overall understanding of payment systems has increased the need for payment solution providers to implement simpler and more intuitive products and services.
Modelling for Modernisation
Successful modernisation initiatives around the world have been those that have extended their focus beyond current business and operating models, and where there has been a clear understanding of the impacts, risks and constraints associated with the new or improved payment environments. Sound design principles should be followed in the technical, business, and operating domains in order to achieve the benefits of participating in a modernised payment system. Most modern payment systems share similar features, which have somewhat become these inherent underlying principles that government, regulators, associations, financial institutions, and other participants have used to define their products and services.
When modelling for modernisation, careful consideration should be paid to the business context to ensure that the strategy followed is in alignment with the capability to operate in the payment environment. Particular attention should be added to the enablers that play an important role in the decision-making and business case for modernising. Some of these enablers include:
- The capability to digitise and the impact this has on existing lines of business.
- The impact of existing and indirect legislation that may create inherent constraints.
- The readiness of consumer groups or segments to adopt modernisation.
- The capability to implement Cloud-based strategies to lower costs and improve access to markets and users.
- The direct impact of more comprehensive and rich data that adds new challenges to the transmission, processing, storage and scale of IT operations.
- The decision to replace or co-exist with legacy systems changes the operational complexity and cost models.
All principles and considerations are subject to the driver of the change itself. In most instances worldwide, the process has been mandated or triggered by inclusive regulatory initiatives. This has led to a more cooperative and inclusive model where industry participants have been engaged to formulate and implement the modernisation journey. Where this is followed by a more singular approach, it has proven more difficult to implement however, and more disruptive in nature. It is therefore of great importance to design for the journey with an understanding of how it will be implemented.
Embracing Modernisation
Although the main advocates for the revolution towards modernisation are the financial and non-financial institutions, focus cannot be detected on the end user or consumer to be ready for the change. A large portion of this readiness depends on the chosen implementation and delivery model, which can result in a critical impact on these stakeholders. Various delivery models have been implemented with different levels of success. The success of which has largely been attributed to how the journey was delivered and how the solutions have been adopted by end users and consumers. Two typical models have been utilised, however, alternative strategies are emerging due to the growing availability of information:
Regulatory-Led Approach
Identified as the most successful journeys with collaboration of regulators and participants at different stages of the initiatives. Models have included direct engagement with detailed involvement or at a higher-level oversight function. The implementation is typically characterised with a “big-bang” approach where systems and processes are implemented with immediate effect at an agreed and specified time by all participants.
Participant Migration Approach
These have been implemented with varying levels of success and are more conservative in nature, attributed to the complexity of the existing systems and the readiness of the impacted end users and consumers to adopt the change. This approach entails either the parallel or co-existence of the legacy and modernised payment systems. The implementation is categorised as a lower risk, albeit higher cost, model where consumers are migrated to the modernised system over time. Models have shown that there needs to be an ultimate goal of completing the migration, otherwise the user adoption may slow the process to a grinding halt.
Regardless of the chosen approach, careful planning should be applied to ensure the following adoption success factors are catered for:
- Participants of the modernisation journey should be included as early as possible. As a sound change management practice, the earlier the involvement and participation in the solution, the higher the likelihood of success.
- Communication should be consistent, clear and understandable. Given the impact to large stakeholder groups, the failure to communicate will invariably create negativity, fear and further constraints to adoption.
- All stakeholders should be able to interpret what it means to embrace modernisation, how they can be part of the journey and what they need to do to adopt it.
Modernise or risk being left behind…
Modernisation is a trend being followed globally and across all of the different payment domains, schemes and environments. Although payment ecosystems are no strangers to change and have needed to undergo many large-scale initiatives over the past few decades, the changes being driven by modernisation are far-reaching and have major implications to all stakeholders and users. Failure of the organisation to mobilise and start the journey will find themselves struggling to stay relevant, negatively affect customer retention and meet the challenges in a highly competitive payment environment.
