In a world where technology is evolving at breakneck speed, banks need to adapt in order to keep pace. The rise of new technologies, such as CBDCs and Open Banking, is transforming the very fundamentals of the financial sector, while the widespread adoption of ISO 20022 is redefining communication standards.
For financial institutions, failing to stay abreast of these changes could mean losing their competitive edge. To remain relevant, banks must not only replace their outdated systems with modern solutions, but also offer unique customer experiences.
Why modernize payment systems?
The challenges of modernization
In the United States, the FedNow system and the RTP network are showing increasing interest in ISO 20022. In Europe, pressure is building up as new regulations are being introduced, requiring companies to adopt the new standard for instant payments. The trend is clear: transition to ISO 20022 is becoming unavoidable for all financial institutions that value their place in today’s banking landscape.
Market pressure
Banks are facing increasing competition. New players, often sharp and innovative, are putting pressure on traditional financial institutions. To keep up, institutions must continually upgrade their systems and offer services that outshine those of their rivals. Simply maintaining them is no longer enough; they must now reinvent themselves to meet customer expectations.
ISO 20022, open banking and CBDCs take center stage
ISO 20022 marks a revolution in payments by improving communication between financial institutions. With more detailed and accurate information, this standard makes transactions simpler and more transparent. In addition, open banking is transforming the banking sector by giving authorized third-party providers access to customer financial data through APIs, which can be used to initiate transactions on behalf of the user. Such openness stimulates innovation and competition, and banks need to adapt to these new requirements to prevent their customers from turning to more suitable alternatives.
Last but not least, CBDCs (Central Bank Digital Currencies), created by central banks, aim to modernize payment systems while offering a stable alternative to volatile cryptocurrencies. The integration of CBDCs could transform everyday transactions by making them faster, cheaper, and more secure, and redefine the relationship between banks and their customers.
Modernizing: sure, but how?
Banks can modernize their platforms in one of two ways, says HPS Worldwide : the hard way, or the slow way. In other words, by opting for a complete system change or a step-by-step upgrade of specific components. The complete changeover offers seamless integration, but requires careful preparation, while the gradual upgrade reduces risk, but requires rigorous management for successful implementation. Ultimately, the choice depends on the priorities and resources of each institution.
Here are some of the strategies banks can adopt to transform their payment systems:
- “Big Bang” migration, replacing an entire system in a single step, enables rapid implementation but carries a high risk of disruption and failure, thus requiring rigorous planning and testing to ensure success.
- Parallel running, where old and new systems temporarily coexist, enables a smooth transition by comparing performance and resolving problems without interrupting operations, but requires rigorous management due to its complexity and resource requirements.
- Incremental modernization updates system components gradually, thereby reducing risks, but requires careful planning to ensure smooth integration of new technologies. For example, this might involve upgrading the payment processing system first, then moving on to mobile banking apps, and eventually revamping the core banking infrastructure.
- Phased migration by product/service transfers system components sequentially, targeting changes to minimize disruption, but requires simultaneous management of old and new systems, which can complicate operations. In practice, a bank may first migrate its credit card processing system to a new platform, while retaining the loan processing system on the old one until the new credit card system is fully operational.
By adopting a well-thought-out strategy that is sufficiently responsive and effective without being too rigid, banks not only remain competitive; they also lay the foundations for their future success. These choices may be hard to make, but they are crucial to banks’ ability to innovate, to meet customer expectations, and to thrive in a globalized market that never seems to stop redefining itself.