Abstract

In the current business environment, disruption is the new normal.

Banks, as incumbents in a sector with an influx of new entrants, are struggling to adapt and stay competitive. Fintechs’ disruption of the retail payments market has all but taken banks out of the equation, with digital transactions now possible without them. Having witnessed superlative user experience on the retail side, corporate customers of banks now expect the same from the B2B arm. They envision fast, frictionless digital transactions with a wide product choice at lower costs across geographies. Moreover, the demand for quicker settlement times and more efficient real-time payment solutions has increased, making the case for completely transforming wholesale payments for corporate customers. 

The revised Payment Services Directive (PSD2) has banks excited about the possibilities ahead, especially as seen in recent collaborative solutions with fintechs. However, there are pain points given that existing legacy systems inhibit banks’ efforts at innovating for the future.

We examine the challenges banks face in wholesale payments digital transformation programs and outline the strategic initiatives and investments that will help banks reinvent as they strive to deliver frictionless customer experiences and stay competitive. 

Transformation challenges

The banking industry is in a state of flux.

This mandates industry players to deliver world-class offerings and secure, seamless, and digital customer experiences while simultaneously updating the fundamental framework and internal systems underpinning their processes. We believe the following to be the biggest roadblocks to this transformation: 

Outmoded legacy systems built for a different era in banking make it impossible to meet future market needs given their higher operational and maintenance costs.

The absence of a standardized global payments network results in layers of complexity and inter-dependence for banks to facilitate current cross-border payments systems, and they are compelled to pass on the high processing costs to customers.

Banks often make fear-fueled investment decisions as apprehensions linger not just about the security of modern technologies but also the anticipated cannibalizing of their existing corporate payments business. This makes them reluctant to see value in new avenues that facilitate real-time payments.

Retention of customer lifetime value and hygiene factors to augment payments activity within the existing banking ecosystem are critical. This implies an aggressive push to invest early and heavily in addressing current regulatory requirements such as ISO20022 for cross-border payments. 

Banks face challenges with monetizing new product opportunities by redefining value-added services that integrate into their existing payment product lines and leveraging their massive client base. Such opportunities include richer remittance information and application programming interface (API)-driven open banking solutions.

With these as priorities, ranging from infrastructure and technology to regulatory directives, banks must allocate resources and investments wisely. In short, banks must view wholesale payments as part of their broader modernization strategy. 

Change, to keep customers

In order to retain wholesale customers, banks must embark on large-scale transformation.

However, they should avoid reengineering critical workflows and processes without proper infrastructural support. Doing so would be akin to constructing a building without a foundation. Overhauling legacy systems is just the first in a series of required steps. We propose a five-pronged approach for banks to tackle existing challenges:

Complement legacy systems to provide frictionless payments

As real-time payments gain prominence, banks with a frontend facade of agile new systems connected to obsolete core systems must change. They must move away from delivering the feel of real-time transactions to actual real-time capabilities. Otherwise, the continual stress this expectation places on their legacy platforms will build to a crescendo. Another key measure banks and financial institutions must adopt is to leverage the granularity of data standards such as ISO20022 and SWIFT global financial messaging (gpi). This would help them build next-generation intuitive solutions backed by powerful payments insights providing 360-degree control over the payments experience through APIs. Citibank, for example, has built an in-house Citi® Payment Insights, leveraging SWIFT gpi and big data to enable payments on-demand through its electronic banking platform, keeping its institutional clients at the center of its strategy. This is to ensure that the bank can continually improve transparency, speed, and convenience, and provide its clients with real-time payments visibility over the transaction lifecycle.

To keep up with technological innovation and regulatory changes in the payments ecosystem, banks should begin by analyzing the shortcomings of their current platforms. Consecutively, they must focus on procuring the hyper-personalized new-tech-enabled solutions available in the market and offer them as components of their final package to customers. This will help reposition them as providers of products and services. Such a business model would relieve banks from the responsibility of managing IT, technology, and operations, enabling them to focus on new revenue streams.

Collaborate with fintechs

Revenue streams are moving to fee-based models with highly tailored services, enriched end-user experience, and solutioning backed by data insights. This has led to a shift in the industry’s perception of fintechs from a competitor to a co-innovator and revenue multiplier. Banks must integrate fintechs’ capabilities into their existing systems, as they can offer advantages such as short time-to-market and ability to pivot from one innovation to the next to create customer-centric experiences. For example, ABN AMRO launched the white-label recurring payment management feature provided by Danish fintech company, Subaio. The result was a grand success of their combined efforts through the Grip app that provides users a convenient way to manage recurring payments.

Capitalize on monetizable B2B and B2B2C opportunities

For banks looking to woo new clients, B2B and B2B2C companies that are demanding real-time payments and reporting and omnichannel presence, represent the biggest revenue-generating opportunities. Banks must invest heavily in digital channels to offer a better flow of information and a banking as a service (BaaS) model to stay relevant and increase market share. Further, banks white-labeling their products and services bring with them the banking license and decades-long expertise in managing regulatory obstacles, while their fintech partners handle the solution’s technology components. Compliance responsibility (Level 1 PCI DSS compliant), transparent pricing, and time and cost savings are only a few of the many benefits that banks – as white-label partners – bring to these businesses who cannot justify substantial investments and high risk of building their in-house payments platform, which may become outdated. These creative, monetizable, targeted, and collaborative new product offerings based on request-to-pay and real-time delivery are bound to result in corporate customer delight.

Leverage analytics across payment lifecycle

Emerging technologies and growing regulatory pressures mean many organizations are now adopting robotics or artificial intelligence (AI) to automate several aspects of the workflow to remain competitive and cost-efficient. Banks must adopt transaction analytics to get a complete view in order to identify and fill gaps in performance information, which will then positively impact their bottom-line. This coupled with AI-like behavior pricing – such as price differentiation based on customers’ usage or buying history – is the new way forward and a crucial differentiator to aid in changing client value perception and capturing a larger market share. Banks can adopt a dynamic pricing model catering to different customer segments by combining the traditional benchmarking and market assessment strategies with value-pricing strategies.

Adopt blockchain to boost payments

Blockchain, with its distributed ledger technology, has a definite promise in the short term for global payments. The technology can provide banks with a viable, hybrid, digital cash, real-time alternative that offers the best of both worlds – the regulated traceability and other digital benefits of cryptocurrencies alongside the preferred attributes of central bank digital currencies. Other areas where banks can leverage blockchain in payments are reconciliation, know your customer (KYC), audit trails, internal transactions, and similar elements of correspondent banking.

The way forward

Banks that are already on a payments transformation journey have their work cut out. 

To clarify their digital transformation strategies, banks should focus on modernization and trailblazing their own path rather than struggling to keep up. Banks have a choice: bring dated legacy systems up to speed piecemeal or alternatively, and more radically, re-engineer these completely for agility. Alongside the latter, they can adopt flexible approaches to partner with those who innovate unhindered, discovering enroute that this braver option has the higher pay-off in the long run.

The forward-focused new era of banking is gaining momentum and mandates more aggressive investments in strategies that are essential to bringing their back-office payment systems into the future. Embracing this risk will allow banks to lead the charge in innovation to make a comeback. Wholesale payments transformation will enable banks to craft that perfect customer experience marked by speed, service excellence, data-driven personalization, and convenience. Banks must act now to reclaim their dominance in the wholesale payments business and solidify their relevance in the years to come.