Payment Modernization Strategies for Mid-Sized Banks: Preparing for 2025 and Beyond
Here are the top five hacks for banks to convert payments from a cost center to a revenue generator:
This article, written by Finzly, was published in Fintech Futures and drives home key messages to banks undergoing payments transformation.
Banks have traditionally catered to the payment needs of their customers with disjointed and rationed solutions provided by legacy technology, resulting in payments being deemed as cost centers. However, with interest in the likes of alternative payment methods, digital wallets, buy now, pay later (BNPL) and crypto on the rise, the post-pandemic period is seeing increased pressure on bank leaders to move from a tactical to a strategic approach to payment modernization.
At this moment of truth, many banks are also strategizing to convert traditional payment "cost centers: into "revenue generators."
Here are the top five hacks for banks to convert payments from a cost center to a revenue generator:
Modernize top-down: strategic vs tactical payment modernization
The banks that don't see a need for payments modernization are driven by a short-sighted "why fix something that's not broken" philosophy. This leads to equilibrium challenges between strategic and tactical initiatives for payments modernization. On one hand, banks are strategically treading down the innovative path of providing Payments-as-a-Service to fintechs, but on the other, there is a futile attempt to gratify fintechs with incumbent weak payments infrastructure. This is a classic example of payments becoming a cost center as against a revenue generator, with transient gains resulting from a mismatch of strategic and operational initiatives. With payments contributing between 20% and 30% of the typical bank's profits (according to EY), the premeditated alignment of payments to business objectives is imperative. Revisiting payments top-down, eliminating payment operational silos and optimizing payment processes to line up with the top level business strategy can quickly reap returns from payment modernization initiatives.
Align transformation to vertical-based payment needs
Banks are stepping out of their generic "clearing and settling" functions to offering a complete gamut of payment services to industry verticals including healthcare, educational services, utilities etc. For instance, healthcare institutions process large volumes of high value invoices and might benefit from automated clearing house (ACH), while title companies might benefit from wires. The convenience of electronic payments is seeing a surge in healthcare claim payments, with Q4 of 2021 recording a 13.4% rise with 112.2 million payments over the ACH network (according to NACHA). When banks work with different verticals, being mindful to the unique payment needs calls for different payment rails and a clever interoperability between them. Banks that generate revenue from payments are using the power of payment hubs to intelligently route payments across ACH, instant payment rails, wires and Swift networks according to the bespoke payment demands of the verticals.
Move from the habit of thought to the eyes of the customers
Customer experience with payments is a simple function of time and cost. Just by asking customers about the "when" and "where" of payments, banks with sophisticated payment solutions are able to assure least-cost routing, powered by smart payment hubs. Reducing friction in payments follows suit when payment systems are conceived from the eyes of the customers rather than from the limitations of the existing obsolete technology. Banks that are able to provide integrated payment experiences, driven by customer convenience, are seeing great revenues from payments on all fronts — corporate customers especially.
Fuel embedded payments
With many fast-changing variables in the payments landscape, banks are rummaging for predictable revenues. With fixed IT investments for cloud-based payment infrastructure, many banks are reaping platform fees and transaction-based payment revenues by fueling embedded payments for fintechs and non-financial players. With customers demanding financial services at the point of consumption of various services including e-commerce, healthcare, real estate and others, banks are generating revenues by being the hidden challengers behind fintechs and other businesses providing these solutions. By providing integrated experiences to customers using adaptable business models, companies can increase their revenue per customer by two to five times and banks can generate additional revenue up to $230 billion (according to the Lightyear Capital research). Banks playing in the Banking-as-a-Service (BaaS) market with best-of-breed, cloud-based payment services have the revenue potential from a flourishing global $7 trillion for embedded banking (according to Accenture).
Focus on API-powered real-time treasuries
Corporate treasurers are looking at sophisticated platform-based payment solutions to manage their treasuries using application programming interfaces (APIs) for their different needs. Banks provide APIs that integrate into accounts receivable and accounts payable (AR/AP) systems of corporate customers or accept the different payment methods through enterprise resource planning (ERP) and customer relationship management (CRM) systems of their corporate customers. By providing visibility into payments, real-time balances, sophisticated reporting and rich remittance information for domestic and cross-border payments, banks are able to harness the willingness of corporate customers to pay for integrated services.
Being misled by their narrow focus on transaction costs for legacy payments systems, many banks are blind to the costs of running these payments on legacy infrastructure. Cloud-based platforms help banks deliver value and scale up with ecosystem partners, while catalyzing revenue from payments. Banks are no longer at the endpoints of the value chain for payments. McKinsey estimates that traditionally, 85% of the payments revenues have been netted by the players at the endpoints. Nevertheless, with new business models and powerful cloud-based technology available for banks, what better time to carpe diem than strategically make payments a revenue generator?
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