Our research shows that trillions of transactions are projected to shift away from cash in the next 10 years. Modernising payments is rapidly becoming urgent.
Many banks today are not seeing the returns on their investments in payments modernisation they hoped for. This is often due to a reactive, compliance-driven, piecemeal approach that makes it harder to adopt new capabilities.
New research from Accenture confirms that only a handful of banks have unlocked material business value from their payments modernisation programs—and highlights the growing urgency of change here.
Based on information from GlobalData, we project that over the next decade 2.7 trillion transactions worth $48 trillion will shift away from cash and to cards, interbank payments, and alternative payments instruments. This represents a $300 billion opportunity for payments providers.
But our survey of banking executives suggests that few payments players are ready to seize it. Just 13 percent of global banks have increased payments revenue in the last three years at above the average market growth rate of 6%. Their expectations for the next three years are not much better.
Globally, 63% of leaders told us their bank treats its payments business as a cost centre rather than as a growth generator. We also found that payments governance is often fragmentary, leading to uncoordinated investments in payments tech.
Perhaps worst of all, almost all leaders (92%) told us that their bank is satisfied with the progress of its payments modernisation program—despite mediocre returns on investments that can run into billions of dollars. We see this as evidence that a compliance mindset dominates the payments space.
Given the regulatory and disruptive pressures facing banks, it’s not surprising that many are addressing payments modernisation through ad hoc tech investments. But the size of the opportunity our analysis identifies—corroborated by the already-growing competition in the payments space—suggests that over the long term this approach will, at best, leave money on the table.
So what should payments transformation look like? The details will differ between institutions, but we suggest four steps that can work for anyone.
Step 1: Define the vision
To lead payments change rather than just respond to it, a bank will need a high-impact, comprehensive vision for payments modernisation. This vision will look past cost and compliance and towards opportunities to generate income from new services and products. It should identify key performance indicators for each new initiative, and align with the bank’s broader digital transformation strategy.
Step 2: Create time and space to invest
Making successful payments investments entails maintaining the right balance between supplying sufficient budget to each project and preventing costs from spiralling out of control. An agile approach to budgeting and a 10-year analysis horizon are both useful tools for avoiding typical pitfalls. We also suggest using a bottom-up approach, which starts with looking at a particular customer journey or a small piece of payments functionality and modernising it across different layers of architecture and value chain. This will highlight integration headaches early in development, allowing banks to budget more realistically for broader parts of the programme.
Step 3: Align the operating model
Our research highlights two major payments modernisation challenges for banks: a lack of governance due to multiple stakeholders and a misalignment of costs and revenues. Addressing these is key to driving profitable payments modernisation. Tomorrow’s payments leaders will empower decision-makers in their organisations with the resources and authority to make the right investments and change the organisational structure where needed. They will also involve the HR team, which is often overlooked in payments modernisation. Many payments-related skills are scarce and hard to hire on short notice.
Step 4: Develop a flexible architecture
Many banks are weighed down by an architecture characterised by a collection of point solutions not designed for continuous change and interoperability. This is often compounded by international operations. Payments leaders will overhaul their architectures and replace legacy systems with more flexible, modern platforms.
One area that no bank can neglect here is the cloud. Though all banks have now adopted cloud systems in other parts of their business, our research shows that only 38% are investing in cloud systems as part of payments modernisation.
If you have questions about this report or you’d like to talk through your payments modernisation journey, I would love to hear from you on LinkedIn. You can also find the full report here, or watch an episode of Finextra TV which looks at these trends.