The payments industry is evolving rapidly, driven by changing consumer and commercial needs. Payments executives are grappling with rising costs, shrinking margins and emerging technologies like generative AI, prompting a reevaluation of their strategies. The key question is: What tech investments should be prioritized to stay competitive? Our new research, based on insights from 326 bank leaders across 18 countries, addresses this. In this post, I preview our findings, focusing on challenges that affect North American banks’ payments technology investments.
Challenge #1: Banks struggle with legacy payments IT systems
North American banks are burdened by outdated payments IT systems and significant technical debt, with 58% facing this challenge. When we take a closer look at the payments technology stack, the application integration layer carries the most technical debt for North American banks. This might be due to piecemeal fixes without a holistic strategy. Over the years, many banks ended up adding more and more integration software layers to the ecosystem. It is not unusual to see a bank having five to six varieties of middleware that perform overlapping functions.
Looking at specific payments areas, the technical debt in both consumer and commercial accounts and domestic payments is significant and is complicated by its deep integration with the overall bank’s stack (e.g. customer data, analytics, current accounts, reporting, compliance/regulatory, channels, security) and the significant changes it has undergone due to recent regulatory requirements (e.g., ISO 20022, PSD 2/3).
The inefficiencies of legacy systems are not just operational inconveniences; they also have a financial impact. The increasing technical debt requires resources for maintenance and updates, diverting funds that could be invested in strategic growth projects. Yet, within this challenge lies an opportunity to invest strategically in areas laden with technical debt but ripe for growth.
Challenge #2: The cost profile of commercial payments is not keeping up with revenue
Operating expenses for commercial payments services are rising faster than revenue, threatening banks’ financial performance. In North America, this trend is pronounced in domestic corporate accounts, with the cost to serve these accounts rising due to high tech debt. Cash management services are also affected, with the complexity of managing liquidity and payments across multiple channels adding to the cost. Trade finance is also affected by manual processes and operational inefficiencies.
This highlights areas ripe for technology investment. Advanced digital solutions can streamline operations and reduce manual work to improve efficiency and enhance commercial payment services.
Challenge #3: Lack of advanced technology skills
The technology skills gap is more noticeable in North America than in any other region covered in our survey. This makes it a big challenge for payments business plans and investment decisions. The lack of the right tech skills for the future not only hinders the adoption of advanced technologies but also slows the pace of payments modernization efforts.
Artificial intelligence (AI) can help fill the skills gap by automating and improving manual tasks. This frees up resources to focus on more important projects. Our research has found that North American banks are making some progress in adopting AI in areas such as credit scoring, chat automation and fraud detection.
So now what?
The challenges in the payments business impacting technology investments are just one half of the of the story. The next, and most important part, addresses the crucial question of how banks can grow their payments function amid constant change. We believe reinvention is the answer, supported by a strong digital core comprised of digital platforms, data, AI, cloud, security and integration layers.
Our upcoming research will provide banks with a path to reinvention readiness in payments. By analyzing leading banks with mature digital cores, we offer insights into their investment priorities and strategic choices.
Reach out if you’d like to learn more or if you’re headed to Money2020, we can connect there to discuss our research further. Stay tuned for more information when we share our full research findings.
Special thanks to Hannes Fourie and Pia Matoto for their contributions to this blog post.
