Accenture Banking Blog

Payments is a hot topic for middle market banks. In fact, I think payments modernization is the most consequential transformation that they’ll make this decade. With the shadow of an aging payments infrastructure looming large, banks can’t stay on the sidelines. This is an existential issue. Banks that don’t act put their future at risk.

I reached out to just the person to discuss this urgent issue. My colleague Conrad Sheehan leads our core payments practice in North America. He’s got a wealth of experience helping banks through the strategic, operational and technical aspects of payments modernization. We talked about why it’s so important—and so different—for middle market banks and what successful approaches look like for them.

To level set, what do you think are the most critical influences driving payments modernization in the United States right now?

Conrad: There’s never been a time like this. Banks must navigate converging forces. They are constrained by aging payments infrastructure and operations. Industry-wide innovation in the form of real-time payments from The Clearing House, the Federal Reserve and non-bank competitors is very disruptive. And of course, banks must address regulatory requirements like the migration to ISO 20022, a new global standard for payments messaging.

Obviously, the pandemic has had a massive influence on so many aspects of banking, including payments modernization. What impacts are you tracking?

Conrad: It’s fascinating, actually. All of these forces that I just mentioned were driving attention to this issue before. Then the pandemic amplified the urgency of payments modernization. It’s driven a change in the mix of payments, primarily on the retail side. This is because of the burst in electronic commerce and mobile payments over the last year and the cliff-drop for cash. People literally don’t want to touch cash anymore.

Merchants have to figure out how to serve their customers with digital payment options, and banks have to help them to do this. They’ve been chugging along with simple referral agreements, vault operations and old-fashioned check processing. But consumers’ new behaviors have driven more changes in payments in the pandemic year than we’ve seen in the previous two decades. And in my view, I just don’t think people are going back.

That’s so true. For years, I tried to convince my dad to try digital banking. He finally did because he couldn’t go into the bank during quarantine. Now he’ll never go back.

So, let me ask you this specifically about middle market banks: Why is payments modernization so important for them?

Conrad: It’s as important for these banks as it is for the largest banks. They need to do this to maintain competitive parity and regulatory compliance. But here’s what’s different. Middle market banks don’t have the resources to admire the problem and muse about all the different ways they should solve it. So they essentially have a bias to action and inherent agility that we don’t see in large national players. This is a clear opportunity area where middle market banks are less encumbered and have the advantage of speed.

Middle market banks can definitely leverage this agility in payments modernization. What are some of the successful approaches that you’ve seen in this market?

Conrad: Banks do well when they take a balanced and pragmatic approach that reflects the skills and resources they have. They typically don’t need a custom solution, and they can execute at pace because they aren’t hampered by overly-complex requirements or a cumbersome project plan.

This was the case with one of our clients. They had a straightforward replacement strategy and were some way down the road to upgrading a few major components of their enterprise payments system when we came in on the project. They had a hard external deadline, which mandated strong execution. They had no other option but to make decisions quickly. We helped focus on the “must haves,” and it worked out—on-time and on-budget.

We’re working with another client right now who has had a history of resiliency issues and also needs to align with ISO20022. They are taking a systematic approach within the boundaries of their budget. They understand what the bank needs to do, what it wants to do, and frankly, what it is never going to do. When our work is done, they’ll have more system reliability, better customer service, a lower cost of operations, greater auditability and compliance, and faster speed to market for payment innovation.

What building blocks should middle market banks have in place to drive a successful payments modernization initiative?

They need a firm understanding of the existing situation and its pain points. From there, banks can explore solving as many pain points as possible using commercially available software. Sometimes this means making tough choices and setting priorities. What’s also key is running the implementation well—from requisition through implementation, testing and change management. Banks must do all of this in a predictable and managed way while still running the bank and not ballooning their employee base.

I always remind middle market banks that payments modernization is a once-in-a-generation change. I admire banks seeking to solve their own problems. But in my view, payments modernization is one where they can benefit from seeking outside help.

Connect with Paula O’Reilly on LinkedIn to stay up to date on the latest trends in middle market banking and read How Middle Market Banks Can Play to Win.

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