In recent years, consumers have increasingly clamored for a more convenient payment experience. And the past 18 months, COVID-19 created urgency into this demand by accelerating innovative business approaches and people-focused offerings when social distancing and lockdowns forced consumers to move to e-commerce and other contactless shopping channels.
However, financial institutions relying on old legacy platforms often struggle to keep up with this demand. These platforms launched in decades past were explicitly designed for physical cards, point-of-sale, and ATM transactions and struggle to cope with the needs of the digital age. In other words, they weren't made to solve the problems of today's non-card transactions and digital payments. As a result, financial institutions face challenges related to legacy systems. They generally manifest in two major issues: performance, which relates to cost, speed, reliability, and scalability, and second is the innovation which refers to flexibility and speed to market.
On top of that, regulations around payments are regularly emerging and evolving. Banks must comply with mandates around strong customer authentication, instant payments, open banking, and many more. Doing so successfully on outdated platforms that lack the bandwidth to adjust to market changes is a significant challenge.
Why a "Big Bang" approach misses the mark
Of course, legacy system modernization is more straightforward said than done. Migrating and upgrading have been tried many times by many institutions and not always successfully. But why is that? Historically, shifting from legacy system "A" to the next generation system "B" has taken a toll on the institution's current operations, budget, and resources making a move.
This often occurs when financial institutions use a "Big Bang" approach—building a new system and cutting the old one out all at once. This long and laborious tactic requires development hours and can only move forward once specific benchmarks are met. Many big bang projects fail to meet expectations, even after pouring time, money, and resources into the project. Even after a successful project, they didn't deliver a successful solution because the migrated system didn't respond well to the continuously changing market and consumer expectations over the long project course.
Some banks have decided to maintain their legacy systems and avoid facing the daunting risks associated with the big bang approach. However, even maintained legacy systems continue to age, accumulating technical debt, and burdening the margins.
A phased approach is key to successful modernization
Doing nothing isn't the way to go, but a Big Bang approach is risky and expensive. Fortunately, there's a third way to update existing systems: running a new system co-existing with the old one. This phased, agile approach is the least risky because it allows financial institutions to ramp up legacy systems step-by-step, channel by channel, and transaction by transaction.
Instead of a big bang, you can minimize the role of the legacy systems by adding a new platform that focuses on agile enablement by supporting innovation with scalable and reliable infrastructure. So financial institutions have the choice to keep their platform for the time being but minimize their role by adding more modern and flexible solutions on top. FIs should try to find partners with tools that enable them to rapidly configure new payment offerings and orchestrate transaction flow across multiple systems to achieve this path. The new platform acts as a payment services hub that seamlessly processes any payment transaction and keeps pace with regulatory compliance.
The modern platform should be easily integrated into the existing ecosystem and the marketplace for an enterprise view of customers, accounts, and transactions. Also, it will deliver innovative products and services, including support for non-card transactions, Request to Pay, Buy Now Pay Later use cases, and more. It would help optimization of regulatory mandates such as PSD2, Instant Payments, and SEPA initiatives. A phased approach also bridges the gap between existing systems and modern services such as real-time transactions, cloud migration, and API enablement. Ultimately, this approach minimizes the legacy by isolating and leaving it to continue to perform existing activities. The new solution, on top of that, handles new types of transactions and orchestrates all of them. Over time, transactions may be migrated from the legacy solution to the new, replacing the overall transaction processing.
How financial institutions can adopt a growth mindset
It's time for financial institutions to focus on the here and now. The payments market and environment are changing rapidly, and old systems cannot keep up with new demand. No matter what resources financial institutions have invested in maintaining legacy systems, ruminating about past decisions will not prove beneficial moving forward.
Card payment acceptance alone is no longer the way forward. New and alternative payment types need to be prioritized, and external factors, trends, regulations, and consumer expectations should be paid close attention to. An open and accepting mindset enables financial institutions to promote better internal decision-making.
Approaching change in bite-sized pieces makes modernization more manageable, more achievable, and less risky. By staying open to new possibilities and opportunities, financial institutions will be well-prepared to embrace the future of payments.
that already have the tools needed to rapidly configure new payment offerings can help dive into the modernization path without the arduous processes, risk, and expense of a complete system overhaul.