In a world of digital wallets, mobile payments and fintechs, platform modernization stands as an inevitable journey for banks and payments processors. New technologies, intense competition and soaring customer expectations now drive banks to transform their payments systems. Meanwhile, ongoing industry disruption, cost issues and margin pressures fuel shifts in payment assets ownership and the emergence of distinct payment business models.
Thus banks face an overarching decision as they undertake modernization. Do we “rip and replace” the entire existing infrastructure? Or should we ease in from the periphery and platform engineer to nibble away at pieces of the legacy architecture—and reduce dependence on the existing core infrastructure?
Banks may admire the courage of making a full swap. But most will leave the heroism to someone else: too complex, too disruptive and too risky.
That leads them back to the latter strategy: start nibbling. So where to begin? We see five factors that drive most banks’ modernization efforts. Then, depending on which factors most appeal to individual institutions, banks can take one of four approaches we’ve seen to attack specific payments requirements and build momentum for overall transformation.
Five modernization drivers
As they shape their business models, banks and processors may view payments as a channel to engage customers and perhaps bundle third-party products. Alternatively, they may treat it as a utility for back-end core processing functions. Others may consider payments as an end-to-end platform focused on innovation—and that exposes application program interfaces (APIs) for active engagement in an open payments ecosystem.
Whatever the chosen path, five drivers will prove integral to the effort:
- Agility. The imperative is straightforward. Burdened by complex payment infrastructure built up over time, banks and processors must consider how they can roll out new functionality to customers faster—and with as little impact as possible on that existing infrastructure.
- Open infrastructure. The emergence of fintechs and implementation of the EU’s revised Payment Services Directive (PSD2) continue to drive the spread of open banking. APIs enable banks and processors to incorporate functions from other parties rather than build it themselves.
- Real-time processing. As organizations push payments to their suppliers, they must know the liquidity impact of these transactions within seconds instead of waiting days for them to close. Real-time payments processing enables the instantaneous execution and notification that individuals and organizations increasingly demand.
- Security. Growing cyber threats, coupled with regulatory edicts such as Europe’s General Data Protection Regulation (GDPR) and U.S. data protection laws on federal and state levels, keep security a top priority for businesses individuals and governments.
- Consolidation and rationalization. The cost and complexity of maintaining current infrastructure—and tying its disparate pieces together—place ongoing demands on payments operations. Application and infrastructure consolidation/rationalization form the underpinnings of any modernization initiative.
Four modernization approaches—taking small steps
We see banks using these four approaches to tackle their platform makeover:
- Unbundling of non-core functions. Non-core payment functions such as orchestration, customer data management and product/pricing management can be shifted to specific platform layers. Assigning these functions to enterprise payment, customer engagement or product innovation layers can support development and delivery of a nimble core architecture.
- Establishing systems of engagement. Process-driven functions such as customer onboarding, collections processing, disputes and back office operations can be offloaded into systems of engagement. Based on analysis of customer inquiries to customer service agents, one bank recently developed requirements for a common data source to serve multiple lines of business. Defining cross-reference tables and microservices has increased information accessibility and improved performance of account service functions. This also reduced latencies and dependencies on legacy systems for information access.
- Modernizing batch processes. Functions built on batch architecture cannot meet the real-time information demands of today’s customers. Such legacy operations can be offloaded by adopting distributed systems—especially for functions such as reconciliations, embossing, data sharing and settlement. For example, one bank built its embossing function on coarse-grained services, monolithic code and infrastructure ill-designed to support "failover" and resiliency. Through development of microservices, the bank now populates certain data elements in the embossing file ahead of the batch cycle by referencing newly developed tables in a DB2 database system. This process reduces the batch processing window and coupled with more cycles each day, improves embossing card turnaround.
- Building APIs to the core. Legacy operations can be isolated by constructing an API-enabled in-memory grid that acts as a core interface. This approach reduces dependencies that batch processes impose in the experience layer of real-time data and transactions. The grid caches data and uses the cache to deliver real-time APIs, while syncing the data to the core for processing. Banks have taken a phased approach to building API interfaces—starting with simple functions such as customer identification, pricing and fees. They then progress to more complex operations such as authorization matching and payment exception handling.
Choose the right role to find the right path
One bank may want to own the end-to-end payments value chain. Another may want to own the customer. Yet another just wants a piece of the action. The role that a given bank, intermediary or processor aspires to will dictate how it responds to modernization drivers and where it begins the modernization quest.
Given the stakes, it pays to choose and proceed intelligently. And in the long run, nibbling that's applied with persistence and focus can take a big bite out of a mission-critical task.
Anil Das is managing partner at Cognizant.
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