Aging paytech stacks are a resource drain on traditional financial institutions. According to research done with IDC, 73% of financial institutions (FIs) have payments infrastructures that are not well equipped to handle payments for 2023 and beyond. Because of this, $250 billion in payments revenue will be lost by FIs by 2030.
Card payments, a payment method that has been around since the 20th century, will still see growth – roughly 4% annually between now and 2030. However, it’s quite evident that there are new ways to pay and FI payments technology needs to be able to accommodate them based on trends like Buy Now, Pay Later (BNPL), which grew 79% in 2020 and is set to grow 15% year on year to 2030 (IDC).
There is also a race to the finish line before consumers choose their primary providers; the clock is ticking. FIs need to move faster and stake their claim, before someone else does.
But how? By preparing for the new landscape and having the flexibility to cater for new payments needs.
The ageing paytech stack
Payments are transforming at the fastest pace in decades with new ways to pay constantly being created. Digital payments usage has been steadily increasing and even before the onset of the pandemic, quicker and more efficient payment methods have been ramping up in usage. Alongside all of this is the emergent parallel world of cryptocurrencies and stablecoins. As a result, it’s expected that the global digital payment market size is expected to reach USD 361.30 billion by 2030, expanding at a CAGR of 20.5% over the forecast period.
As a consequence of how we pay and what we choose to pay with, there are far-reaching implications for central banks who preside over the world’s monetary systems. Many of them are now questioning how to adapt and prepare for a digital future.
Moreover, the rise of innovators in payments rapidly acquiring market share through superlative payments experiences is hastening FIs to reposition themselves in the payments ecosystem. Fintechs are catering to consumer choices through new and more convenient ways to pay driven by the rise in new – and emerging – digital asset classes, real-time payments, and point-of-sale options such as BNPL. Regulation also plays a role, with Open Banking, domestic real-time payments schemes, and Central Bank Digital Currencies (CBDCs) adding pressure to FIs by shaking up traditionally safe revenue streams. And innovators, fintechs and non-FIs are supporting more and more asset classes every day.
FIs must be able to respond quickly to market demands and evolving end-user behaviours. IDC estimates that 74% of global consumer payments will be handled by non-traditional FIs by 2030. These incumbents, however, are far from being displaced from payments if they can reshape the role that they fulfil in the payments landscape of tomorrow.
How FIs can become future-proof and ready
IDC deemed that only 3% of FIs have ‘future ready’ paytech – meaning a payments infrastructure that’s prepared for future ways to pay with new forms of payment. In the meantime, what can FIs do to remain competitive? Quite simply, focus on enhancing legacy tech stacks. FIs are still grappling with too much legacy mass which continues to rise. As a result of legacy expenditures, payments innovation is restricted in terms of growth and budget, which makes it difficult for them to succeed in a competitive market.
FIs need to shift their mindset to be able to respond to market demands and changing end-user behaviour. One way this can be achieved is through collaboration with fintechs to develop new products and services. The focus should be on finding collaborative ways to work together on inclusive platforms. FIs and non-FIs are part of a payments ecosystem where each can excel if they find a way to create new value.
Multiple platforms created in different eras are often a challenge when innovating and creating new products. FIs will continue to struggle until they adopt paytech that will help to drive efficiencies and accelerate speed to market. By implementing these considerations, financial institutions can compete in the financial services land grab, find new sources of revenue, and futureproof their businesses for the payments landscape of tomorrow. It’s time FIs went out with the old and in with the new when it comes to payment technology.