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Effective Preprocessing Part I: How Payment Friction Inhibits Digital-Channel Adoption

Key Takeaways from A New Aite-Novarica Study on Payments Modernization

As part of Volante’s ongoing efforts to provide insights to help financial institutions navigate the complexities of payments modernization, in the latest white paper written by Aite-Novarica, “Effective Preprocessing: The Path to Faster Payments Modernization,” brings clarity and guidance around preprocessing as a means to jump start innovation leveraging emerging payment types and management services.

In this three-part blog series, we’ll provide a brief, high-level overview of key insights revealed in the report. To start, let’s take a look at what the research tells us about how friction impacts payment-channel adoption, as well as expectations from businesses to gain access to innovation from their banks and financial providers.

Payment Friction is Inhibiting Digital-Channel Adoption

For all of the known benefits of payments modernization, it’s clear that financial institutions (FI’s) are faced with many challenges when it comes to achieving the necessary capabilities to reach their strategic objectives. Today’s global financial marketplace is incredibly complex, as payments travel through a variety of different formats and standards, originating from different systems and channels. In short, offering new payment methods to business customers is not an easy task.

No matter the approach, points of potential friction are abundant; replacing payments systems can be complex to navigate, leaving stubborn hurdles to modernization firmly intact.

If the end goal of an FI is to attract new business customers with new value-based services, the best approach will be to shoulder the burden of eliminating friction with the least amount of risk and fastest response times, allowing customers to transact on new payment rails and facilitating the translation of file types. Asking customers to use specific formats will only serve to increase their frustration.

But in order to achieve this, FI’s will need to simplify the process of translation within their own operations, allowing staff to centrally manage payments through the next generation of internal management systems. To this end, FI’s might consider integrating a modularized Payments-as-a-Service (PaaS) model to introduce new payment channels and begin converging payments rapidly, or seek similar capabilities through alternative cloud-based offerings.

Businesses Look to Banks for Innovation

While some businesses will actively seek out new payment solutions on their own, many continue to be put their trust with their banking partner. As illustrated in Figure 1 below, when asked to describe how their organizations view new payment options and technologies, 42% of 790 respondents said their business waits for new capabilities to be offered by their financial institution.

Of course, there are also plenty of businesses that don’t have the luxury to wait for new solutions to be offered, and in such cases it becomes necessary to seek out a new provider. For example, a large commercial real estate organization may be in the process of acquiring a new client, but the contract may be contingent on gaining the ability to pay vendors using Zelle or a similar real-time provider. If the organization’s current bank doesn’t offer this capability, they will have no choice but to work with an outside provider or risk losing the contract.

Banks that continue to follow the status quo risk disintermediation. Explore these findings in more depth by downloading the full white paper, and otherwise stay tuned for the next edition of this blog series, in which we’ll highlight how accounting systems inhibit payment channel adoption for your customers, as well as the increasing need for preprocessing solutions.

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