Traditional payment systems, once the backbone of financial transactions, are increasingly failing to meet modern demands. As customer expectations soar and regulatory requirements tighten, many banks find themselves at a crossroads. Enter Payments Modernization 3.0, a revolutionary approach that promises to reshape the industry. This isn’t just an upgrade; it’s a complete reimagining of how financial institutions handle transactions. 

The need for change

Aging payment infrastructures, changing customer expectations, and regulatory requirements like ISO 20022 and FedNow are driving the need for a new approach to payments. However, our approach today has not met expectations. In many cases, banks have experienced cost overruns and project failures and the innovation they have hoped for never materialized. 

The challenges leading to these failures are not new. Recent research reveals persistent challenges in the payments landscape. According to Volante’s “Payments Modernisation: The Big Survey 2024,” the top three customer pain points have remained consistent since 2021: 

1. Efficiency and speed of cross-border payments 

2. The cost of payment processing 

3. Access to real-time or intraday liquidity 

Why most modernization efforts fail 

This consistency in pain points isn’t due to lack of effort. Many banks have invested millions over multiple years with little progress to show. Four primary issues are driving these failures: 

1. Over-customization of solutions instead of leveraging core functionality 
2. Vendor platforms undergoing modernization themselves, creating competing priorities 
3. Drastic scope increases, making “big bang” approaches unfeasible 
4. Inability to work agile and deliver in parallel due to architectural and resource constraints 

Introducing Payments Modernization 3.0

Payments Modernization 3.0 represents the change the industry has needed. It presents a thoughtful and logical approach to payment modernization, building upon the foundation laid by earlier iterations: 

1. Payments 1.0: The first stage of payment modernization began with the introduction of electronic funds transfer systems in the 1970s, such as SWIFT and Fedwire. This time period also included the development of single-purpose systems such as the ACH (Automated Clearing House) system. 

2. Payments 2.0: As the payments ecosystem grew, institutions sought to move past single-purpose systems, and the general-purpose payment hub era began in the 2000s. These systems are now more than twenty years old, classifying them as legacy systems, given they were designed before the advent of real-time payments or ISO 20022. 

3. Payments 3.0: This new era is defined by the combination of support for instant payments, ISO 20022, and modern digital experience. This phase sees banks moving from monolithic systems to cloud-native microservices architectures, leveraging APIs to enable a flexible PaaS (Payments as a Service) approach. 

To overcome the four primary issues driving modernization failures, Payments Modernization 3.0 emphasizes five core tenets: 

1. Adoption of commoditized SaaS solutions for core functionalities 
2. Internal development of “edge” capabilities to reduce vendor dependencies 
3. Selection of vendors not currently modernizing their platforms 
4. Investment in client and partner enablement 
5. Implementation of digitally decoupled and modern solutions 

The modern advantage

“Accenture has consistently been at the forefront of payments modernization for the last three decades. It is not surprising that they are leading the PayMod 3.0 charge, and Volante is pleased to be partnering with Accenture for the benefit of our mutual customers,” states James Penniman, Chief Revenue Officer at Volante. 

The PayMod 3.0 approach offers several key benefits: 

1. Accelerated time-to-market: Leveraging cloud-native microservices architecture and low-code configurability, banks can rapidly deploy new payment solutions and adapt to market changes.  

2. Reduced total cost of ownership: Flexible architecture and efficient development processes lead to lower implementation and maintenance costs over time.  

3. Enhanced customer value through expanded services: Banks can offer advanced features such as real-time payment tracking, enriched data insights from ISO 20022, and seamless multi-channel payment support.  

4. Customizable “build and buy” flexibility: Larger organizations can combine vendor-provided solutions with in-house developed components or orchestrate multiple vendor solutions for a best-of-breed approach. 

5. Future-ready infrastructure: PayMod 3.0 positions banks to easily integrate emerging technologies like AI, cryptocurrencies, and Central Bank Digital Currencies (CBDCs), ensuring long-term relevance and competitiveness. 

The path forward

The journey to Payments Modernization 3.0 is not without its challenges. The Volante survey reveals that while 64% of respondents indicate increased budgets for modernization, the majority plan to allocate less than $1 million in new spending. This emphasizes the need for cost-effective solutions that can deliver significant value. That’s exactly what Payments Modernization 3.0 brings to the table, enabling a flexible, piece-by-piece approach to updating a bank’s payments approach. 

As we move forward, the financial services industry must embrace this new era of payment modernization. By leveraging partnerships, adopting flexible architectures, and focusing on customer-centric innovation, banks can not only meet the challenges of today but also position themselves for the opportunities of tomorrow. 

The future of payments is here, and it’s time for financial institutions to seize the moment and embark on their Payments Modernization 3.0 journey. 

Contact a Volante payments expert to learn more about payments modernization.