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The six top payments modernization challenges for financial institutions

Dan Pilling
Executive Advisor, Volante Technologies

The banking industry is undergoing a massive transformation in the payments space. Banks are faced with the daunting task of upgrading their legacy payments architecture while simultaneously meeting regulatory and industry demands, building new payment rails, exploring revenue streams, enhancing security, and increasing availability, scalability and resilience. And they must do so in the face of ever-tightening budgets and resource limitations, an almost impossible feat. 

I have worked in the payments industry for over 30 years, and most recently as CIO, Global Head of Payments for Barclays. The challenges that banks face remain consistent, however what is new is the pace of new technology, ever-increasing payment volumes, and new payment rails against a backdrop of high levels of regulatory and industry change.  

  1. Adapting to Regulatory and Industry Demands: One of the primary challenges for banks is keeping up with evolving regulatory standards such as ISO 20022 and the UK’s New Payments Architecture (NPA), among other domestic modernization schemes. Compliance with these standards requires significant upgrades to payment systems, which must be carefully managed to minimize disruption to day-to-day operations, not to mention the investment in staff this requires, as evidenced by Finextra’s 2023 report The Future of Regulation, Risk Management and Compliance, that found 58% of banks are having to increase the number of their compliance teams.
  2. Building New Payment Rails: The rise of instant payment schemes, such as RTP and FedNow in the US, and SEPA Instant in Europe, presents another challenge for banks. These initiatives enhance the speed and efficiency of payments, offering customers real-time and instant settlement capabilities. Banks need to invest in the development of new payment rails to remain competitive – particularly as instant payment volumes are set to reach $123 billion by 2031 according to Allied Market Research.  
  3. Expanding Revenue Streams through Digital Ecosystems: To stay relevant in the evolving payments landscape, banks are exploring opportunities to generate new revenue streams, which according to Grand View Research are expected to reach $135 billion by 2030. They are leveraging APIs and Open Banking to create a broader payments digital ecosystem. This ecosystem allows banks to offer innovative services and collaborate with third-party providers.  
  4. Reducing Total Cost of Ownership and Accelerating Change: Managing the total cost of ownership (TCO) and driving the speed of change are critical challenges for banks. Legacy systems often come with high maintenance costs and complex integration requirements. According to a study by Deloitte, Financial Institutions spend an average of 73% of their IT budgets on maintaining and operating legacy systems. Upgrading to the latest technology can help reduce TCO and enable banks to adapt quickly to market demands.  
  5. Enhancing Availability, Resilience, and Security: In 2020, the global banking industry saw a 238% rise in cybersecurity attacks according to VMware Carbon Black. In an era of increased cybersecurity threats, banks must prioritize the security and resilience of their payment systems. Fraud prevention and compliance with sanctions regulations are crucial components of an effective payments infrastructure.  
  6. Driving Scale and Throughput: As digital payment volumes continue to rise (expected value to reach $360 billion by 2030 according to Grand View Research) banks face the challenge of processing transactions quickly and efficiently. They need systems that can seamlessly scale to handle increasing volumes while maintaining performance and reliability.  

To drive successful payments modernization, banks must carefully choose technology vendors that offer strategic solutions, simplify integration, drive innovation, and ensure security and scalability. Partnering with the right vendors enables banks to transform their legacy payments architecture, stay ahead of regulatory demands, and seize opportunities for growth and success. In my next blog post, I’ll discuss key factors for banks to consider when selecting technology partners and maximizing the value of those partnerships. 

Dan Pilling
Dan Pilling
Executive Advisor, Volante Technologies

Dan is a Payments Industry Expert with over 30 years experience in the field.


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