In today’s fast-paced technological landscape, sticking with legacy systems can leave financial institutions lagging behind. With the rapid evolution of payment methods and regulations, banks must stay ahead of the curve or risk being left out of the game.

The necessity for modernisation is driven by several key factors, including the migration to ISO 20022, the rise of Open Banking and the introduction of Central Bank Digital Currencies (CBDCs).

Additionally, financial institutions must adapt and differentiate in a crowded market by designing and delivering a superior customer experience. Keeping pace with changing market dynamics and accelerating time to market for quickly launching new digital products are essential to remaining competitive.

The Drivers of Change

ISO 20022 has become the global standard for payments messaging, with two-thirds of real-time payment systems around the world already using it, according to Mastercard. The benefits of ISO 20022, including improved communication between banks and payment systems, are prompting even those not currently using it to plan upgrades.

In the US, the Federal Reserve’s FedNow system, released in July 2023, follows the Clearing House’s RTP Network, which has been adopted by over 285 financial institutions. PwC forecasts that cashless payments in the US and Canada will nearly double by 2030.

European banks will soon have to implement the new Instant Payments Regulation with prescriptive timeframes, or face penalties.

The need to modernise payment infrastructures is critical in this age of instant money transfers. Banks must develop both short- and long-term strategies to capture these opportunities, addressing not only the demand for instant payments but also the need for improved messaging standards, regulatory compliance, and the agility to adapt to emerging technologies and market trends.

Strategies for Platform Modernisation

Modernising payment platforms, however, can be challenging. There are typically two main approaches.

The first approach is a complete change of system, and several different strategies can be employed to achieve that.

The second approach is to modernise only certain components of a system, rather than the entire platform.

This could include particular products or portfolios, or even a launch within a specific country or region. The choice of modernisation strategy depends on balancing the risks and rewards of each approach.

Here are several examples of strategies that financial institutions can consider:

1. Big Bang Migration

A big bang migration involves switching from the old platform to the new one in a single, decisive move. This approach demands thorough planning and extensive testing to ensure a smooth transition. While it can be efficient if executed well, the risks of disruptions and failures are higher.

2. Parallel Running

In this approach, banks run both old and new systems concurrently for a period, allowing for real-time comparison and gradual transition. This strategy provides a safety net, as any issues with the new system can be addressed without disrupting ongoing operations. However, it can be resource-intensive and complex to manage.

3. Incremental Modernisation

Incremental modernisation involves gradually updating components of the payment system rather than overhauling the entire platform at once. This strategy allows banks to start with specific portfolios or functions, such as credit or debit card processing, and progressively transition other elements. The advantage is a lower immediate risk, but it requires careful planning to avoid integration issues.

4. Phased Migration by Product/Service

This strategy involves transitioning or launching specific products or services (e.g. credit cards, corporate cards) on the new platform. It allows for manageable segments of change, reducing risk and enabling focused attention on each product’s transition. The downside is the prolonged period of dual system maintenance.

5. Selective Migration by Customer Segment

Banks can choose to migrate specific customer segments (e.g. high-net-worth individuals, or corporate clients) first, before rolling out the new platform to the broader customer base. They could also consider this approach to expand their activities and launch in other regions or other countries. This strategy allows for targeted testing and optimisation prior to a prospective full-scale implementation. The challenge lies in managing different segments on different platforms.

Keeping Up

Modernising payment systems is imperative in the rapidly evolving financial landscape. Banks and financial institutions must carefully evaluate their strategies to ensure they stay competitive while managing risks.

Whether through big bang migration, parallel running, incremental modernisation, phased migration, or selective migration, each approach offers unique benefits and challenges.

Featured image: Edited from Freepik