How mid-sized banks can win the payments race

From real-time payments to seamless business integrations, banks and credit unions are feeling the pressure to modernize their payment systems as business banking clients demand new tools and capabilities. According to recent research from Datos Insights, 96% of banks are already investing in payment technology.

Mid-sized banks face competition from all sides: small banks and credit unions, large financial institutions, and fintech disruptors. Fortunately, banks in the mid-sized category can leverage their unique strengths, such as deep client relationships and personalized service to differentiate themselves in a crowded, competitive landscape. As the digital payments era continues to accelerate, these institutions are making strategic choices around modernization, capitalizing on opportunities created by industry changes such as ISO 20022 and CBPR+ and unlocking new revenue streams.

Tackling the payment modernization challenge

Remaining competitive against larger banks and fintech disruptors requires that mid-sized banks prioritize investing in payment modernization as part of a comprehensive digital transformation plan. When asked about working with fintechs, nearly half of midsized U.S. businesses that work with a fintech vendor (45%) cited “more payment options” as a reason. The same number selected “better integration with internal systems” and “access to real-time payments” was close behind at 43%.

One major opportunity for mid-sized banks is the small and mid-sized business client segments. To capture this market, banks need to understand the needs of these clients and tailor their plans accordingly. For example, as the demand for cross-border payment solutions grows, banks may need to partner with alternative cross border payment providers to make international transactions faster, less expensive, and more transparent.

Offering integrated solutions that address primary hurdles like integration complexity, the need for automation and technology costs can also help mid-sized banks position themselves to deliver value to their customers. These banks should create an integrated financial services ecosystem through payment hub solutions that offer pre-integrated value-added services such as sanctions screening, fraud detection, alternate cross-border payments and integration with ERP systems to drive faster speed to market and innovation.

Tapping cloud technology and strategic partnerships

It’s also important for mid-sized banks to recognize that the cloud plays a critical role in modernizing payment systems. Transitioning to cloud infrastructure isn’t simply a technical upgrade; it requires a fundamental shift in how banks approach technology strategy and risk management. Banks will also need to make a strategic choice of managing payments systems in-house vs. going with a SaaS solution that offers the best outcomes without complexity so that banks can focus on their core competency of delivering customer value.

Mid-sized banks need flexibility, reliability, and a foundation to support rapid innovation and seamless scaling. Cloud technology delivers on these fronts. Migrating payment processing to the cloud and seeking cloud-native solutions when partnering with technology vendors can help mid-sized banks improve scalability, innovation capabilities, agility, and cost-efficiency.

At the same time, due to the complexity of modern payment systems, successful banks often engage in strategic partnerships to achieve the technological capabilities needed to deliver the services and solutions their clients expect. Collaborating with a partner that has a global footprint, a built-in ecosystem, PaaS capabilities, and a strong track record of innovation in payments can help drive innovation and improve customer outcomes while also allowing mid-tier banks to focus on their core strengths.

Capitalizing on transformational opportunities

According to research from Datos Insights, 89% of business clients (particularly those in the mid-market segment) are planning significant payment technology improvements in the next 24 to 36 months. For mid-sized banks, the drive toward payment modernization presents opportunities to strengthen relationships, develop new revenue streams, and position themselves as essential partners in their clients’ digital transformation journeys.

The upcoming transition to the ISO 20022 payments data standard exemplifies one such opportunity. ISO 20022 represents a fundamental transformation of the way financial data moves through the banking system, and adoption is underway around the world.

In addition to preparing their systems in accordance with the new standard, mid-sized banks play an important role in helping their business clients adapt. This shift represents a critical juncture for banks to demonstrate their value as strategic partners to their corporate clients. However, with many businesses already ahead of banks on adoption readiness, mid-sized institutions must accelerate their ISO 20022 adoption preparations to meet the upcoming deadlines and clients’ expectations.

ISO 20022 also presents an opportunity to develop value-added services that leverage the rich data required by the standard. Anti-money laundering (AML) and compliance are two of the most promising areas for leveraging ISO 20022 data. The additional structured data in ISO 20022 messages can feed into artificial intelligence and machine learning systems, improving the detection of complex AML scenarios and reducing false positives. In addition to helping banks more effectively meet regulatory requirements, these enhanced systems also provide a valuable service to their business clients.

In addition, forward-thinking banks are developing value-added services like advanced cash flow forecasting and working capital optimization tools, transforming payment modernization from a cost center into a revenue driver. Mid-sized banks should invest in robust data analytics capabilities to extract meaningful insights from ISO 20022 data and cloud-based systems while enhancing security measures and compliance efforts using advanced technologies like AI and machine learning.

The digital payments space is evolving quickly, and with mid-sized banks facing competition from larger financial institutions and fintech disruptors, staying abreast of payment modernization trends is crucial to meeting clients’ expectations. Fortunately, mid-sized banks pride themselves on the strength of their client relationships, which provide a distinct advantage when it comes to helping clients navigate payments opportunities and challenges.

Radha Suvarna is Chief Product Officer for Payments at Finastra.