Payments play a major role for future-ready banks

A version of this article first appeared in the July BAI Executive Report: Modernizing payment methods. Find more insight within the issue on topics including consumer payment preferences, FedNow and RTP, check fraud and more.

With financial services technology advancing in ways that were unimaginable just a few years ago, the business of banking as we know it will hardly be recognizable soon.

To keep up, today’s financial institutions need to embrace a new generation of technology and strategically respond to these challenges and opportunities.

For this reason alone, technology decisions can no longer be based solely on features and functions. Purchasing criteria must also assess the ability of solutions (and their providers) to enable near- and long-term innovation by leveraging:

• An unrelenting commitment to digital and payments reinvention
• Open banking and unbundled technology platforms
• Embedded finance and embedded fintech
• A client-driven product strategy that combines aggressive proprietary development, best-of-breed fintech and third-party solutions and competition
• A documented, consistent and meaningful investment in R&D
• The ability to support the financial health of the people, businesses and communities the financial institution serves

This approach to technology due diligence is designed to help financial institutions choose solutions that are future-ready because the reinvention of banking will require significant changes in business strategy, operational infrastructure and technology partners.

Digital banking is firmly positioned as the foundation of the new financial services industry. But the way banks innovate will determine whether they can meet accountholder expectations, compete with traditional and nontraditional organizations, realize their growth goals and, ultimately, survive.

Change starts with opening up

Digitizing payments is essential to moving money in the exact moment of need—already a ubiquitous expectation for consumers and businesses. This is why converting slow, expensive traditional payments into faster, cheaper digital payments is a fundamental component of digital reinvention.

To accomplish this goal, banks must now evolve traditional technology infrastructure into open platforms that unbundle legacy technology stacks. Open platforms enable banks to build their own proprietary applications or to integrate fintech and third-party solutions without permission or assistance from existing technology providers. Operating as an open platform provides absolute control over who you partner with, what solutions you integrate and when.

Embrace BaaS for new revenue

Banking-as-a-Service (BaaS), or embedded finance, promises to further disrupt and challenge traditional banking by enabling virtually any company in any industry to embed financial services into its customer experience, including websites, mobile apps and business automation solutions.

BaaS blurs the line between chartered and nonchartered providers of financial services by enabling nonfinancial entities to “rent” a financial institution’s secure, regulated API-driven infrastructure to embed financial services—including payments and deposit accounts—into a curated customer experience.

Every bank must consider the impact BaaS will have on its competitive environment. Organizations that embrace BaaS with a supporting strategy and technology will generate new recurring revenue streams. Those that do not will lose financial transactions, accountholder relationships, market share and revenue opportunities.

What will come to PaaS?

Payments-as-a-Service (PaaS) enables virtually any company in any industry to leverage relationships with financial institutions and fintechs to embed payments into a curated customer experience.

As PaaS gains momentum and fundamentally changes the payments industry, every financial institution faces yet another strategic decision—to either embrace embedded payments and develop the business strategy and technology partnerships to capitalize on them or accept that PaaS is another threat that will erode market share and revenue. It is a very important decision considering payments are the most popular service in embedded finance.

The fintech effect

Fintechs are a competitive force to be reckoned with, especially in the payments space, and many banks are struggling to successfully compete. Innovative, agile fintechs reinvented person-to-person (P2P) payments and then turned their attention to income payments, merchant services and financial management solutions.

Now, many of them are strategically positioned with the technology, expertise and brand allure to further disenfranchise banks by offering deposit accounts, loans and cards. The brand allure of fintechs will evolve into a competitive differentiator as more consumers choose who provides their financial services based on brand affinity, and younger consumers are increasingly open to trusting nonfinancial companies for their financial needs.

Much like the big BaaS decision, banks must decide if these inspired fintechs will be competitive foes or embedded fintech friends.

Payments at the epicenter of financial wellbeing

Today, many banks are renewing their fundamental commitment to reducing the barriers to financial freedom for the underbanked and unbanked. This pursuit, especially as technological competition lowers the cost of entry and boosts the reach of services, in turn generates legitimate differentiators in today’s crowded, highly competitive financial services industry.

While there’s no silver bullet for improving the financial health of today’s extremely diverse consumers and businesses, offering modern, flexible, digitally accessible payments is the place to start.

As the most common money “moment,” payments, from rent to bill paying to food shopping, are a fundamental component of sound financial management.

It takes a village

Originating, processing and settling diverse payments depends on leading-edge technology. No financial institution—not even mega banks—has the vision, expertise, time or budget to build and maintain its own payments platform. And no fintech—not even the payment giants—can autonomously build and maintain a platform that supports all payment channels and types without a little help from its friends.

Successful payments modernization requires traditional banks and their partners to cultivate strategic relationships and embrace “coopetition.” Then, they can efficiently and seamlessly deliver the solutions and functionality to meet the evolving expectations for a modern payment experience and successfully compete with nontraditional payment providers.

Dennis Jones is Senior Marketing Manager at Jack Henry.