The future of finance is open, so payments should be, too

For decades, banks were a one-stop-shop for an entire suite of financial services. Customers relied on them to hold, transfer and invest their hard-earned money. But rapid technological changes brought about by fintechs have brought new players to the field, creating a complex web of tools and providers where there used to be just one.

This is especially true in the world of payments. This no-frills sector of the financial industry has transformed into a breeding ground for innovation due in no small part to evolving consumer demand. Think about it: When was the last time you saw someone take out their checkbook to pay for a purchase? As customers’ payment expectations continue to change at a rapid pace, the pressure is on financial institutions to meet them where they are at or risk being replaced by leaner, more agile alternatives.

The majority of the industry is wise to this reality. In fact, a recent survey found that only 6% of banks were not planning to invest in payments technology in the near future. But many also acknowledged that the road ahead will be rocky, with 40 percent categorizing the technical challenges of integrating new technology with legacy systems as a major obstacle.

How can banks retrofit their IT strategies in time to retain and acquire customers in a competitive landscape while headwinds like operational costs and cumbersome infrastructure threaten to hold them up? It comes down to prioritization. By focusing on implementing technology and solutions that offer the highest return on investment, specifically open APIs and cloud-based architecture, banks can quickly integrate desired services like real-time payments and position themselves to adapt to new demands quickly.

Open APIs connect banks to apps

These days, there is an app for everything – from P2P providers like Zelle and Venmo to personal finance tools like You Need a Budget, most banking needs can now be taken care of with a simple swipe of a smartphone. APIs have been critical here, as they enable the transfer of information from one platform to another.

Banks that are able to plug into other companies’ APIs unlock a world of tools for their customers. Apps and companies that communicate via open APIs have been used to simplify cross-border payments, streamline compliance, and improve fraud detection. By leveraging open APIs, banks can implement these services quickly, seamlessly, and at a much lower cost than if they were to try and build the capabilities themselves.

Cloud-based platforms make innovation easier

The tech industry’s move-fast-and-break-things ethos has always been a hard sell in the financial industry, where trust and security as the most important aspects of the customer relationship. This safety-first attitude is, in part, why the industry has been slower to adopt cloud-based infrastructure and solutions. Companies were hesitant due to  unknowns around integration and gaps in security.

In the past few years, the cloud has become a prominent component of large bank implementations and has proven to be safe and provide worthwhile infrastructure when the proper guardrails are in place. These days only 9% of banks report having rejected moving some part of their payment processing to the cloud.

This shift in attitude comes after new payments-as-a-service (PaaS) offerings arrived on the market, allowing financial institutions with cloud-based infrastructures to speed up and simplify the payments process for their customers. PaaS also allows banks to pivot and respond to new customer demand for solutions like real-time payments in a cost-effective manner.

Adapting to the financial industry’s new digitally native reality should be a marathon, not a sprint. The process requires a hefty investment of both time and capital. However, there are certain things financial institutions can do that will both benefit them in the short-term and set them up for long-term stability.

By embracing open APIs and cloud platforms, financial institutions can satisfy consumer demand for innovative solutions and future-proof their organizations, laying the groundwork for success in the digital age no matter what changes the future brings.

Sylvie Boucheron-Saunier is chief revenue officer for the payments business unit at Finastra.