Financial services sector participants are aware that innovation usually increases at a slow, gradual pace, and as certain technologies mature, this leads to acceleration. This has not been the case in recent years and much of this accelerated adoption of technology has been because of fear, uncertainty, or doubt. Exponential growth has been on the horizon for years, and there are no signs of slowing down.

This is an excerpt from Future of Payments 2023.

Customers call the shots now

It is also clear that customers are now dictating what banks should add to their tech stacks and cloud has been proven to provide the scalability that banks require. Innovation can only be achieved with experimentation, and cloud has the potential of enabling this without adding to existing technical debt that some traditional financial institutions may be overburdened with.

By bridging the cloud migration gap and establishing a holistic strategy for how technology can be leveraged, successful cloud usage can separate the winners from the losers and establish competitive advantage. Cloud allows companies to remain differentiated, go to market with unique propositions and operate with predictable cost.

Further to this, while cloud supports a progressive banking model and platforms that are built on modular capabilities, digital transformation is becoming more complex by the minute and newer firms are also creating technical debt by attempting to resolve issues with security, scalability, and resilience. Digital transformation and cloud migration are two sides of the same coin, and you cannot have one without the other.

As new cloud strategies emerge, the migration process becomes more complex and dealing with regulatory fragmentation becomes a struggle which involves multiple options in cloud providers, and a unique array of approaches to the transition.

The UK’s FCA is an innovative regulator, and they are picking up on how the industry is changing. Across Europe, it is essential to have the support of authorities to operate under their guidelines and frameworks to design products and services within the cloud infrastructure up to their expected standards.

In addition to this, financial institutions must strike the balance between migration processes taking servers temporarily offline, ensuring data does not become unavailable or at risk of breach and keep pace with loyalty or personalisation initiatives, at the same time. Everything starts with the customer: all users and customers are humans and banks, when establishing new products and services, should understand that their expectations are shaped by the experiences they are having with their financial services providers.

Simone Satan, global head of digital market management, treasury services, BNY Mellon, highlights that “one of the focuses for banks is to improve profitability, either by enhancing the customer experience or by improving operational efficiency.” The upgrades that banks are currently undergoing, and will continue to do so, by leveraging emerging technologies play a substantial role in the wider digital transformation of the entire financial services industry.

Satan continues: “Banks, however, generally struggle to isolate and quantify the cost and revenue impact of their digital transformation strategies. For example, the transformation budget can easily be consumed by updates to legacy systems, which leaves limited budget available for innovation that is necessary to keep the bank’s competitive advantage. This is ever- more concerning as new market entrants and requests for tailor-made digital solutions continue to intensify and present new competitive market pressures for banks.”

Cross-border payments, open banking and innovating the rest

With enhanced customer experience at the forefront of minds and utilising technology to support this, Satan also calls into question the example of open banking and how this initiative allows banks to “open their IT infrastructure, leverage historical client data and utilise market intelligence to help build new solutions that matter to their customers.” With innovation in mind and as banks integrate products into their core banking systems, leveraging solutions owned by third-party vendors, financial institutions should choose providers that meet their requirements from a financial, operational and compliance risk perspective.

Satan also references a BCC report in which it is projected that the cross border payments market will grow from $176.5 billion in 2021 to $238.8 billion in 2027. Banks could lead the charge in this space and if these organisations continue to innovate, maintain competitive advantage. Satan explores use cases such as regional banks looking to leverage the capabilities afforded to them by global financial institutions to offer their customers global FX payment services.

“Sometimes, initiating FX transactions online and creating customized self-service options do not provide a seamless experience. Other challenges include complications in accessing real-time rates and limited multi-currency exchange capabilities because of the legacy payment systems.

“Partnering up with global players in the cross-border banking space that offer these FX capabilities – such as real-time payments, tracking, and AI – can be the secure, predictable, and fast low-value cross-border payment solution regional banks are looking for. Having such capabilities integrated through new technologies such as APIs can create a shift towards customer- centric payments transparency and build a competitive advantage.”