Financial news

Spending on legacy paytech is rising rapidly and damaging the growth prospects of banks around the world; according to a new study by IDC Financial Insights sponsored by Episode Six, a global provider of enterprise-grade payment processing and digital ledger infrastructure.

Globally financial institution (FI) spending on outdated payment systems is expected to climb to cost banks and FIs $57.1billion in 2028 – a drastic rise from $36.7billion in 2022, with an average annual growth rate of 7.8 per cent.

The IDC study ‘Future Ready Payments Platforms Enabling the Next Phase of Growth for Banks’ also revealed some of the hidden costs of legacy paytech, which renders banks unable to compete for new payments-related income. FIs could miss out on an additional 42 per cent of payments-related revenue and legacy cost savings of up to 21 per cent annually if they fail to migrate to future-ready paytech platforms.

Future-ready paytech offers additional capabilities that can boost revenue. These include new product creation, such as:

• Deferred payments or digital wallet platforms (22 per cent)
• Banking-as-a-Service (BaaS) and Payments-as-a-Service (PaaS) revenue (12 per cent)
• Data monetisation (eight per cent)

Annual savings could also come from:

• Retiring unneeded legacy technology (eight per cent)
• Orchestration cost benefits (five per cent)
• Downtime reduction (four per cent)
• Development cost reductions (four per cent)

Overall, 40 per cent of respondents in IDC’s 2023 banking survey cited legacy technology as a major pain point in their digital transformation efforts. Because of this, banks and FIs across the globe are actively looking for future-ready payment technology to enable their next phase of growth and innovation.

‘A real drive for the consolidation and simplification of the technology estate’

Ian Bradbury, CTO of financial services at IT solution provider Fujitsu UK&I, discussed the next steps required for traditional banks.

“Despite being much younger than traditional financial institutions, digitally native firms have long leveraged their unique ability to offer customers more agile services. It’s clear that these digital offerings are driving competition in the banking sector with challengers like Starling Bank hitting profitability. Thankfully, however, the traditional players are looking to catch up, investing billions in fintech,” Bradbury commented.

“But this commitment to new technology doesn’t necessarily eliminate the old, and over the years the mainstream players have acquired a host of legacy systems and the longer these old processes are maintained the more difficult moving away from them becomes.

“We’re already seeing a real drive for the consolidation and simplification of the technology estate, but this must accelerate if banks hope to effectively modernise and reduce soaring support costs that will build up over time,” he concluded.

Which factors are driving the change in the banking landscape?

Some of the major forces driving a faster transition away from outdated payment systems, and pushing banks towards future-ready payments technology are also discussed in the IDC report:

• Consumer demand: As payment choice increases in importance for consumers, by 2024, 70 per cent of retailers will add at least two new payment options, such as QR codes, contactless, or alternative payment methods.
• Infrastructure: Driven by increasing technical complexity and growing numbers of payment rails, 50 per cent of global banks will adopt PaaS for some or all payment processing workloads by 2028, with a focus on cloud-based payment processing.
• Business model innovation: By 2026, worldwide B2B BNPL will reach $500billion, with BNPL platforms competing with legacy FIs to provide small and medium-sized businesses with working capital loans.

According to IDC’s analysis, moving to new future-ready paytech platforms delivers new product and service innovation for banks and financial institutions. Currently, only five per cent of global FIs have future-ready paytech, highlighting how much room for growth exists.