The Cost of Legacy Payments in Light of Innovation’s ROI 

Innovation, particularly within financial services and payments, tends to be centered around speed, cost efficiency and transparency.

However, many financial institutions (FIs) with incumbent infrastructure seem to take the view that those innovation benefits quickly turn into new costs when they consider moving away from their legacy systems — with benefits that, at the time of investment, may appear to be relatively opaque. 

But increasingly, while the cost of technical modernization is not negligible, the price of not modernizing can often be much higher — particularly for banks that find themselves facing a shifting ecosystem full of FinTechs, Banking-as-a-Service providers and more 21st century competitors crowding what used to be a relatively staid landscape. 

This, as a new report from the Riksbank, Sweden’s central bank, found that digitalization has not only significantly reduced banks’ costs for payment services, but has even made them profitable.

That’s because banks incur costs to provide payment services, including labor and IT systems. The evolution of payments, from physical cash and other legacy methods to digital money movement vehicles that settle faster and offer rich transaction data, has created a new environment with optimized workflows and led to an 80% decrease in payment processing costs for FIs within Sweden over the past decade. 

“As more payments are made digitally, the banks’ costs per payment decrease, as the costs of digital payments are largely fixed and do not increase as the number of payments increases,” Riskbank wrote in the report. “On the other hand, the banks’ revenues increase as payments increase, especially for cards. As a result, banks have gone from making a loss on their payment services in 2009 to making a profit on them in 2021.” 

What the findings reveal is that the while value inherent in eliminating manual processes around cash management and investing into improving payments functions may appear to be an obvious choice, modernization initiatives are often overlooked by FIs as a way to activate growth. 

Read more: Why It’s Time to Sink the Sunk Cost Theory of Legacy Payments Infrastructure

Despite decades of investment in digital technologies and innovation, the maturity of the financial services sector’s payment capabilities remains varied. Simply spending more on technology does not lead to better performance, and savvy firms should take a more tailored and intentional approach to their modernization initiatives.

That’s because there is always a technical lift beyond just money that includes resources and human capital, making legal, finance and IT crucial stakeholders in process modernizations. As the saying about “too many cooks in the kitchen” goes, this can lead to a type of institutional inertia where businesses tend to ask, “Why change?” rather than make the necessary changes that will benefit them in the future.

But today’s banking and payments landscape is only going to witness the continued need for, and speed of, processing in payments as well as access to always-on payment capabilities as more and more industries shift to 24/7 business models and expect their financial institutions to keep up.

“Banks still play the role they’ve always played, but as we become digital, as we become mobile, and as the banks become branchless, the relationship becomes centered in the technology and the capabilities — not always the individuals, the bankers that knew you,” Shaunt Sarkissian, founder and CEO of AI-ID, told PYMNTS.

After all, firms using legacy methods like spreadsheets, outdated processes and entrenched workarounds may find it difficult to build and scale in today’s environment, where process optimization can put a firm ahead.

See also: Data-Ready Banks May Have Competitive Edge in Digital Innovations

Completing a series of small steps is an easy way to make a big change, particularly as monolithic firms look to tackle their legacy processes. 

“You don’t want to boil the ocean and try to solve for everything at once,” Corcentric CEO Matt Clark told PYMNTS in June. “Firms need to look at [transforming their existing processes] as a kind of crawl-walk-run mentality to get to where they need to go.” 

But the banking landscape is changing, as are end-user expectations around services and convenience, which means that banks themselves need to adapt and innovate.

“Historically, it was just banks competing with banks. But increasingly, FinTechs and other disruptive entrants are leveraging solutions…innovations and competitive offerings…which can be costly and complex for banks to quickly stand up,”  William Artingstall, global co-head of cross-border payments and receivables at Citi, told PYMNTS.

As Form3 U.S. CEO Dave Scola told PYMNTS, “creaking, older legacy platforms” are struggling to adapt to new demands.

That’s why the need for financial institutions to modernize their infrastructure is so pressing. And while the initial investment in modernization may seem daunting, the long-term gains in efficiency, competitiveness and customer experience are becoming increasingly obvious in the digital age of banking and payments. 

After all, PYMNTS Intelligence in “The FinTech-Bank Relationship Shifts Toward Collaboration” shows that nearly two in three banks and credit unions surveyed (65%) have entered into at least one FinTech partnership in the past three years, with 76% of banks viewing FinTech partnerships as necessary to meeting customer expectations.

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