Preparing for Payments Innovation 

Here are some concrete steps that every financial institution can take now to prepare for any outcome when confronting the payments space.

Matt Herren
Director of Payment Strategy

Sweeping and fundamental shifts are coming to the payments landscape that will have universal implications for community banks. No one can predict the outcome. Anyone who says differently is lying. There are, however, some things we know to be true.

We know cashless payments are expected to triple between 2020 and 2030, according to PwC, hastening the obsolescence of physical currency. We know that cards dominate the payments landscape today, but mobile wallet usage is increasing in popularity at both physical and digital points of sale. And we know that generative AI, like ChatGPT, will play an increasingly important role in customer experiences, financial personalization and the broader digital payments ecosystem.

Yet there are also plenty of unknowns confronting the payments space. Will biometric cards’ fingerprint payment authentication slow mobile wallet adoption? How will an evolving regulatory environment affect generative AI applications? What should banks invest in next? 

No one can definitively answer those questions, but that doesn’t mean that banks should simply wait to see what happens. Here are some concrete steps that every financial institution can take now to prepare for any outcome. 

Ditch the Status Quo
Anyone who says that legacy technology is in its twilight is wrong. An IDC study sponsored by Episode Six found that global spending on legacy payments technologies surpassed $36 billion in 2022 and is expected to reach $57.1 billion by 2028. This comes even as nontraditional financial firms, big tech firms and central banks introduce new payments technologies, channels and options that are disintermediating traditional banks.   

In 2020, traditional financial institutions held 40% market share in consumer payments globally. By the end of the decade, that figure is predicted to drop to 22%. So, why would any traditional bank continue to overinvest in legacy payments technologies when consumer preferences are clearly shifting toward new services like mobile wallets, buy now, pay later and digital currencies?

Embrace an Open Infrastructure
Even amid uncertainty, the goals banks hope to achieve from their payments models won’t change. The overarching objective will center on making payments experiences simple, seamless and easy to integrate.

The best strategy for banks to achieve those outcomes, maintain share of wallet and create opportunities for promising new business models is to migrate, consolidate and adopt an open payments infrastructure. 

Banks that embrace cloud-based systems can avoid losing customers who are attracted to new channels or to capabilities that are delivered at the right inflection point.

That, of course, isn’t a license to pursue every hot new commodity that enters the market. Banks need the right capabilities and value propositions. That might mean a crypto offering, same-day issuance or having the ability to push card information seamlessly from a digital banking account to a digital wallet. 

The cloud also reduces the pressure on banks to own both the technology and the relationship. Banking and payments as a service models expand the definition of partner to  include fintechs, technology companies and others. Banks, as forward-looking partners in the embedded finance market, can be at the center of their account holders’ financial ecosystems without without heavy technology investments.       

Working with fintechs can open the door to noninterest revenue and partnership opportunities that can justify modernizing the payments infrastructure, even if it means redefining the relationship between the bank and account holder. A recent analysis by Cornerstone Advisors found that a sponsor bank with 1 million customer accounts growing at 2% per month could generate more than $17 million in noninterest income annually, with more than a third coming from interchange revenue. That’s untapped revenue potential desperate to be claimed. 

Cloud-based systems represent the path of least resistance for one reason: Application programming interfaces negate the need to invest in every new piece of technology required to facilitate new payments trends. That’s especially important for responding quickly when new channels or capabilities, such as generative AI, suddenly become popular.

Banks that want to keep pace in the rapidly evolving payments space should consider adopting future-ready infrastructures now. Embracing a strategic plan that follows the path of least resistance, aligns directly with account holder needs and provides a versatile tech stack that can easily adapt to market trends — without excessive capital and operational costs — can prepare a bank for tomorrow’s opportunities and challenges.


Matt Herren

Director of Payment Strategy

Matt Herren is the director of payment strategy at CSI, where he heads strategic product management, payment channels and data analytics with a focus on industry analysis, emerging technologies, customer profitability and risk mitigation.