In the fast-evolving world of financial services, one thing remains constant – change. Payments, the lifeblood of the banking industry, have been undergoing a profound transformation in recent years. The traditional banking landscape is being disrupted by the rapid rise of fintech companies, while payments volumes are soaring, driven by technological advancements and changing consumer preferences. However, payments revenues are not growing at the same pace. In this blog post, we will delve into the core reason driving payments modernization for banks and how it impacts their strategies, competitiveness, and the role of solutions like Volante in addressing these challenges.

Payments volume surge

According to Capgemini, payments volumes are projected to rise by a staggering 15% annually over the next five years. This growth rate is approximately 1.5 times higher than what was projected before the pandemic. This surge in payments volume can be attributed to several factors, including the increased adoption of digital payments, e-commerce expansion, and the global push towards real-time payments systems.

The digitalization of financial services, accelerated by the COVID-19 pandemic, has led to a shift in consumer behavior, with more people opting for online and mobile payments. As a result, traditional banking channels, such as physical branches and checks, have given way to digital transactions. This surge in payments volume is forcing banks to adapt quickly to meet the growing demand for efficient and secure payment services.

Payments revenue challenge

In contrast to the explosive growth in payments volume, payments revenues are expected to slow down to a mere 7% annual increase, as projected by BCG and McKinsey. While this growth rate is still robust, it represents a significant discrepancy between volume and revenue growth. To put it in perspective, if everything else remains the same, revenue per payment will drop by 30% in just five years.

The primary challenge for banks is that they need to maintain profitability and growth in an environment where payments volumes are growing at a much faster rate than payments revenues. To understand the magnitude of this challenge, it’s essential to consider the impact on their profit margins.

Cost and margin pressures

Banks are under constant pressure to manage their costs efficiently. If payments volumes are surging, but revenue growth is sluggish, this can lead to a significant margin squeeze. In simple terms, if costs remain the same while revenues do not keep up with the pace of payments volume growth, banks will face a decline in their profit margins.

The rise of fintech disruptors

Another factor exacerbating the situation for traditional banks is the rapid proliferation of fintech companies. These agile and innovative startups are capturing a growing share of the market. Presently, fintechs are capturing about 6% of the total revenue pool, and by 2030, this share is expected to increase to approximately 25%. The fintech sector is not encumbered by the legacy systems that traditional banks rely on, allowing them to be more nimble, efficient, and responsive to market changes.

Traditional banks are facing a dual challenge. On one hand, the overall pie of the payments market is not growing quickly enough to accommodate their existing revenue expectations. On the other hand, their market share is diminishing, and their legacy systems are becoming increasingly obsolete.

What this means for banks

To thrive in this evolving landscape, banks must adapt and evolve their strategies. There are two core imperatives they need to address:

1. Investing in Customer Experience and Product R&D: To retain and grow both revenue and customers, banks must invest in enhancing the customer experience and innovation in product research and development. They need to deliver services that are superior to those offered by fintech companies in terms of speed, quality, and cost-efficiency. This entails creating a seamless and user-friendly digital experience that meets the evolving expectations of modern consumers.
2. Reducing the Cost of Payment Processing: Given the growing disparity between payments volume and revenues, banks must continually find ways to reduce the cost of payment processing. This isn’t a one-time effort but an ongoing journey towards ever-increasing efficiency. It’s about optimizing operations, automating processes, and adopting advanced technologies to streamline payment processing and cut costs without compromising security or compliance.

How Volante can help

Volante offers a range of solutions that align with the core drivers of payments modernization for banks. These solutions address the challenges faced by banks in terms of reducing costs, enhancing efficiency, and enabling innovation. Some of the key ways in which Volante can assist banks include:

1. Platform as a Service (PaaS) and Cloud Solutions: Volante provides PaaS and cloud solutions that enable banks to modernize their payments infrastructure. This allows for greater flexibility, scalability, and cost-efficiency. By moving to the cloud, banks can reduce their infrastructure costs, improve resilience, and enhance their ability to adapt to market changes rapidly.
2. Real-Time Payment Capabilities: Volante’s solutions enable banks to support real-time payments, meeting the demand for faster and more immediate transaction processing. Real-time payments are essential to stay competitive and offer customers the convenience they expect in today’s digital world.
3. Low-Code Development: Volante’s low-code capabilities empower banks to develop and deploy new services and features faster, reducing the time-to-market for innovative payment solutions. This flexibility is crucial for banks looking to stay ahead in a rapidly changing market.
4. ISO 20022 Compliance: As the financial industry moves toward the ISO 20022 messaging standard, Volante’s solutions can help banks seamlessly transition to this global standard, improving interoperability and enhancing the efficiency of cross-border payments.

Conclusion

The core reason driving payments modernization for banks is the growing gap between payments volumes and revenues. As payments volumes continue to surge, traditional banks must adapt to remain competitive in the face of fintech disruption. To thrive in this evolving landscape, banks must invest in customer experience and product innovation, while also reducing the cost of payment processing to maintain profitability and growth. Solutions like Volante play a vital role in helping banks meet these challenges, offering PaaS, cloud, real-time, low-code, and ISO 20022 payments modernization solutions. By embracing these technologies, banks can not only survive but thrive in an ever-changing financial landscape.

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