The fast pace of financial technology has created endless opportunities – and significant challenges – for financial institutions. Given the monumental shifts occurring, including the launch of the FedNow® service in July, these banks are no longer just playing catch-up; they’re aiming to set the pace.

Volante’s Payments Modernization: U.S. Mid-Tier Banks 2023 annual survey reveals the proactive steps these institutions are taking to streamline operations and meet current challenges head-on. In part two of this two-part series, we look at banks’ most pressing challenges and the importance of a strategic Payment as a Service (PaaS) integration to confront present-day challenges.

Confronting the Current Challenges

Survey responses indicate that financial institutions face a myriad of challenges, including fraud, improving operations through automation, speed of payments and change, resources and training, and simplifying operations.

We mentioned in part one that one-third of institutions battling ACH issues say rising volume is their top challenge, making it a consistent concern since 2021. Reporting is the second-most mentioned challenge, with 22% of institutions mentioning it. One upside is the decline in concern about interoperability with other payment engines; 15% of institutions cited this as a top challenge in 2021 compared to just 6% this year. Fraud remains a concern, with 17% reporting it as a top challenge faced by the ACH processing operation.

These challenges have proven a compelling force for embracing real-time payments and modernizing their systems, including leveraging PaaS and APIs.

The Prominence of Payments as a Service (PaaS) and APIs

The PaaS model is undeniably taking root, with half of the surveyed institutions either already using it (43%) or in the midst of its implementation (7%). Most institutions (55%) report using a hybrid approach to processing payments and typically combine the services of their core provider with other solutions.

It’s no surprise considering the global payment as a service market was valued at $8 billion in 2021 and is projected to reach $53.6 billion by 2031. PaaS not only offers institutions the flexibility to adapt to an ever-changing landscape but also empowers them to innovate at record speeds, keeping them at the forefront of the financial revolution.

The popularity of APIs has also skyrocketed, with 33% of institutions naming it their most desired new payment capability. This upswing, from 9% the previous year, solidifies the belief that APIs will be central to the next wave of payment evolution. These findings align with a recent McKinsey global survey on APIs in banking, which reported that 88% of respondents think APIs have become more important over the past two years.

Institutions are keen on leveraging PaaS solutions and APIs to enhance their payment operations and enable faster, more effective innovation.

Conclusion & Next Steps

In this ever-evolving financial arena, mid-tier institutions are not only confronting challenges but are also diligently working towards integrating innovative solutions. APIs and PaaS solutions are foundational to enhancing payments capabilities and enabling innovative digital payments offerings these institutions need to thrive. The path ahead necessitates agility, timely decision-making, and the right partnerships.

For those seeking further insights into this dynamic transformation and looking to understand the broader implications, download the full survey report here.