A smart approach to payments modernization

Insights

• Most customer prefer digital payments, but banks are still working on legacy technology that is expensive to maintain.
• Challenges to payment modernization include talent acquisition, a lack of strategy and planning, cost management, regulatory compliance and extracting business requirements and rules from legacy code.
• The target architecture for payment modernization is designed to create a robust, flexible, and comprehensive framework that can support a variety of payment schemes and systems.
• There are three approaches for banks to reach their target architecture: (1) Build in-house, (2) Purchase a commercial off-the-shelf (COTS) platform and (3) Leverage cloud-based payment as a service (PaaS).
• In our experience, a three-stage framework helps banks decide on the most effective approach to modernization and achieve the target state architecture. These include: Stage 1: Discover, Stage 2: Evaluate and envision and Stage 3: Formulate a roadmap.

The imperative to modernize payment infrastructure is well-understood

Customers and businesses prefer digital and immediate payments — whether peer-to-peer, between businesses, or across borders. As per McKinsey, nearly 90% of US and European consumers made digital payments in 2024. Banks are aware that their legacy payment infrastructure is expensive. Financial institutions are expected to spend $72 billion on legacy payment technology in 2028, up from $46 billion in 2022. However, their technology also holds them back from offering new products and services to customers and from complying with regulations such as ISO 20022. Over 70% of banks face difficulty adapting to regulatory changes due to their reliance on legacy technology.

Payments modernization equips banks to:

• Boost the speed and security of payments, offering a better customer experience.
• Reduce the total cost of ownership by moving out of legacy infrastructure.
• Respond faster to regulatory requirements.
• Utilize artificial intelligence/machine learning to enhance payment operations effectiveness.
• Enhance transparency and resiliency of transactions.
• Leverage and monetize rich ISO 20022 data.

The challenges to modernizing payment infrastructure

Modernization is a complex and costly endeavor. According to McKinsey, over two-thirds of banks attempting digital transformation fall short of their objectives. This journey often disrupts business continuity and affects stakeholder experiences. Gartner highlights the financial implications, estimating that just one hour of downtime can result in losses of $300,000 for businesses. For banks, the stakes are even higher, as such disruptions can erode customer trust and damage relationships. While banks grapple with various challenges in their modernization efforts, the most pressing issues revolve around talent acquisition, a lack of strategy and planning, cost management, and regulatory compliance. From a technology perspective, extracting business requirements and rules from legacy code and reengineering is one of the biggest challenges banks face in the modernization journey.

The target architecture for a modern payment infrastructure

The target architecture for payment modernization (Figure 1) is designed to create a robust, flexible, and comprehensive framework that can support a variety of payment schemes and systems. This architecture is essential as banks face increasing pressure to innovate to meet customer demands and enhance the efficiency of payment processes.

Figure 1. The target architecture of a modern payment infrastructure

Source: Infosys

The payments integration and orchestration layer (PIL) is at the heart of the target architecture. The PIL facilitates processing payment messages and their routing to various payment hubs for appropriate processing based on specific payment schemes. Its primary role is to enable:

• Message translation and validations: The PIL helps integrate channels for payment initiation and validates and transforms messages based on the payment type received.
• Message orchestration: The layer supports integration and orchestration with peripheral systems (such as fraud, AML, and sanctions core banking) as needed based on the workflow. It also helps route transactions to the right payment hub/engine based on the payment type being processed.
• Left shift custom changes and enhancements: The PIL is the preprocessing layer where any custom changes should reside, eliminating the need to make changes in the payment engine. This reduces cost and dependency on third-party platforms. The layer can also handle some of the regulatory requirements that need enhancements like ISO 20022 address remediation to hybrid or structured addresses.

A modern PIL (Figure 2) encompasses several key features that enhance its functionality.

Figure 2. Features of modern PIL

Source: Infosys

The roadmap to the target architecture

Based on our experience, there are three approaches that banks across the globe adopt to modernize and reach their target architecture:

1. Build in-house: Create the core payment processing solution and the integration and transformation layer in-house and adopt business process management tools to orchestrate service calls to each peripheral system.
2. Purchase a commercial off-the-shelf (COTS) platform: To address business and compliance requirements, buy a COTS product for core processing and a microservices-based solution for the orchestration and initiation layer.
3. Leverage cloud-based payment as a service (PaaS): Adopt payment orchestration and core processes of a PaaS service provider and retain on-premises control of customer and reference data.

However, the above three approaches have nuances and banks must be mindful of these before adopting any approach.

1. Prioritization strategy: Key considerations are whether a payment scheme is strategic to the business, its transaction volumes, and whether it is prone to frequent regulatory changes.
2. Cost: Implementation and run costs should also be considered in decision-making. While the cost remains high to medium for in-house and COTS builds, the implementation cost for a PaaS solution is often lower. On the other hand, run cost is higher for a PaaS solution as it is volume-based.
3. Time to market: The time factor becomes imperative when chasing a definite milestone. While the in-house build requires a larger implementation window, the COTS product offers some time comfort as it comes with base product features to start with. A PaaS solution provides a plug-and-play way of making it a favorite choice when time is of the essence.
4. Regulatory and change cost: While COTS and PaaS solution providers automatically provide patch upgrades for rulebook and regulatory changes, the bank needs to absorb the cost of these changes for in-house build.
5. Control on change and roadmap: Banks will have more control over the changes and roadmap of an in-house solution than COTS or PaaS.
6. Requires skills: Building a solution requires a well-rounded skill set within an organization. The requirements of these skill sets vary depending on the approach undertaken. While in-house building requires an extensive skill set, that requirement tapers with COTS or PaaS solutions.

Figure 3. Comparison of the three approaches to modernization

Source: Infosys

In our experience, a three-stage framework (Figure 4) helps banks decide on the most effective approach to modernization and achieve the target state architecture. This blueprint allows high-level planning for change management. The execution roadmap accelerates business value by enabling enterprises to prioritize strategic change programs based on complexity, value, and interdependencies. This proven Infosys framework helps assess the build vs. buy decisions for diverse payment schemes and business case development. It also helps rationalize the effort and cost of upgrading enterprise payment systems and messaging interfaces.

Figure 4. Three-stage framework to select the modernization approach

Source: Infosys

Stage 1: Discover

This stage evaluates banks’ current payment capabilities and identifies strengths and weaknesses. It includes a fit-for-future assessment and a cost and IT process maturity assessment. This stage sets the foundation for identifying opportunities to enhance and rationalize the efforts required for upgrading enterprise payment systems.

Stage 2: Evaluate and envision

This stage envisions the target state architecture: What future capabilities are required and how will these capabilities deliver business and customer value? Decisions on change management, payment schemes, and hubs are made during this stage.

Stage 3: Formulate a roadmap

The final stage involves creating a detailed execution roadmap that outlines the effective implementation of the chosen solutions. Key decisions during this stage include a timeline for the roadmap, building in-house or purchasing third-party solutions for payment schemes, and priority of strategic change management programs.

The three-stage framework is valuable for banks seeking to modernize their payment systems effectively. By systematically assessing current capabilities, exploring solutions, and creating an actionable roadmap, banks can accelerate business value, rationalize modernization costs, and make informed decisions about modernization strategies, reducing implementation risks.