Core modernization: Payments

Introduction

You're listening to “Core Modernization with KPMG,” a banking podcast series dedicated to helping banks become future-ready with digital transformation strategies that work and executions that deliver.

Celeste Diana

Hello, and thank you for joining us today to discuss payments core modernization. There are a lot of hypotheses around the future of banking, but there are three things that we do know today. One, the competitive landscape is rapidly evolving. Digital is leveling the playing field and allowing any entrant to leverage modern technology patterns, to win customers. Two, mastering money movement across the supply chain is an absolute necessity to thrive in the future. And three, modernizing the banking payments ecosystem is a necessity. Money movement is a must-win for banks to maintain relevancy in their customers' lives.

Welcome, my name Celeste Diana and I am responsible for leading digital transformation across banking. We believe that digital transformation unlocks the ability for human interaction to be a consumer choice and not a requirement driven by the constraints of legacy structures. Achieving this transformation requires a surgical approach to modernizing everything from the business models, the operating models, all the way down to the core banking platforms. We recognize that the road to a future-forward bank is expansive, and we've developed a series of podcasts devoted to navigating the path forward. Starting with modernizing the long pole in the tent, "core banking platforms."

In today's podcast, we will be discussing payments core modernization. I'm joined by two of KPMG's payment leaders, Courtney Tremble, and Troy Hagey. Courtney is a partner focused on global payment and is an industry leader in modernizing the payment ecosystem from front-end capabilities all the way down to core platforms. Troy is also a leader in our payments practice, and he is responsible for driving cross-sector money movement strategies for banks, and non-banks. At the conclusion of today's podcast, we will have discussed the following topics. What does modernization mean and what is needed today to win customers tomorrow? Will it be winnerss and losers? What actions are required now, and what value will it unlock? And finally, where to start, for those underway, where to accelerate? Understanding that customers sit at the heart of everything that matters, Courtney, can you talk about what is driving the need for modernization and what is needed today to win customers tomorrow?

Courtney Tremble

Thanks, Celeste. We've seen an acceleration of the digital agenda and the move to digital-first banking, especially with the advent of COVID. Business's models have changed. Banking is no longer someplace we go, but it's something that we do. There is a true war for the customer, both from the traditional banks, the new digital banks, and also the non-banks.

Digitally savvy customers are increasingly demanding differentiated customer experiences, as more digital banks and non-banks compete with the traditional banks for a share of wallet. It's all about the money, the movement of money, and who can offer the superior client experience in a frictionless way. There are also a number of converging market forces and trends that are shaping the future of payments globally, and serving as a catalyst for payments modernization, including ISO20022, which is the new language for payments that is a global mandate for all FIs, real time payments, and also open banking. A modernized payments infrastructure and technology is central to seamless money movement across the payments ecosystem and positioning FIs for both successfully offering these new table-stake payments capabilities that the market is demanding, and then also creating the frictionless experience that customers demand.

Celeste Diana

Thank you, Courtney. So, it sounds like seamless money movement is a necessity that comes through modernizing the payments ecosystem. I guess, pivoting a little bit, Troy, and looking at the competitive forces and thinking about that landscape that changes, it seems like every day, can you share your thoughts and the characteristics of winners and losers in context of the competitive landscape?

Troy Hagey

Sure. Thanks, Celeste, and Courtney spot on around the seamless client experience. From our view, there's no clear winners or losers; however, those that have embraced modernization, end-to-end, will be ahead of those that put their heads in the sand. It's all about the digital agenda. It's all about the client experience, as we've mentioned in really embedding payments within the ecosystem and the experience so that it's easy for a customer to make a payment, and almost seamless, and behind the scenes in some instances. We've seen that in examples around car ride services, that you just take the car ride and the payment happens; there's nothing for you to do. As well as digital wallets, that exist with various players out there, that when you check out, you just open up your wallet, and then payment is made. So it is all about the client experience. Those that don't embrace that will fall behind and not meet their client's expectations.

Celeste Diana

That's very helpful, Troy. Courtney, thinking about those expectations and those that potentially can fall behind, and we of course want to prevent that, how does that translate into action? Not only for the banks but from a consumer standpoint as well?

Courtney Tremble

Sure. Thanks, Celeste. Troy, spot on with how we're looking at this from both a bank and a non-bank standpoint, it's all about focusing on a modern payments infrastructure and the customer experience to win in the market. From a bank standpoint, traditional banks generally have more technical debt and are focused on streamlining their payments infrastructure through investments and modern payment hubs, to enable modern payments capabilities. So we spoke about ISO20022 real-time payments and open banking, this modernized infrastructure, the traditional banks will need to up-tier their capabilities to account for the movement in the market in these capabilities, as well as a modernized channel layer and front-end portals. We're seeing a lot of investment in those as well. In addition, one of the things that we're seeing is an uptick across both large banks and regional banks around the re-engineering and digitization of the client onboarding process, to promote a more seamless and frictionless client experience.

Digital banks are also prioritizing the onboarding experience as their first point of contact with the customer. Banks are also investing in connected banking. This will significantly change how and where customers experience banking. This presents an opportunity for banks to potentially lower acquisition costs by partnering with, and embedding their banking services into leading FinTechs and brands. As banks adapt to this new business model, it will require them to also upgrade their legacy infrastructures to move to a more API-first delivery model, to provision data and services to and from trusted third parties. Banks will also need to adopt an offensive mentality, or an aggressive mentality, around up-tiering and modernizing their payments capabilities in order to aggressively fend off the non-banks and the FinTechs, who are also aggressively going after the same customer base. When we talk about the non-banks, non-banks are aggressively going after the traditional banking clients leveraging the customer stickiness they have through existing business models to capture wallet share, and the customers banking relationships.

These non-banks are creating marketplaces and making investments and embedded payments into their ecosystems, and they're becoming payment facilitators, which enable them to move money and transact with the customer. Non-banks are also experiencing expanding their business models into a more traditional [inaudible] and beginning to offer banking services to their customers in some cases. They have the benefit of building payments capabilities from scratch with less technical debt than the banks do, and have also invested deeply in the customer experience. For the non-banks, they must determine their strategy of becoming a PayFac or utilizing a third party processor, and the implications of obtaining a business license and a banking license from a risk and regulatory standpoint. So, lots to think through, on both sides of the equation to capture that market, a wallet share of the customer.

Celeste Diana

So, Courtney, you just mentioned PayFac, maybe if you could take a second, for the folks listening today, describe that a bit.

Courtney Tremble

Yeah. PayFac is a payment facilitator, or the capabilities for an organization to send and receive money from their merchants. Traditionally this was more of a banking capability. This allows your traditional FinTech players such as the Facebooks, the Googles of the world, etcetera, as they develop marketplaces, to be able to transact one-on-one specifically and transact back and forth with the merchants.

Celeste Diana

Fantastic. Really what I'm hearing is a lot of action is needed, and it's really about unlocking that future, which sounds like anybody can compete if they have the right technology and ambition. I guess that's a way of saying it, and thinking about that long laundry list of the actions, maybe Troy, you could help us get our arms around where to start, or even those that have already started, where they need to accelerate.

Troy Hagey

Yeah thanks, Celeste. It all starts with really understanding your clients and customers, and that journey from an end-to-end perspective and really a clear understanding of where does a customer want to engage you. It's not a one size fits all, as it relates to payments and how it fits into the ecosystem. Having a clear understanding of that is critical. That should drive where you start. Is it onboarding, is that the number one priority, or are there other areas in back-office that need to be modernized? Regardless, it is all about the client journey and needs to be seamless to them. It's really an uptick in your capabilities to combat, from a banking perspective, against the non-banks. So how do you not become the dumb plumbing in the future, and how do you engage with your clients from an end-to-end perspective?

As Courtney mentioned, be on the offensive, not the defensive side of things. We think that's critical, and we think that's driving a lot of the investments that are happening in the modernization of the payments ecosystem. It does typically start with the channel layer, and that gets back to the point on meeting your client where they are, and how do you create that seamless experience for them, while banks that may be tied with legacy technical debt, modernize the back office. It's really a front-end, client-facing journey that should drive the investments that are made, and how an organization should start and think through modernizing their platforms.

Celeste Diana

In summary, what I've heard both of you articulate today is customer really needs to sit at the heart of any kind of discussion in any kind of investment. You need to look right and left for the competitors. There is that client interaction layer that needs time and attention today, and that needs to be powered by a modern core platform, which we know is usually the long poles in the tent. The overall messaging is relevancy in a future-forward bank is starting today. If you haven't started your journey, you need to get in the car and hit the gas pedal now.

Troy, thank you; Courtney, thank you. Appreciate your thoughts and insights today. This is obviously an important and complex topic, and really just one of a multi-part podcast series. We at KPMG have handpicked industry leaders to provide deep perspectives in all these topics that are top of everybody's agendas, and that includes deposits, commercial and consumer lending, mortgage transformation, and much more. So, when you're on your digital transformation journey, we will help you accelerate this one bank approach, to modernization your core platform and really scaling your infrastructure. So you can connect your front, middle and back offices, equip your workforce, and seamlessly interact across the ecosystem and strengthen your connection with customers. We hope you found today's discussion informative, and if you would like more information, please reach out to us. Thank you and have a great day.

Closing

Thanks for listening to this episode of "Core Modernization with KPMG." We look forward to hosting future conversations where we'll dive deeper into the core infrastructure.