The Age of Disruption: Why Payments Modernization is Non-Negotiable for Banks
Banks today face a complex set of challenges with customer expectations soaring, regulators tightening scrutiny, and competition fiercer than ever. Meanwhile, IT budgets are stretched thin, with the lion's share dedicated to maintaining aging systems, leaving little room for the innovation that's crucial for survival. However, this year’s ISO 20022 language standard migration presents a unique opportunity for forward-thinking banks and other financial institutions (FIs) to leverage this transition to restructure their operations and gain a substantial long-term competitive edge.
Payments Modernization: Turning a Mandate Into an Advantage
The transition to ISO 20022 comes as the broader financial ecosystem is evolving with payments modernization allowing FIs to meet customer expectations and stay competitive. Adopting Payments-as-a-Service (PaaS) solutions is central to this shift, with 92% of banks planning to incorporate PaaS into their current operations. These cloud-enabled platforms provide the flexibility to integrate real-time payments and ISO 20022 capabilities without overhauling legacy infrastructure.
By championing a PaaS model, banks can reduce costs, speed up implementation, and offer clients real-time payment services with minimal downtime. More importantly, these solutions enable scalability, allowing banks to add new payment rails or adapt to emerging standards without an extensive rework. However, challenges remain.
The Customer Retention Hurdle
Corporate banking clients demand faster, more transparent, and more reliable services. According to a 2024 Celent survey, nearly half of banking leaders reported difficulty retaining clients compared to the previous year. This trend is especially pronounced in Europe and the Middle East, where customer expectations outpace the modernization efforts of many FIs. These banks risk losing clients to more agile fintech competitors without proactive upgrades.
In addition to staying competitive, ISO 20022 allows FIs to significantly improve risk management capabilities and use the comprehensive data that comes with the messaging standard to track and monitor real-time payments, enabling proactive risk mitigation strategies and improving fraud detection capabilities. Leveraging these industry changes will open the door for further growth, which is key to mitigating concerns and allowing financial businesses to focus on long-term success.
Cross-border payments remain a major pain point with customers consistently citing efficiency, cost, and access to real-time liquidity as their top concerns. This dissatisfaction has fueled a global push for real-time payment networks, with 90% of banks planning to expand their cross-border capabilities within the next year. Yet, for many institutions, execution lags far behind ambition.
Stagnant Budgets, Limited Innovation
While IT spending is up, the allocation of funds tells a different story. Many banks dedicate less than 12% of their technology budgets to growth-oriented initiatives, focusing instead on compliance and maintenance. This approach leaves little room to develop competitive differentiators or address systemic inefficiencies.
The ISO 20022 migration is more than a compliance checkbox, it’s an innovation catalyst. A 2024 Finextra study found that in North America, just 35% of banks feel confident they can cost-effectively implement the standard by the 2025 deadline. The benefits of ISO 20022—richer data, enhanced fraud prevention, and streamlined payment operations—are being overlooked in favor of short-term compliance goals. For forward-thinking institutions, this is a missed opportunity to harness the power of extended, structured data for strategic growth.
Cross-Border Payments: The Next Frontier
Global trade and international commerce rely on efficient cross-border payments, yet these transactions remain fraught with inefficiencies. A lack of transparency, processing delays, and high costs are major points of contention for customers. While regional variations exist—such as the Nordics reporting lower dissatisfaction—this remains a critical area of focus for banks worldwide.
ISO 20022’s introduction offers an opportunity to address these inefficiencies. Banks can improve data transparency, reduce reconciliation times, and enable faster settlements by standardizing messaging formats. Combined with PaaS, these enhancements can transform cross-border payments from liability to competitive advantage.
The Tech Factor
AI and advanced data analytics are breaking the glass ceiling, with many financial institutions deploying these tools to enhance fraud detection, streamline compliance, and optimize back-office operations. These tools are particularly effective when paired with ISO 20022's data-rich framework, allowing banks to automate processes and provide clients with actionable insights.
Beyond AI, innovations like Banking-as-a-Service and embedded fintech solutions enable banks to expand their offerings without building from scratch. These technologies provide flexibility to integrate with third-party platforms, extending the bank's reach and enhancing customer experience.
Building a Modern Payments Infrastructure
For banks to succeed, payments modernization must be viewed through a strategic lens, moving beyond compliance and leveraging new technologies to improve operational efficiency, reduce costs, and deliver better customer outcomes. Collaboration will be key. The rise of PaaS and other partner-driven models spotlights the importance of working with third-party providers to accelerate implementation and reduce risk.
Real-time payment networks are a clear priority, with many banks planning to add multiple domestic and cross-border connections over the next 12 months. This is critical in addressing customer pain points like liquidity management and transaction speed. However, the success of these initiatives will depend on how well banks integrate these networks with their existing systems.
Outpace the Competition: ISO 20022’s Advantage
The time to act is now. The ISO 20022 FedWire migration is more than just a compliance milestone—it's a chance to gain ground on strategic and innovation goals and redefine the future of payments. By adopting flexible, scalable solutions like PaaS, integrating emerging technologies, and focusing on customer-centric outcomes, financial institutions can turn regulatory challenges into opportunities for growth.
About the Author:
Nadish Lad heads up Volante’s Product Management organisation. He has over 20 years of design and advisory experience in Payments and related areas like Funds check, Liquidity, FATF, FX and Sanctions. Nadish started his career working on cheque Payments within the UK and has worked in leading organisations like Jack Henry Associates, Citi London and more recently in the Payments Advisory practice of EY where he has implemented core products like payment hubs and corporate online channels. Nadish has extensive experience in retail and transaction banking products as well as experience of developing branch and central clearings products from scratch and taking them to market. He has a 1st Class Honours degree in Electronics Engineering from Bombay University and an MBA from the Open University.