Digital transformation isn’t just a pricey lesson in technobabble. It’s about operationalizing the smartest, fastest tech now available to financial institutions (FIs) to create the new pushbutton financial products consumers want.
Open banking architectures and application programming interfaces (APIs) are enabling these secure, engaging new customer experiences. On the backend, technology like containerization is smoothing legacy retrofits and building digital resilience into older core banking systems.
In a recent Trend Talk with PYMNTS, Red Hat Director of FSI Strategy, Ecosystem and Strategic Partnerships Kelly Switt detailed a “year of infrastructure” on the immediate horizon, underscoring the symbiosis between technical and business road mapping.
Noting that traditional business is dominated by two prime factors – consumer demand and regulatory mandate – Switt said payments choice is reshaping both, pointing to several high-visibility upgrade efforts from Europe to North America to Asia and beyond.
To make it all happen soon, Switt describes “…a new global market infrastructure that will help [enable] a move to modern architecture based on open technology through the use of automation, APIs, data streaming and machine learning.”
“This has been happening all over the world, and we at Red Hat have been a part of a number of different payment networks and their modernization efforts,” she said. “This trend will continue in order to really meet the demands of the consumer as well as the issuer and acquirer networks” as real-time payments become industry standard.
Bringing ‘Clicks to Bricks’
Consensus is rapidly building around 100 percent contactless payments as a major part of the payments changeover forced by the pandemic.
Switt noted, “[When] you look post-COVID, you start to see that contactless is going to become the new normal. And in order to become the new norm… there’s going to be a wholesale change both for the banks as well as the retailers [and] the payments networks.”
“Payment networks are going to need to rethink their cardless transaction fee structures, and how they look at card-not-present transactions. Those tend to be a really big pain point for both the retailers and the issuers,” Switt said. “There’s [also] going to be a point-of-sale modernization effort for the retail industry. If you think about contactless, it’s really the idea of bringing digital or clicks … into a brick-and-mortar institution.”
This “bringing clicks to bricks,” as Switt calls it, is already underway, with a visible example being Walmart’s decision to go wide with contactless POS in U.S. stores. For FIs, the analog is how “top of wallet” status will be defined going forward. While it was previously a literal matter of placement – the most-used physical card in consumers’ actual wallets – that’s changing fast.
Now, top of wallet will be “…based on … mobile presence, [and on] direct interaction with individual retailers,” Switt said. “That completely shifts the paradigm on how the banking institutions have to think about their brand loyalty and their connection to consumer buying behavior. They will now have to start thinking about unique, very bespoke integrations within individual retailers in order to really drive that same top of wallet [positioning].”
Simplifying to Advance
Implementation fears, whether they are about costs or timeframes, have delayed core banking upgrades for years. Switt feels this process is out of step with how things have already changed, to say nothing of bigger changes to come. Yet, she stresses the need to remove complexity.
“When you look at what the industry really needs … [it] is a simplification of how … we go to market,” she said, noting that banking products were historically bound to physical distribution points (such as bank branches and retail settings), which over time grew into hard-to-manage tech stacks.
“It became a very siloed effect in the distribution and creation of [bank products] being tightly coupled, which is really what has created the level of complexity the banks are now dealing with,” Switt said, adding that the need to simplify revolves around modularizing banking products and simplifying distribution mechanisms to offer new products across channels, including direct integration into retail, Big Tech and more.
“That simplification is going to help provide greater distribution of the products and services that a traditional payment issuer has today,” Switt noted. Again, APIs and open banking are a huge part of this modernization wave, and they stand to play an even larger role.
The pre-COVID world was patiently assessing “types of direct integrations that issuers need to start having within the retail industry, and how they need to provide their services beyond a physical card,” she said. “We’re going to see many more consumers who may have traditionally always been brick-and-mortar purchasers or buyers … now permanently convert to being much more of … internet-based shoppers or mobile shoppers, which requires us to think differently about how we really open ourselves up and provide our very necessary products within the actual ecosystems of the consumer.”