Reinventing Payments: Breaking Down Banking Infrastructure to Build a Composable Future

Banks rely on core tech to handle the basics: transactions, deposits, loans and more. But the kicker is that most of these systems were built decades ago. As in 1980, not 2010.

Back then, “digital transformation” through the lens of a financial institution (FI) meant upgrading from a typewriter to a green-screened PC.

But with the news that cloud-based core banking vendor Mambu has acquired Paris-based banking aggregation and payment automation platform Numeral, observers are hoping that the payments and banking sectors may be charting a new course: one that leads directly to the cloud.

“Payments are at the heart of how companies do business around the world, yet they remain trapped in systems designed decades ago, unfit for the ongoing instant payments revolution. This is a problem that Mambu intimately understands having helped banks and financial institutions worldwide to migrate from rigid, traditional core systems to agile and adaptable cloud infrastructure,” Édouard Mandon, co-founder and CEO at Numeral, said in a release.

Banks and payment providers are grappling with rapid changes in consumer expectations, competitive pressures from FinTech disruptors and an unrelenting pace of regulatory evolution. Customers, including businesses, now demand seamless, real-time digital experiences, from peer-to-peer transactions to embedded financial services. Meanwhile, the rise of real-time payment systems like FedNow® Service and TCH’s RTP® Network, as well as the growing adoption of other innovations, have further increased the urgency for modernization.

While estimates show that between 83% to 91% of banks are now operating in the cloud, that still means that up to 17% of banks, and their key end-users, are potentially left operating without the scalability and integration capabilities necessary to compete.

Read more: Making Sense of the Great ERP System Cloud Migration

Why Core Tech Is Overdue for an Upgrade

Banks can’t just slap on a shiny mobile app and call it a day. Without upgrading their core infrastructure, they are likely to keep falling behind. Legacy systems are not only expensive to maintain but often lack the agility required to meet the demands of a rapidly evolving marketplace. These systems were designed in an era before real-time payments, cloud computing and AI-powered analytics became critical components of financial infrastructure.

“It’s an interesting time in the in banking and the payments industry,” said Michael Lozanoff, managing director, global head of merchant services for J.P. Morgan Payments, to PYMNTS. “Many of the systems we ran for decades have reached their shelf life. And one of the things we have done is learn from the past so we can build for the future. We have the unique opportunity to reinvent (banking infrastructure) and build it new — as if we started from scratch. As a result, that may require you to take really large systems and break them down into smaller pieces. Doing this allows you to then really understand which capabilities need to be the most scalable, resilient and fastest and figure out how to distribute them across the globe.”

The payments and banking sectors are no longer competing only with each other but with the tech giants and FinTechs that are unencumbered by legacy systems.

“It’s becoming an imperative to improve the operational efficiency at these legacy banks and be more responsive to client needs and industry trends,” Galileo Head of Product Strategy Michael Haney told PYMNTS. “As an ex-banker, I witnessed the dichotomy, where banks invested heavily in digital front-end solutions while their back-end systems lagged behind. This created a disconnect, limiting their ability to innovate rapidly.”

Read more: How APIs Bridge Modern and Legacy B2B Payment Architectures

The Power of Data in Payments Modernization

PYMNTS Intelligence has found that in the era of digital and hyper-personalization, traditional FIs must look beyond offering one-size-fits-all solutions to compete with their FinTech rivals. Composable banking presents a viable solution, enabling FIs to mix and match services for a more agile banking infrastructure.

While modular infrastructure addresses the “how” of payments modernization, the “why” is increasingly tied to data.

For AWS Head of Payments Mark Smith, the ability to manage and extract value from large datasets is one of the most exciting aspects of payments modernization. “Payments are chock-full of data, and payment companies are continuing to find new and innovative ways to use that data,” he told PYMNTS. “The intersection of cloud and payments will provide faster, more reliable and more secure payments, with a lot more automation.”

Real-time analytics, fraud detection and personalized customer experiences are just a few examples of how cloud-powered data management is helping to transform the industry. As the industry reinvents itself, collaboration between traditional banks, FinTechs and technology giants will be crucial.

“Historically, it was just banks competing with banks. But increasingly, FinTechs and other disruptive entrants are leveraging solutions … innovations and competitive offerings … which can be costly and complex for banks to quickly stand up,” William Artingstall, global co-head of cross-border payments and receivables at Citi, told PYMNTS.