Why Modernizing Payments Doesn’t Always Have to Be About the Cloud

Payments modernization and cloud migration are two phrases that often get mentioned in the same sentence.

However, that might be a limited view.

Payments modernization can take place outside the cloud as new technologies and data reshape the ways and means of delivering a seamless transaction. Digital wallets, virtual card issuance and the rise of platforms all have converged to reimagine the user experience for businesses and consumers.

For banks and FinTechs, the graveyard of failed efforts to modernize the payments journey is crowded, Neil Mumm, senior vice president, general manager and head of Visa DPS, told Karen Webster in an interview. Consumers, not stakeholders, ultimately decide whether FinTech, bank and merchant efforts prove successful.

Consumers want uniform experiences no matter whether they’re transacting in-store or online, and they want to be able to choose their payment method with ease, toggling between, say, credit or debit cards and buy now, pay later (BNPL).

There’s a disconnect between ambition and reality. For example, 76% of banks say payments modernization is a critical endeavor, but only 14% have completed major modernization projects.

Charting the Modernization Journey

Among thousands of financial institutions, FinTech partners and merchants served by Visa, each provider may be in a different phase of the journey of providing digital experiences for their end customers, Mumm said. Some firms know exactly what they want to offer and have the capabilities in-house to get there; others are only in the early phases of their digital blueprints.

“There are two things that we hear from our partners when it comes to their goals,” Mumm said, adding that “one [goal] is to enable better customer experiences — to figure out ways to remove friction for their customers through the modernization journey. The second thing is they want to reduce costs or create more operational efficiencies.”

Mumm was quick to dispel a bit of conventional wisdom — that to realize those goals, everything must move to the cloud. That’s not the case, he told Webster, although that mindset might be the headwind stymying banks’ modernization efforts.

Many of Visa’s partners “have determined that the costs and tradeoffs and the effort required to go fully ‘cloud-native’ won’t help them accomplish their business objectives,” Mumm said.

A hybrid model suffices, mixing different technologies including APIs, generative artificial intelligence and cloud-native solutions, he said.

There’s no need to completely abandon legacy systems and infrastructure, as legacy operations have helped underpin the evolution of payment ecosystems, delivering reliability and scalability, he said.

“These are things that need to be ‘extracted’ out of legacies and maintained at the foundation of a payments experience with the existing infrastructure, and then built upon,” Mumm said.

Some of the most significant payments innovations throughout the past few decades — shifting from plastic cards to mobile payments, for example — have been built on original ISO messaging standards, such as contactless payment technology. That foundation has given rise to tokenization, Mumm said.

Visa’s Efforts

Visa, for its part, has streamlined the modernization journeys of client firms by offering a platform orchestration later that serves up a menu of offerings. It’s a modular approach that can let an issuer “plug” into Visa’s capability to manage disputes and fraud prevention efforts, he said.

“We create the modularity and the flexibility to pick and choose the things that are best suited to what [these partners] want, what they want to take in-house and what they want to work with Visa or with other partners on,” Mumm said.

The joint efforts can scale globally with speed through SDKs and APIs. There’s also an advisory layer to the partnerships for client firms that want an even more bespoke approach to their payment efforts, he said.

The Rise of Tokenization and Flexible Credentials

The rise of tokenization offers a key illustration of the benefits tied to embedding digital credentials into several use cases (and devices). During a first-quarter earnings call in January, Visa said it issued 12.6 billion tokens, representing 44% year-on-year growth. Mumm told Webster tokens improve lifecycle management of cards, as well as offer an additional layer of security (as card level details are not exposed) and a boost in merchant conversion rates.

“With tokenization, we’ve been able to take these payment credentials and embed them into phones and the Internet of Things in ways that have changed the way consumers” use cards, “as the payment credential can ‘sit’ across the ecosystem of their life to be used in different ways,” he said.

Layering on the Visa flexible credential has taken tokenization a step further, as the offering creates a single credential that lets users choose and toggle between the funding sources they want, ranging from debit and credit to BNPL, and set rules that govern which method will be used, he said.

No matter the use case, fraud and fraud prevention remain top of mind. Visa’s December acquisition of FeatureSpace will enable the near-term rollout of fraud prevention tools within DPS and powered by generative AI, along with additional “risk scoring” options, he said.

At a high level, FinTechs, banks, merchants and Visa working together creates a continuum of payments modernization.

“The ability to take the Visa card that you received from your favorite bank in Minneapolis, Minnesota, and travel to Tanzania or Indonesia and see something there that you want to buy or a place you want to eat… you can take that card or the mobile wallet that was developed by Apple or Google, and you can tap it at a payments device there, and you know it’s going work,” Mumm said. “The restaurant or that store knows they’re going to get paid, and they know how much and when they’re going get paid. I think that’s kind of magical.”

And, he added, “being diligent and thoughtful about where you implement each of those technologies is the best way to get to modernization quickly — and to the payoff that our partners are looking for.”