Digital transformation in payments

Watch Martin Coen, CEO, Dovetail in an interview with The Business Debate on digital transformation and how leading banks are progressively modernizing their payments systems



Dovetail’s position paper on digital transformation



Martin Coen, Chief Executive Officer
23 February 2017

Payments … a key opportunity AND challenge for banks
The payments market, incorporating both consumer and commercial payments is worth over 1.3 trillion dollars annually- that’s larger than the airline industry. It’s also growing strongly, at over 6% pa.

Payments may provide a great opportunity for banks, but rapidly increasing consumer and corporate expectations to provide faster, online services at lower costs combined with a changing regulatory landscape, disruptive technologies and new entrants, are all making the market increasingly competitive and challenging.

A clear strategy
Banks that are succeeding are those that have a clear strategic direction and are investing in the capabilities required to address the new opportunities within that strategy- and this critically includes the effective use of technology and automation. So most successful banks are investing in payment infrastructure that is real-time, 24X7, opening up APIs and extending the range of clearing channels– giving them the strategic agility to continually improve their ability to react quickly, safely and cost effectively to future change.

This is all about banks modernizing and digitally transforming their business.

Defining the target model
Digital transformation is THE driver and accelerator for the essential changes that banks need to make in payments. Recent papers by strategic consultants in this space – McKinsey, A T Kearney, BCG and others have helpfully set out what it means to digitally transform a bank and the optimal target state…with payments modernization one of the key pillars – so banks have no excuse in understanding where they need to head.

Legacy to modern
Banks are undoubtedly encumbered by legacy infrastructure – much of it home built. However, that same legacy infrastructure, in most cases, is what ensures banks operate reliably day after day.

Typically, the problem isn’t that legacy infrastructure doesn’t work – it does work, and often very well – the problem is that legacy infrastructure cannot support the level and pace of change now required.

What banks have to do is to modernize their back end infrastructure to be more competitive in this new world-they really have no choice.
What is more, the real threat to banks is not the widely discussed Fintechs (who are working more and more collaboratively with banks); it is other banks modernizing faster than they do.

Progressive modernization
Payments modernization can be difficult and banks are naturally risk averse. We know this well since, at Dovetail, we have worked for over a decade with many of the world’s leading and most complex banks in large scale modernizations (and many much smaller ones as well!).

Banks often compare such a program to doing open heart surgery on a patient while the patient is running. This is a reflection of how core payments are to a bank’s operation, and how fearful the banks are of change in that area.

However, it is possible to do such modernization well. At Dovetail our focus is on providing banks with progressive modernization solutions that deliver significant benefits in relatively short cycles without undue risk.

Proven solutions to minimise risks
What’s interesting in recent years is the change in mind set of the majority of banks with which we work. There is a much stronger recognition of the benefits of buying proven software solutions for the enterprise layer, and for banks to focus their own development efforts on differentiating the way in which they package up their customer propositions and go to market with an improved user experience.

Where market “best practice” is already provided by a solution, there is a much greater propensity to adopt it rather than rebuilding existing (often arcane) processes. This is having a huge effect in reducing complexity, cost and the time in which value is delivered through implementation… and, therefore, the risks.

No longer an option
It is no longer an option for banks to remain on legacy infrastructures. The banks that have started their digital transformation (such as our clients) are already seeing significant advantages.

As systems are modernized the maintenance and compliance costs come down, it leaves a greater portion of the budget available for innovating in the business and further modernisation. This builds a momentum for early movers that will make them increasingly hard to catch.

Unless a bank starts investing in real change and modernization quickly, it risks being left behind to a point where catching up is no longer possible.