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Making the Smooth Transition from Legacy Payments to Emerging Payments

By: Sean Pennock

As financial institutions increasingly embrace younger customers, many are looking to adopt technology that appeals to their younger audiences. While legacy technology is still required to cater to their established customer bases, financial institutions are beginning to implement emerging technologies as well. Keeping pace with customers not only enables financial institutions to offer greater customer service, it is also a requirement to remain viable in this hyper-competitive market.

The problem facing many financial institutions with an interest in emerging technology is that many are encumbered with a multi-year contract from legacy vendor. As contracts expire on various payment systems, financial institutions are positioned to begin building a unified payments infrastructure. For financial institutions considering bolstering their existing legacy technology with emerging technology, it is crucial that they determine if their prospective vendor partners offer support for multiple payment technologies to avoid creating more silos within their organizations.

Vendors that have multiple solutions on the backend require financial institutions to configure each different system and apply changes separately to each system. This process becomes particularly cumbersome for correspondent banks, who work with hundreds of community financial institutions. A unified payments solution requires setup and configuration to occur only once for each respondent bank, so system management and administration is simplified. While there are vendors in existence that offer a unified payments system, financial institutions must evaluate if the solutions being offered are truly unified.

As payment types begin to blend, whether it is a check conversion to ACH or otherwise, tracking payments via disparate systems is a labor-intensive process. With a unified payment system, financial institutions have a much easier time tracking any payment type, determining its origin and conducting returns and adjustments. Because it is difficult for financial institutions to unify their entire payments structure overnight, it is critical to assess their vendor options and engage vendors that offer a common infrastructure for all payment types.

According to William Mills Agency’s 2011 Bankers As Buyers report, “The good news for financial technology is that the financial industry has to invest to address operational and credit risks; update legacy systems (or better yet, replace them); and meet or exceed competitive pressures. It simply takes more technology to run a financial institution today than in years past. The back office, infrastructure and integration of technologies may offer financial institutions and their vendor partners more ways to wring out better margins and make better decisions for attracting and managing profitable customer relationships.”

Financial institutions operating without a unified payments system are missing opportunities to save money and operate more efficiently by identifying payment types that qualify for conversion to a more cost-effective option. The unification of a financial institution’s payments stream creates efficiencies in the back office, as well as creating commonality among payment systems for the end user, which makes it easier to get up and running with the system and to cross-train personnel.

Emerging Payments on the Horizon

Boston-based Aite Group has predicted that mobile payments will account for $214 billion in gross dollar volume by 2015 — an increase from $16 billion in 2010. While the benefits of emerging technologies for financial institutions are clear — different mechanisms for clearing, whether it is ACH or check, many are hesitant to adopt new technology without the guarantee of an ROI.

Despite financial institutions’ hesitation, demand for emerging technology is accelerating fast on the consumer side. Generation Y has grown up with technology and, as such, is not as hesitant to adopt mobile technology. This segment represents a huge market for financial institutions.

Currently, there is no option for consumers to pay merchants on their mobile devices. Eventually, there will be on-demand payment options on a mobile device, similar to a check. As vendors work toward this goal, financial institutions and merchants will have to collaborate to enable widespread adoption of mobile payments. The industry as a whole is slowly moving toward real-time capabilities.

Bridging Legacy and Emerging Payments

The problem many community financial institutions face is they lack resources and funding to support a new, unified payments system. Payment systems are becoming too complex and expensive for community financial institutions to run by themselves. As a result, they are relegated to managing their payments in silos.

Payment silos create a rigid environment where adapting to changes in regulations and standards as well as emerging technologies becomes impossible. Financial institutions have lagged behind in adopting emerging payments, remaining faithful to their legacy payment structures, rather than taking the risk on a whole new infrastructure without the assurance their customers will embrace the new technology. But financial institutions no longer have to choose between their existing legacy systems and adopting new emerging technologies.

The industry has evolved to include a single solution that processes all payment types. The flexibility to process payments of any type in a single platform enables financial institutions to bring together all legacy payments in a single solution and better manage those payments, driving down costs on existing payments. A unified payments platform also enables financial institutions to easily add emerging technology without changing the whole infrastructure of the organization. This removes operational risk as well and barriers to evolving, allowing financial institutions to offer solutions to their customers without a huge investment and risk. 

As reported in Bankers As Buyers 2011, IDC Financial Insights expects financial institution technology spending to increase by about 2 percent for 2011 to just under $51 billion. With a unified payments system, financial institutions do not need to interface with a third party system. When all payment types are interconnected via a common codebase and single processing engine, tracking and item processing becomes seamless. As financial institutions of all sizes strive to remain competitive, investing in a unified payments system delivers numerous advantages, including improved profitability and efficiencies.

Sean Pennock is president of Rockwall, Texas-based Aptys Solutions, a provider of payment processing technology for financial institutions nationwide. He can be reached at spennock(at)

Copyright © July 2011 BankNews Media