Payment modernization: take a holistic approach

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Every payment provider is looking for payment nirvana, but few have found it-and there's a reason for that.

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The ideal payment hub is a significant undertaking. To blend integration and scalability with a sleek, modern customer experience, providers must tackle a range of major initiatives, from microservices-based architectures and open banking to real-time payments networks and ISO 20022 migration.

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It's easy to lose sight of the big picture-yet the big-picture view is key. Closing in on the goal of payment hub modernization means zooming out from a piecemeal, project-oriented strategy and adopting a comprehensive, holistic approach.

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By understanding the strategic role of payment hubs and the trends that will impact modernization, banks and payment providers can shape a holistic approach that's ready to succeed.

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The strategic role of modern payment hubs

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Payment hubs-centralized platforms that connect multiple payment systems and channels- enable faster, cheaper, and more secure transactions.

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For payment providers, modernization has become a hot topic because payment efficiency and security impact a wide range of people and institutions, from consumers and businesses to financial services, regulators, and policymakers. Modernization also brings big benefits, including the following:

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• Reduced operational costs and complexity as a result of consolidated payment systems and processes.
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• Increased scalability and flexibility of payments (through the enablement of easy integration and adaptation to new markets and regulations).
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• Improved compliance and security.
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The benefits for businesses and customers are also extensive. Modern hubs' seamless, convenient transactions greatly enhance customer experience with a wide array of options, faster processing, and lower fees. In addition, management of multiple payment systems and channels is simpler and more cost-effective.

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Drivers and trends in payment hub modernization

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Payment hub modernization doesn't occur in a vacuum. Trends impacting it include:

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• Higher availability and scalability or cloud migration instead of cloud-based hubs. More payment providers are adopting cloud-native payment processing solutions to leverage cloud's advantages in scalability, flexibility, reliability, and cost. Cloud-based hubs also enable faster and easier integration of new payment methods and technologies such as artificial intelligence.  
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• Real-time payments. Improved cash flow, liquidity, and transparency are just a few of the benefits that attract payees and payers to real-time payment solutions. Payment hubs can accelerate adoption of real-time payments through ISO 20022 rails and by connecting to payment networks and systems such as TCH-RTP, FedNow and Zelle.  
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• Open banking. Open banking's application programming interfaces (APIs) enable customers to easily share their financial data and access a range of financial services. Product APIs allow for the externalization of payment data and services, acting as intermediaries that enable banks to share information with fintech companies and customers. The upshot? Collaboration facilitates tailored financial solutions that cater to the unique needs of different customer segments. What's more, open banking allows providers to offer greater choice, convenience, and value-added services. 
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• Transforming large monolith applications or microservices-based architecture. Faster development, deployment, and scaling of complex applications are key outcomes of microservices-based architecture, as are improved fault tolerance and resilience. In the payment industry, advantages include reducing the complexity and maintenance costs of monolithic payment systems that are often hard to modify and test. In addition, the ability to deliver new features and update faster and more frequently helps meet customer demands and regulatory requirements.  
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Choose the approach that works for your organization

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A holistic approach to modernizing payment systems can take many forms. Every bank, non-bank, fintech, and merchant needs to determine the approach that best fits its goals. 

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• \r\n
• Hollow the core. This strategy abstracts the core functionalities of hubs and divides them into three manageable components: 
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Every payment provider is looking for payment nirvana, but few have found it-and there's a reason for that.

The ideal payment hub is a significant undertaking. To blend integration and scalability with a sleek, modern customer experience, providers must tackle a range of major initiatives, from microservices-based architectures and open banking to real-time payments networks and ISO 20022 migration.

It's easy to lose sight of the big picture-yet the big-picture view is key. Closing in on the goal of payment hub modernization means zooming out from a piecemeal, project-oriented strategy and adopting a comprehensive, holistic approach.

By understanding the strategic role of payment hubs and the trends that will impact modernization, banks and payment providers can shape a holistic approach that's ready to succeed.

The strategic role of modern payment hubs

Payment hubs-centralized platforms that connect multiple payment systems and channels- enable faster, cheaper, and more secure transactions.

For payment providers, modernization has become a hot topic because payment efficiency and security impact a wide range of people and institutions, from consumers and businesses to financial services, regulators, and policymakers. Modernization also brings big benefits, including the following:

• Reduced operational costs and complexity as a result of consolidated payment systems and processes.
  
  
• Increased scalability and flexibility of payments (through the enablement of easy integration and adaptation to new markets and regulations).
  
  
• Improved compliance and security.

The benefits for businesses and customers are also extensive. Modern hubs' seamless, convenient transactions greatly enhance customer experience with a wide array of options, faster processing, and lower fees. In addition, management of multiple payment systems and channels is simpler and more cost-effective.

Drivers and trends in payment hub modernization

Payment hub modernization doesn't occur in a vacuum. Trends impacting it include:

• Higher availability and scalability or cloud migration instead of cloud-based hubs. More payment providers are adopting cloud-native payment processing solutions to leverage cloud's advantages in scalability, flexibility, reliability, and cost. Cloud-based hubs also enable faster and easier integration of new payment methods and technologies such as artificial intelligence.  
  
  
• Real-time payments. Improved cash flow, liquidity, and transparency are just a few of the benefits that attract payees and payers to real-time payment solutions. Payment hubs can accelerate adoption of real-time payments through ISO 20022 rails and by connecting to payment networks and systems such as TCH-RTP, FedNow and Zelle.  
  
  
• Open banking. Open banking's application programming interfaces (APIs) enable customers to easily share their financial data and access a range of financial services. Product APIs allow for the externalization of payment data and services, acting as intermediaries that enable banks to share information with fintech companies and customers. The upshot? Collaboration facilitates tailored financial solutions that cater to the unique needs of different customer segments. What's more, open banking allows providers to offer greater choice, convenience, and value-added services. 
  
  
• Transforming large monolith applications or microservices-based architecture. Faster development, deployment, and scaling of complex applications are key outcomes of microservices-based architecture, as are improved fault tolerance and resilience. In the payment industry, advantages include reducing the complexity and maintenance costs of monolithic payment systems that are often hard to modify and test. In addition, the ability to deliver new features and update faster and more frequently helps meet customer demands and regulatory requirements.  

Choose the approach that works for your organization

A holistic approach to modernizing payment systems can take many forms. Every bank, non-bank, fintech, and merchant needs to determine the approach that best fits its goals.

• Hollow the core. This strategy abstracts the core functionalities of hubs and divides them into three manageable components: 

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2. Channel orchestration: Managing various customer interaction channels efficiently.
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3. \r\n
4. Payment process orchestration: Streamlining and optimizing the payment processing flow.
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6. Standardized messaging integration: Ensuring seamless communication with downstream systems and clearing and settlement mechanisms (CSM) such as FedNow and SWIFT.
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1. Channel orchestration: Managing various customer interaction channels efficiently.
   
   
2. Payment process orchestration: Streamlining and optimizing the payment processing flow.
   
   
3. Standardized messaging integration: Ensuring seamless communication with downstream systems and clearing and settlement mechanisms (CSM) such as FedNow and SWIFT.

This division enhances the system's modularity, making it easier to implement upgrades and integrate new features without disrupting the entire architecture. By abstracting core functionalities and leveraging cloud-native solutions, financial institutions can achieve greater agility and performance. Despite the challenges, the strategic benefits make hollowing the core a compelling choice for future-proofing payment infrastructures. 
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• Replace the core.  Replacement consists of two options.
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1. \r\n
2. Buy cloud-native. On the buy side, the industry is increasingly adopting cloud-native payment hubs for their enhanced scalability and flexibility. These platforms offer the benefits of ISO 20022 compliance, microservices-driven architecture, and comprehensive feature sets. 
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   \r\nYet cloud-native systems also bring challenges in several areas that payments providers need to be aware of, including feature integration (ensuring that new features are incorporated into the product backlog and delivered on time; modernization (aligning with the platform's own modernization roadmap); and cost of ownership (managing the financial implications of transitioning to and maintaining a cloud-native payment processor).
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4. Build from scratch. Another strategy is to build a "challenger" core-a modern cloud-based tech stack to which payment processing capabilities are migrated incrementally. For example, a single new payment rail like FedNow is migrated to the challenger core to establish the new platform's stability. Once the platform is stabilized, additional payment rails are moved over, and the legacy core is sunset. 
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Achieving the ideal payment hub

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Watershed moments like the convergence of instant payments, open banking, and new business and technology models bring challenges and opportunity. In exchange for a careful strategy and holistic approach, banks, payment companies and non-banks gain a path to the ideal payment hub that provides flexibility and cost-effectiveness-and a payment processing platform ready for what's next. 
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This division enhances the system's modularity, making it easier to implement upgrades and integrate new features without disrupting the entire architecture. By abstracting core functionalities and leveraging cloud-native solutions, financial institutions can achieve greater agility and performance. Despite the challenges, the strategic benefits make hollowing the core a compelling choice for future-proofing payment infrastructures. 

• Replace the core.  Replacement consists of two options.

1. Buy cloud-native. On the buy side, the industry is increasingly adopting cloud-native payment hubs for their enhanced scalability and flexibility. These platforms offer the benefits of ISO 20022 compliance, microservices-driven architecture, and comprehensive feature sets. 
   
   Yet cloud-native systems also bring challenges in several areas that payments providers need to be aware of, including feature integration (ensuring that new features are incorporated into the product backlog and delivered on time; modernization (aligning with the platform's own modernization roadmap); and cost of ownership (managing the financial implications of transitioning to and maintaining a cloud-native payment processor).
   
   
2. Build from scratch. Another strategy is to build a "challenger" core-a modern cloud-based tech stack to which payment processing capabilities are migrated incrementally. For example, a single new payment rail like FedNow is migrated to the challenger core to establish the new platform's stability. Once the platform is stabilized, additional payment rails are moved over, and the legacy core is sunset. 

Achieving the ideal payment hub

Watershed moments like the convergence of instant payments, open banking, and new business and technology models bring challenges and opportunity. In exchange for a careful strategy and holistic approach, banks, payment companies and non-banks gain a path to the ideal payment hub that provides flexibility and cost-effectiveness-and a payment processing platform ready for what's next.

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