Rapid industry changes, fierce competition, and evolving customer needs has driven merchants, financial institutions, and payments providers to revamp systems, processes, and goals for the future. Modernization and digital transformation are both relevant options, but which is best?

The payments ecosystem — for merchants, financial institutions (FIs), and payments providers — continues to grow increasingly complex. Today’s organizations are up against rapidly evolving customer demands, regulatory changes, and emerging technology. While these drivers of change are largely positive, they do require organizations to keep up as the landscape changes or risk getting left behind.

Taking advantage of the opportunities that come with change and disruption requires organizations to ensure they have the infrastructure and processes in place to support current requirements and the agility to rapidly adapt to changing demands. From ensuring that payments happen securely to supporting real-time payments, IT teams focused on payments have their work cut out. As industry-wide adaptation occurs to sophisticated customer preferences and stringent regulatory requirements, many organizations are turning to modernization or digital transformation to support new payment systems and processes — and innovation. While the two approaches are related and even intertwined in some ways, they are also very different.

Payments Modernization

Payments modernization typically focuses on a left-to-right, bottom-up approach geared toward improving flexibility, reducing cost, speeding up systems, and impacting business results. It involves adopting new technology and automating the legacy environment. In payments, this means moving infrastructure and workloads to the flexible cloud and focusing on agile application development.

Upgrading systems, adopting new platforms, and standardizing and modernizing apps helps organizations meet today’s needs while future-proofing for the changes that are sure to come. Modernization follows a spectrum and may include things as basic as implementing new software and hardware to automate tasks and processes to things as complex as moving infrastructure to the cloud while phasing out legacy systems. Payments modernization also takes security and compliance into account, ensuring the organization has a robust approach to both.

As KPMG points out, it also involves facilitating a strategic readiness to help stakeholders within the organization to better understand the impacts of modernization. This can serve as a starting point for larger digital transformation initiatives and can provide a solid foundation for kicking those initiatives off in the future.

Digital Transformation

Digital transformation is a larger undertaking that aims to reimagine (and perhaps rebuild) an organization’s systems, processes, and customer experiences with a top-down, right-to-left approach. The key word here is “transformation,” which aims to reverse engineer a business model holistically to accomplish specific business impacts or to achieve certain business performance goals. This often results in new policies, values, and even revenue streams.

Digital transformation is usually mandated by the C-suite and, while it aims to keep costs under control, the end goal is to achieve a business impact or to respond to competitive threats. To get there, IT must focus on a fast and agile approach to support the path to the end goal. Organizations choose digital transformation to adapt to new customer behaviors, to capitalize on new growth and revenue opportunities, to pivot in the face of new regulations and compliance mandates, and to respond to disruptive technologies.

Where to Focus

Payments modernization has been sweeping the industry as many move infrastructures to the cloud and upgrade apps that are moving from the data center to the cloud. Modernization also presents an opportunity for organizations to slim down sometimes massive portfolios of technologies and vendors that have become a drag on infrastructure, inhibiting change due to the overwhelming amount of dependencies.

As the industry evolves in many areas, the payments operations of merchants, FIs, payments providers, and other industries are leveraging digital transformation initiatives to keep up with the massive shifts happening. As digital payments gain momentum, this is becoming paramount to all else. Digital natives and other customers who prefer the convenience of online payments and banking are being drawn to fintechs and neobanks who offer the same products and services as incumbents with a digital-first focus.

Determining the right approach for an organization requires answers to two main questions:
1.What do our customers want and need?
2.How do we pivot or create a business model to address those needs and future-proof for changes in this evolving landscape?

If the organization is in a position to prioritize business needs at any cost, digital transformation is likely the best route.

In the end, digital transformation requires an organization to sideline old ideas about ROI in favor of new ideas that facilitate creative solutions for industry pain points and meeting customer needs. Both modernization and digital transformation require a budget, but the latter will focus more on the solution to the problems at hand than whether or not the project will fit cleanly into an expected ROI calculation. Both types of initiatives aim to ensure payments operations are resilient, agile, and customer-centric. Modernization can help bring an organization up to par with the technological, regulatory, and customer requirements of today, while digital transformation will revamp the organization holistically to spur a fundamental change in business results.

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