IDC Financial Insights, sponsored by Episode Six, found that traditional payment system expenses are hindering global bank expansion. Legacy paytech will cost banking institutions $57.1 billion by 2028, limiting their competitiveness.
According to a new analysis by IDC Financial Insights sponsored by Episode Six, a global provider of enterprise-grade payment processing and digital ledger infrastructure, spending on traditional paytech is rising quickly and harming the growth prospects of banks globally.
Financial institutions (FIs) are estimated to spend $57.1 billion on outmoded payment systems globally by 2028, up significantly from $36.7 billion in 2022 and growing at an average annual rate of 7.8%.
Some of the hidden expenses of legacy paytech, which prevent banks from competing for new payments-related income, were also exposed by the IDC report “Future Ready Payments Platforms Enabling the Next Phase of Growth for Banks.” If FIs don’t switch to future-proof paytech systems, they could lose out on up to 21% in annual legacy cost reductions and an extra 42% of income tied to payments.
Future-ready Paytech provides extra features that could increase revenue. These involve developing new products, such as:
- Platforms for deferred payments or digital wallets (22%).
- Revenue from payments-as-a-service (PaaS) and banking as a service (BaaS) (12%)
- Data commercialization (8%)
Savings per year could also come from:
- removing unnecessary old technology (8%)
- Cost-saving benefits from orchestration (5%)
- reduction in downtime of 4%
- savings of (4% in) development costs
In the IDC’s 2023 Banking Survey, 40% of participants identified legacy technology as a significant barrier to their digital transformation initiatives. Due to this, banks and FIs all over the world are actively searching for payment technology that is prepared for the future in order to support their next stage of development and innovation.
“A genuine push for the simplification and consolidation of the technology estate”
Fujitsu UK&I’s Ian Bradbury, CTO of financial services, spoke on the next steps needed by conventional banks.
“Digitally native businesses have long taken use of their special capacity to provide customers with more nimble services, despite being considerably younger than traditional financial institutions. With challengers like Starling Bank achieving profitability, it is evident that these digital solutions are fueling competition in the banking industry. Fortunately, though, the established players are trying to catch up by pouring billions into fintech, said Bradbury.
But this dedication to new technology doesn’t necessarily mean that the old is eliminated. Over time, the major companies have accumulated a variety of legacy systems, and the longer these outdated procedures are used, the harder it is to abandon them.
“We’re already seeing a real drive for the consolidation and simplification of the technology estate, but this must accelerate if banks hope to effectively modernise and reduce soaring support costs that will build up over time,” he said in conclusion.
What aspects of the banking landscape are changing?
The IDC report also discusses some of the key factors accelerating the transition away from antiquated payment systems and pushing banks toward payments technology that is prepared for the future:
Consumer demand: By 2024, 70% of stores will add at least two additional payment alternatives, such as QR codes, contactless payments, or alternative payment methods, as consumers place more weight on payment choice.
- Infrastructure: By 2028, 50% of global banks will adopt PaaS for some or all payment processing workloads, with a concentration on cloud-based payment processing, driven by rising technological complexity and an increase in the number of payment rails.
- Business model innovation: By 2026, B2B BNPL will reach $500 billion globally, with BNPL platforms competing with traditional FIs to offer working capital loans to small- and medium-sized firms.
- The investigation by IDC shows that switching to new paytech platforms that are prepared for the future results in new product and service innovation for banks and financial institutions. Only 5% of worldwide FIs currently have paytech that is prepared for the future, demonstrating how much space there is for expansion.