Research indicates that payments transformation isn’t optional—it’s imperative for survival. Yet modernising payments infrastructure can be a costly undertaking. Tier 2 and 3 banks can roll out a successful payments transformation programme that minimises risk and maximises innovation for value-added services.

Ask anyone in the industry and most will agree that the current payments processing model simply isn’t working. While most banks are broadly happy with their current payments infrastructure and processing partners, costs are rising and revenues are not growing. In fact, recent research by Celent indicates that 86% of the Tier 1 banks noted that margins on payments are becoming more challenging to maintain. In 2021, the response to the same question was 59%.

The consensus view in the industry is that something must–and will–change. Banks know that they need to transform their infrastructure to stay competitive and in sync with evolving consumer expectations. According to Celent, over 70% of banks in Tiers 2 and 3 either expect to make significant changes to their infrastructure in the coming two years, or are currently underway with such efforts for RTGS, ACH, or real-time payments. 

But with shrinking margins and growing costs, how should banks approach their payments infrastructure transformation? 

In a word: outsourcing.

The tightening economics around payments processing have created new demand for partner-delivered services – and an excellent opportunity for Tier 2 and 3 banks to realise real payments transformation with minimal risk. Perhaps it seems counterintuitive, but for some banks, the best way to transform their payments operations is to offload them; at least for the commodity part of the value chain – execution, clearing and settlement.

It’s an unfortunate reality that smaller banks often don’t have the resources needed to keep pace with technological and regulatory shifts. Bigger banks, on the other hand, have deep pockets and in-house IT teams to drive transformation and facilitate modernising the infrastructure needed to upgrade payments processing technology. 

When smaller banks think strategically and outsource payments processing to a partner bank, it frees up resources to drive true innovation for value-added services that can open up new revenue streams. Next to that, collaboration is nothing new. Correspondent Banking and Agency Banking have been around for a long time, and the request to the Tier 1 banks of the world would be to present their processing capabilities in an easily consumable, multiproduct manner (i.e., ‘Stripe-ification’). 

Research shows that there is growing interest among smaller banks for working with other, bigger banks for payments. According to Celent’s findings, across Europe, 22% of Tier 2 and 3 banks said they would consider working with another bank for these services. Similarly, 55% of Tier 2 and Tier 3 banks in Europe want processing partners that can deliver value-added services. Clearly, an increasing number of smaller banks understand that outsourcing offers a clear path to transformation. This points to a potentially sizeable opportunity for larger banks to consider targeting.

If Tier 2 and 3 banks truly believe that payments transformation isn’t optional, it’s time to consider how handing over payments processing to a Tier 1 bank can help lower costs, drive innovation across other services and bolster their bottom line.