Digital Transformation In Financial Services Mckinsey – New technologies are opening up innovation in payments; To take full advantage, payment providers need to modernize three elements of their legacy technology.

April 14, 2021 Payments are the lifeblood of today’s global economy. Issuers, networks, payment processors and acquirers are investing heavily in redesigning their payment systems, taking advantage of numerous technological advances to better align with customer preferences and the sector’s business requirements. In this article, we look at the latest trends in payment technology modernization and four emerging technologies that are currently driving the wave of innovation.

Digital Transformation In Financial Services Mckinsey

Digital Transformation In Financial Services Mckinsey

Challenges and innovations in payment technology certainly continue. Already popular in many geographies, real-time payments are becoming more popular in the US. Point-of-sale lending and buy-now-pay-later financing solutions are redefining lending and improving the POS experience. Click or scan payment solutions like Apple Pay, Google Pay and QR codes. As digital commerce takes over a larger share of spending — a long-standing trend also accelerated by the pandemic — cash is increasingly being exchanged.

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With these changes and challenges in mind, established banks and payment processors are working to modernize three elements of legacy payment technology:

Significant changes are underway in each of these areas. To understand current trends, a brief assessment of the development of the payment infrastructure helps (Appendix 1). 30 years ago, it was nearly impossible for small startups to enter the space because card platforms relied on proprietary, monolithic infrastructure that was expensive to operate and difficult to scale.

By the early 2010s, ten-year-old startup PayPal was processing more than $350 billion in payments annually. Advances in open source technologies, decentralization, and cloud computing have since enabled flexibility and on-demand capabilities, paving the way for fintechs like Adyen, Stripe, and Square to disrupt the space. We have now entered the era of financial functions as a service/container as a service paradigms.

Using open source technology, it’s now easier to apply deep learning to a variety of workflows, including simplifying credit decisions, reducing cancellation rates, optimizing stands and approval rates, and reducing denials.

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Ultimately, we envision a fully automated and optimized payments-as-a-service (PaaS) future state, where payment functions such as request tokenization, routing, and standing are built as separate functions that can be assembled and scaled like Lego coded. providing a superior customer and cardholder experience. A current example is the Apple payment wheel. In addition, PaaS can provide a personalized experience, including dynamic CVV,

These flexible, modular and automated systems are blockchain, DAG,

And AI will drive the next wave of card and payment technology. Let’s take a look at how some of these technologies are changing the payment landscape and the typical architecture structure of the platform.

Digital Transformation In Financial Services Mckinsey

Blockchain: For some payment types, distributed ledger technology is more cost-effective, more secure, and allows full tracking of money movements for most commercial uses. In the competitive field of cross-border payments, blockchain eliminates complex and ambiguous structures, enabling near-instant and transparent payments. For example, Kenyan startup BitPesa uses a distributed ledger that allows customers to send and receive cheap and instant payments without a bank account or even a registered wallet. Blockchain’s distributed, consensus-based real-time verification means that it is very difficult to cheat the systems that use it; it also enables higher transactions per second and faster settlements than existing card systems. It’s true that there are still technological and regulatory hurdles to overcome before blockchain can be fully implemented – but the potential is clear.

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Internet of Things (IoT): Growth in connectivity, device penetration, and embedded payments are disrupting the payment card industry in a big way. Given the amount of data that can be shared between devices, the need for physical cards and account numbers is debatable. For example, companies are experimenting with biometric payments. Last October, Amazon Go tested a contactless identification service that links customers’ credit cards with palm prints to create a unique biometric signature. Customers can then pay in-store with the palm of their hand on their Amazon One device. Using tokenization, devices such as smartwatches can securely share data (via device IDs or DANs)

) with nearby systems for on-demand payment processing. Fund Token Exchange can further increase value by enabling exchanges between multiple accounts in real-time.

Longer view: Combined with blockchain, embedded IoT systems may one day act as decentralized platforms for credit card processing. This combination has already reduced the cost of plastic cards by allowing a consumer’s digital ID number to be used as a key for payments.

Deep learning and AI: The democratization of data and neural networks makes it important for card issuers and payment providers to leverage artificial intelligence (AI) and deep learning to deliver value through institutionalizing fraud and AML monitoring and higher levels of authentication. fewer declined transactions and credit limit management. In one example, Visa used AI/machine learning models to check more than 500 transaction attributes in real-time for signs of fraud, preventing $25 billion in fraud this year. In another example, Honey (acquired by PayPal in 2019 for $4 billion) uses a combination of deep learning and personalization to offer customers targeted products at attractive prices and direct payments for purchases.

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AI also opens up new revenue and monetization opportunities, including on-demand and real-time analytics for marketers, deep data monetization for advertisers, and effective pricing and campaign support .

Multi-functional tools: Emergence of functional architecture allows banks to facilitate backend token exchange to dynamically link reference account number and reference account to multiple PANs.

Banks can therefore issue a single number for both credit and debit accounts (within regulatory limits) or even for new tenders such as digital currency. For example, the Curve “smart” card allows customers to connect their credit and debit cards to a single physical Curve card using a mobile app. They can then switch between cards before paying or change their chosen card up to fourteen days after purchase.

Digital Transformation In Financial Services Mckinsey

Although multi-functional tools are still an area of ​​innovation, several payment players are promoting this technology as the next iteration of digital wallets, driven by functional mapping of back-end functions.

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Although these disruptions are still in their early stages, they can make a significant difference. By quickly adapting and continuously investing in updating the architecture of existing platforms, payment providers can face significant challenges and launch new products and services faster.

Exhibit 2 shows a high-level reference architecture that enables efficient use of new technologies and capabilities. An example is building a real-time RNN

Powerful lead networks that improve the channel experience, simplify and consolidate customer payment channels, and even provide real-time financial advice and education. In addition, the cross-reference architecture of the blockchain module with existing banking systems enables the cheaper use of credit cards for cross-border payments, reducing overall costs and increasing security.

The technologies we discuss in this article present exciting opportunities – future payment players certainly see the potential and are already thinking about the next wave of payment innovation. But this creative work must rest on a solid technical foundation. We suggest that established providers address four key questions before embarking on a journey to modernize their payment architecture:

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1 A container here refers to a standardized software “package” that encapsulates the code with all its dependencies. Containerization provides software modularity and software compatibility by allowing programs to run reliably in different computing environments.

2 CVV – card verification value – is a payment card code in addition to the standard account number, which is used as an additional layer of security.

6 Recurrent neural networks. A class of artificial networks in which hyperparameters (or nodes) are part of a directed graph and are connected in time series. Often used to decode time series data, given their ability to detect hidden patterns; for example, identifying similarities with potential fraudulent activity not yet identified in existing regulations or highlighting behaviors that indicate the possibility of account termination. I just came across a 124 page report from McKinsey and this report is based on yesterday’s free Deloitte study. about digital transformation and replacing legacy systems, my favorite topic.

Digital Transformation In Financial Services Mckinsey

Financial services technology is currently in a period of profound change as CIOs and their teams prepare to embrace the next major phase of digital transformation. The challenges they face are significant: in a competitive environment of increasing cost pressure, where agility and agility are critical, financial institutions must position their technologies to support large-scale digitization of the front and back end of the business.

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In addition, the current state of COVID-19 is putting significant pressure on technological capabilities (e.g. remote work, new cyber security threats) and requires IT managers to prepare for the “next normal” (e.g. accelerated transition to digital channels) .

Most major financial institutions are well aware of the need for action and have begun to implement the necessary changes. However, these are early days – based on our experience, many are at the beginning of their journey. And in addition to the aforementioned pressures, many face challenges in terms of funding, complexity and talent availability.

This collection of articles is compiled from our latest publication on the topic of financial services

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