Banks’ $75bn legacy spend; why is paytech adoption so slow?

A new study by IDC Financial Insights, sponsored by Episode Six, suggests global banks are set to spend US$57bn on legacy payments technology in 2028 alone, with the cost of supporting outdated legacy systems rising 7.8% year-on-year. 

Sticking to legacy despite fintech growth prospects

It is estimated that global banks spent $36.7bn on outdated payments in 2022, and with costs rising, it seems mystifying that financial institutions are set to continue their outlay up until 2028, instead of transitioning from legacy tech to cost-efficient financial technology.

This is especially true given the hidden costs associated with legacy paytech maintenance, which IDC suggest incapacitates banks in their attempts to compete for payments-related income. 

IDC’s report compounds this conundrum further, suggesting future-ready paytech could deliver a 42% boost in payments revenue for banks. 

IDC feels legacy banks should be taking advantage of the additional revenue capabilities delivered by modern paytechs, to not only move away from costly legacy paytech but start turning a profit too.

Per the report, new paytech products including deferred payments and digital wallet platforms can boost profitability by 22%, banking-as-a-service (BaaS) and payments-as-a-service (PaaS) by 12%, and data monetisation by 8%. 

Meanwhile, annual savings from retiring legacy technology can help save banks 8%, while downtime reduction and development cost reduction can save banks 4% respectively. 

Choice or challenge?

While the estimated outlay on legacy tech by 2028 and monetisation and savings capabilities of paytechs could imply a certain ignorance, procrastination, or reluctance to change from global banks – IDC suggests the transformation stage itself is proving a pain point for legacy financial institutions. 

In fact, 40% of global banks cited difficulty in integrating new technologies into their systems, with a set of prerequisites needed to start the integration process of new paytechs. 

The first, which is arguably already ubiquitous across the payments ecosystem, is consumer demand. IDC reports 70% of retailers have already responded to consumer adoption of digital wallets, by adding additional payment methods.

The next two are where things get tricky for global banks, with increasing technical complexity and a rise in payments rails making it more difficult for banks to integrate new payment systems. This challenge can be even greater if legacy banks have not updated their business models with BNPL platforms. 

According to IDC, the worth of worldwide B2B BNPL models is set to reach $500bn by 2026, with BNPL platforms already competing with financial institutions to provide SMEs with working capital loans. 

Why the time for change is now, despite the challenges

Episode Six CEO, John Mitchell, believes now is the time for legacy institutions to update their internal processes with the latest paytech innovations, despite the challenges associated with integrating new tech into legacy models.

He says: “Maintaining legacy payment technology systems creates a ‘lose-lose’ scenario for banks. On the one hand, they’re spending more and more money to maintain outdated payment systems, constraining technology budgets urgently required to digitally transform their businesses. 

“On the other, they’re missing out on substantial, long-term revenue opportunities to emerging competitors. But, given the business-critical role that paytech plays in banks, most will not be able to ‘rip-and-replace’ legacy systems.

“A progressive modernisation approach defines a faster path to transform mature banks into truly digital banks. By progressively modernising specific parts of their payments stack, banks benefit from the new capabilities of modern future-ready platforms, reduce costs and technical debt, while at the same time minimising disruption from full switchovers to new platforms.”

Michael Yeo, Associate Research Director at IDC Financial Insights, adds: “Payments innovation is being driven largely outside of the bank’s walls. For banks and financial institutions that wish to be competitive in the next phase of payments, a future-ready payments platform will provide the core capabilities required, including quickly integrating a modern payments technosphere.

“As this Infobrief also reveals, migration methodologies have become optimised and provide easier and less risky options to move away from legacy to truly embrace digital transformation by leveraging cloud infrastructure's specific properties.”