U.S. banks are finding themselves at a crossroads, balancing the advantages of relying on dominant service providers with the pressing need to maintain operational autonomy.
From core banking systems to payment processing, service providers offer banks the ability to scale their operations, increase efficiency, and reduce costs. But too much reliance on third-party service providers has pitfalls.
During a recent PaymentsJournal podcast, Oscar Munoz, Vice President of Sales, Ren Americas at Euronet, and James Wester, Director of Cryptocurrency and Co-Head of Payments at Javelin Strategy & Research, discussed the double-edged nature of relying on large service providers and the imperative for banks to have the flexibility to innovate.
A More Autonomous Outlook
Banks face a potential erosion of operational autonomy when they delegate to external providers. They also risk losing control over data security, customer experience, and regulatory compliance.
“Many financial institutions are taking back control of their issuing and acquiring offering from the full outsourced model that we have seen become so popular in the U.S.,” Munoz said. “A lot of the sponsor banks in the U.S. are looking to own their own tech stacks instead of continuing to refer that forward to another company, which many times puts them at risk.”
Munoz emphasized the need for banks to control the final mile of customer interaction, highlighting its increasing importance. When banks take back control, they regain influence over how they communicate with their customers, something that’s especially critical for mid-tier and smaller financial institutions that place a high value on their customer relationships.
Striking the Right Balance
In the search for operational efficiency, banks must strike a balance between in-house capabilities and external services, all while staying compliant with evolving regulations. However, excessive reliance on third-party service providers—as mentioned before—can lead to generic, one-size-fits-all solutions that may not align with the value propositions every bank offers.
Wester pointed out that adaptation is not just a choice but a necessity. Banks must reevaluate their legacy systems and technologies in this fast-evolving landscape, even if they have been reliable and effective.
“For the longest time, that was acceptable,” Wester said. “But fast-forward to now, and suddenly fintechs are coming in, offering things that maybe weren’t seen as important. Or there were things that a financial institution might look at and say we don’t even really need to worry about that, nobody’s asking for—I didn’t know they could get it. Now that I know they can get it, they’re going to start asking for it.”
However, Munoz cautioned that modernization isn’t as simple as flipping a switch and moving from traditional systems to the cloud overnight. Banks must carefully consider the pace of their transformation and ensure they adapt to new technologies while meeting regulatory requirements.
Combatting Fraud in Real-Time
The rise of real-time payments has brought an increase in the speed at which fraud occurs. Traditional fraud prevention methods employed for credit cards—which allow chargebacks and reversals—are not applicable to instant payments. Munoz emphasized how important it is to recognize the differences and deploy fraud prevention strategies accordingly.
“If you’re managing different worlds, they’re going to need different tools because the way you can fix the problem after the fact is very different depending on what kind of transactions you’re working with requires unique expertise and tools and modern technology,” Munoz said.
“Compliance and fraud require that unique expertise, tools, and modern technology to manage both. We’re handling those concerns every day because we’re having these discussions with clients every day, and it’s one of the first things they bring up.”
Wester added that he’s had similar discussions with financial institutions.
“Compliance is something they’re absolutely paying attention to because, as we all know, compliance is baked into the DNA of financial institutions,” Wester said. “They have to be paying attention to all sorts of things across different lines of businesses and across different types of payments.
“And the other thing is, nobody believes that compliance is going to get easier anytime soon.”
Solutions in the Market
Euronet’s Ren Payments platform aims to help banks modernize their legacy systems and maintain the autonomy to adapt at their own pace.
Ren Payments offers banks connectivity to various real-time payment networks and card processing platforms—and bridges the gap between multiple payment channels, including wires, ACH, instant payments, card issuing and acquiring—all under one unified platform.
As financial institutions grapple with compliance and fraud prevention challenges, solutions like Ren Payments offer a lifeline. Compliance will only become more complex with regulatory changes, and banks need to be prepared to handle these changes swiftly.
“Our solution leverages over 12 years of experience in instant payments to deliver fraud prevention solutions tailored to the specific characteristics of each payment type,” Munoz said.
Conclusion
Navigating operational efficiency for U.S. banks is a balancing act. While third-party service providers present enticing solutions to streamline operations and enhance capabilities, banks retain their autonomy, particularly when it comes to the pivotal area of customer experience.
This autonomy becomes even more crucial when viewed through the lens of technology. With Fintechs reshaping the financial landscape, banks, especially mid-tier and smaller institutions, must be agile and responsive. It’s not just about the present efficiencies but ensuring that these institutions are resilient and adaptable for the challenges and opportunities of tomorrow.
But operational efficiency goes beyond the mere act of balancing. It’s a strategic move to future-proof the bank. By modernizing and adapting, banks equip themselves to cater to evolving customer demands, traverse the intricate maze of regulations, and safeguard against real-time fraud threats. In this ever-changing financial ecosystem, the success mantra for banks lies in harmonizing in-house strengths with external services. This synergy will determine which institutions merely survive and which thrive.