By Casey Scheer
BHMI
Legacy systems have served banks and payment processors well for decades, but it's clear they can no longer keep pace with new technologies. As consumers and businesses often want access to new payment methods as soon as they come to market, spending months or even years in coding and process changes is no longer viable.
While traditional banks and processors have typically viewed fintechs as competitors, it's time to embrace their offerings of flexibility and agility. By collaborating with the right fintech, companies can quickly adopt the latest payment systems while preserving security and operational oversight.
For decades, banks and payment processors have operated with legacy back-office systems that are proven and specifically designed to support the unique needs of the financial services industry. However, new technologies, fintech companies and changing consumer preferences have disrupted the entire payment processing model in recent years. Driven by new technologies and automation, new payment methods like P2P, mobile payments and real-time payments are increasingly exceeding the capabilities of legacy systems.
As the industry slowly moves from card-based payments to digital payments, banks and processors can no longer rely solely on long-held systems and in-house capabilities. In general, the more outdated the system is, the more difficult it will be to modernize. "Legacy systems lack API/modern integration capabilities, making them difficult to integrate with new solutions, leading to data silos, inefficiencies, and security risks," said Marcia Klingensmith, CEO of FinTech Consulting.
Both fintech solutions and legacy systems have strengths and weaknesses. Traditional payment processing organizations and systems are more structured, have operational governance and are risk-averse. As a result, they are typically more trusted. However, these systems are also slow to adapt to client demands and changes, such as new rails, messaging formats and innovations.
A recent report by IDC (see tinyurl.com/musstprz) found that the hidden costs of legacy platforms, which include maintenance, fixes and integrations, could cost the financial services industry more than $57 billion by 2028. This doesn't include the cost of lost market share.
On the other hand, fintechs are technology-driven with fresh product ideas and agile solutions. Recognizing they are slow-moving ships that can't make fast turns, many organizations have looked to fintechs in recent years to adopt new channels like P2P, digital wallets and buy now, pay later (BNPL).
However, these fintechs can be less risk-averse and lack a regulatory mindset. In fact, the FDIC recently issued guidance about risk in third-party relationships (see tinyurl.com/33cezkv9) and has hit a few banks with fines and penalties when a partner didn't comply with regulations.
While legacy systems may be the bedrock of payment processing, they lack the flexibility and agility required in today's fast-paced environment.
However, not all fintech vendors operate alike, and they may have different mindsets about compliance. Anthony Serio, founder and CEO of Serio Payments Consulting, said, "Banks and processors can often leverage fintech for payment agility while maintaining secure operations and oversight in a strategy that harmonizes innovation with risk management."
A collaborative approach with the right fintech enables them to retain their inherent strengths while leveraging shared knowledge, resources and expertise to modernize infrastructure. This allows companies to meet evolving client expectations and secure their place in the changing payments world.
"It is important for an organization to choose a fintech partner whose program shares the same views and objectives, so as the relationship grows, they don't grow apart," said Joyce Mehlman, Owner of iLEX Consulting Group.
Executives must realize that moving to a modern payments processing ecosystem that leverages the best of their current operations combined with fintech flexibility will require a paradigm shift. The first step entails changing the legacy mindset among the C-suite and staff who may have years of deep connection working with legacy systems.
Some companies may need to hire new talent who understand the benefits of fintech and modern platforms. Partnering with an experienced consultant to develop a successful collaboration strategy and ensure effective change management is a good idea.
Inviting the entire operations team to the table early and gaining buy-in on selecting a fintech payments vendor is also essential. To drive collaboration, both internal and external parties must be present, accountable and engaged in operational governance with shared responsibility. Both parties should also establish tools for collaboration and identify the building blocks needed to move to a modern, agile payments ecosystem that leverages the best of both worlds.
In the rapidly changing payments ecosystem, neither fintech nor legacy back-office systems can address the needs of banks and payment processors on their own. Through collaboration, companies can leverage the benefits of both, gaining a trusted, compliant system that is agile and can quickly adopt the latest payment methods while delighting clients. 
Casey Scheer is the director of marketing at BHMI, a leading provider of software solutions focused on the back-office processing of electronic payments. The company is best known as the creator of the Concourse Financial Software Suite® — a unique integrated collection of back-office products that allow companies to adapt to the rapidly changing world of payments. Casey can be reached at or 402-333-3300.
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