Embracing Composable Payments Processing: A Strategic Imperative for Indian Banks

The Current Landscape

Over the last two decades, banks globally have faced the frustration of high operating costs and limited budgets, hindering their ability to expand and improve product offerings. The Indian banking industry is no exception.

Regulatory requirements consume the lion’s share of budgets, and maintaining legacy systems is expensive. At the same time, capital investment in infrastructure has been scarce, leaving payments CTOs and CIOs with the challenge of ‘doing more with less.’

This efficiency trap is compounded by a shortage of talent, further straining banks' ability to modernize and remain competitive.

The Promise of Composable Payments Processing

Composable payments processing offers a solution to these challenges. This approach allows banks to selectively assemble capabilities that meet their specific business requirements using a versatile, API-first platform.

By avoiding large-scale modernization projects in favor of a composable strategy, banks can progressively transform their systems, focusing on areas that generate the greatest impact with minimal risk.

A composable approach addresses several key issues in payment processing:

• Outdated Systems: Legacy systems hinder agility, efficiency, and security.
• Regulatory Compliance: Continuous system upgrades to meet new regulations consume substantial budgets.
• Resource Constraints: Maintaining complex payment systems requires significant resources.
• Customer Demands: Customers increasingly demand faster, cheaper, and more convenient payment options.
• Value-Added Services: New services that improve the overall payments experience are essential.

Why Rip and Replace is Not Viable

For many banks, especially in India, a rip and replace approach is not viable. The high cost of maintaining legacy systems and compliance with regulatory requirements make it impractical.

Additionally, many banks rely on mainframe systems with a shrinking pool of employees who understand how to operate them. This shortage extends to business leaders with comprehensive knowledge of payments processes, from customer interactions to clearing and settlement. These factors collectively impact system renewal and customer experience.

Outsourcing and Vendor Collaboration

To manage costs and operational resources, many banks outsource their payments processing. A recent survey revealed that 88% of banks do this, with back-office operations, customer service, KYC, and fraud management being the primary outsourced functions. Despite significant budget allocations, security, fraud prevention, and compliance remain challenging areas that are rarely outsourced.

Regulations like the Digital Operational Resilience Act (DORA) emphasize the need for system resilience and security, impacting banks' operational strategies. While DORA is a European regulation, its principles resonate globally, including in India, where regulatory frameworks are becoming increasingly stringent.

Build or Buy: Strategic Decisions

Banks must continuously evolve their payments processing systems while managing the interdependencies of various components. An orchestration layer can limit these interdependencies, allowing individual systems to be updated or replaced without disrupting the entire infrastructure. This approach provides flexibility in choosing whether to build solutions in-house or source them externally.

The decision to build or buy should be based on compatibility with existing systems and the ability to communicate effectively with them. Vendor agility is crucial, as banks need partners who can adapt to the changing landscape of payments processing.

Relevance for the Indian Banking Industry

In India, the composable approach is particularly relevant due to the rapid growth of digital payments and the regulatory push towards financial inclusion. The Reserve Bank of India (RBI) has been instrumental in promoting digital payments through initiatives like the Unified Payments Interface (UPI). UPI's API-driven framework is a prime example of how composable systems can enhance payment processing capabilities.

Indian banks are increasingly partnering with fintech companies to integrate API-based solutions, enabling modular upgrades and scalability. This approach allows banks to offer innovative payment solutions without overhauling their entire systems, meeting customer demands for faster and more convenient payment options.

Six Steps to Success

To successfully implement a composable payments processing approach, Indian banks should follow these six steps:

1. Assess and Understand: Conduct a thorough assessment of current IT systems to identify limitations and business needs. Prioritize areas for improvement.
2. Define Goals: Clearly define target state goals and objectives for new functionality, including configurability, scalability, resilience, and automation.
3. Identify Critical Capabilities: Break down the legacy system into smaller components and identify critical capabilities for replacement. Start with low-risk capabilities to build confidence.
4. Select Cloud-Native Capabilities: Choose appropriate cloud-native capabilities from technology providers that align with your needs.
5. Proof-of-Concept Projects: Conduct small proof-of-concept projects to validate the approach, test integration points, and identify potential challenges early.
6. Gradual Deployment: Deploy selected capabilities alongside existing systems to minimize disruption and maintain control during the replacement process.

Conclusion

Adopting a composable approach to payments processing offers Indian banks a strategic pathway to modernize their systems, ensure compliance, and meet evolving customer expectations. By focusing on modular upgrades and leveraging partnerships with fintech companies, banks can enhance their payment processing capabilities, drive innovation, and remain competitive in a rapidly changing financial landscape.