Nearly 90% of European banks say they face an urgent need to modernise their payments infrastructure, but most are making slow progress due to fragmented legacy systems, regulatory complexity, funding constraints and talent shortages, according to a report by Boston Consulting Group (BCG).
Payments business under pressure from fintech and big tech
The report said the payments business is becoming increasingly critical as competition from fintech firms, big technology companies and payment service providers intensifies, while new regulations and rising customer expectations require banks to upgrade their technology platforms.
"Many banks tell us their modernization programs are making slow progress, amid fragmented legacy systems, regulatory complexity, skills gaps in the workforce, and pressure on funding," the report noted. Without faster modernisation, banks risk losing market share and profitability, it added.
Most banks allocate less than 10% of change budgets to payments
"The results of our study paint a sobering picture," BCG said, noting that while banks recognise the urgency of modernisation, many continue to allocate less than 10% of their annual change budgets to payments, with nearly half of that spending directed towards regulatory and market infrastructure requirements.
Looking ahead, the report estimates that the global payments market could expand from USD 1.9 trillion in 2024 to USD 2.4 trillion by 2029, driven by growing demand for real-time payments, embedded finance and digital payment solutions. At the same time, regulatory changes, including Europe's PSD3 and Financial Data Access (FiDA) framework, are expected to accelerate the need for technology upgrades.
One-fifth of banks have abandoned modernisation projects
However, execution remains a challenge. Around 20% of banks surveyed said they had stopped or abandoned at least one payments modernisation project because of issues such as vendor performance, budget constraints, regulatory changes and mismatches between technology solutions and business requirements.
The study found that banks are increasingly prioritising artificial intelligence, cross-border payments and real-time payments as part of their long-term payments strategy, while fintech firms are emerging as key partners in the transformation process. Larger banks are generally ahead of their mid-sized and regional peers in adopting these technologies.
BCG urges banks to treat regulation as a catalyst
BCG said banks should treat regulation as a catalyst rather than a constraint and commit to long-term investments, modern cloud-enabled architecture and stronger collaboration across business and technology teams to remain competitive. "Banking leaders must now either seize the moment and commit fully, or risk watching market share continue to flow toward more agile peers," the report said.
