Executive Summary

Fintech Innovation

Fintech innovation is disrupting and helping to transform all kinds of business sectors, from banking and lending to employment services and travel. Innovation is geared both to creating efficiencies and improving the customer experience.

One of the major areas for fintech innovation is to make payment processes smoother, faster and more reliable. For established banks and building societies, keeping pace with newer entrants is easier said than done. Legacy core infrastructure and entrenched ways of working can hamper the kinds of experiences they want to offer. These include payee confirmation during outbound payments; integrated payment initiation services within a single app; and immediate payment reconciliations and refreshed account balances at whatever time of the day or week.

As customer experience leaders continue to break boundaries with fresh, convenient and joined-up new services, there is a risk that traditional financial institutions will fall increasingly far behind if they allow inertia to persist. The result could be a two-speed market in which customers are forced to choose between historical reputation and a modern digital experience.


Closing the gap

But there is a way to close the gap. Even with the most complex internal systems and processes to work around, there are tools that established brands can draw on today to deliver the new experiences customers expect.

By harnessing these capabilities, banks and building societies and other established, FS-linked service providers have a chance not only to keep pace with today’s digital leaders but also to protect and grow their income, just by making it easier for customers to achieve what they need to.

With reference to the latest best practice of digital banking experience leaders, and first-hand insights into what’s possible, this first of two eBooks distils some invaluable recommendations to help established banks and building societies fast-track new customer innovation. In the second guide, we focus on wider opportunities for other digitally-ambitious businesses to do more with payment innovation.


3 issues for digitally ambitious businesses and institutions

Key issues 1 – Legacy technology

In all sectors, established brands – both in financial services and the wider digital commerce ecosystem - face challenges from more agile, technology-enabled new entrants. These trailblazers are changing customers’ expectations by showing them a better, easier way to do things – from planning travel to paying bills and managing money.

From a business perspective, these digital service innovations will ideally achieve more than one goal. First and foremost they present a chance to deliver something better, easier and more engaging for customers, which drives their loyalty and word-of-mouth recommendation. This boosts both revenue and profitability – especially when services are highly automated, reducing the operational costs associated with processing transactions manually or responding to customer queries that have been triggered by lags in the system.

In the digital age, optimising operational inefficiency should be a customer experience-led activity - ensuring that any cost-cutting is matched by an increase in value to the customer, rather than a decrease in service quality. Otherwise, businesses could become engaged in a race to the bottom, sacrificing customer loyalty, profitability and reputation.

In financial services, and broader customer experiences which include a financial transaction, an obvious candidate for innovation and experience refreshment is payment processing. App-led industry disruptors are showing what more instant and traceable payments could look like, and now banks and building societies as well as other businesses with advancing digital offerings have a chance to build these experiences into their own services, to impress and satisfy their own customers.

Yet up to now, this hasn’t been easy. Established brands, especially in the banking world, have come up against inflexible internal systems, and a lack of capability for round-the-clock, real-time payment processing and account balancing. Even simple services designed to complement core payments have presented difficulties – such as delivery of Confirmation of Payee (CoP) and integrated Payment Initiation Services (PIS) utilities from within the institution’s web site or mobile app. As well as frustrating customers, these omissions could be compromising opportunities to bring in money.

Even the most digitally ambitious players can feel the weight of the transformation task ahead of them.

Des Moore, Chief Executive Officer at Cumberland Building Society, which is over 170 years old and provides full-service business and personal current accounts, says he would rate the institution at 10 or over in terms of being constrained by its legacy IT environment.

“Ours has grown up to be quite a piecemeal infrastructure, comprising numerous independent systems,” he says. “Traditionally, in common with many financial institutions, we preferred to build everything ourselves rather than buy, and run everything on our premises. But this has created a lot of challenges,” says Moore.

Cumberland stands proud as a customer-owned organisation that knows its local customers, and has strong ethical values, but acknowledges that legacy systems now challenge the society’s ability to keep innovating and impressing customers with new services and features. Des believes that combining its trusted values with a fresh new partner could help strengthen its lead in its local market:

“You'd have a match made in heaven - the credibility to operate in the marketplace with all of these customers, the know-how to look after them and give them a great experience, plus brilliant customer journeys the fintech innovators are offering today.” − Des Moore, CEO of The Cumberland Building Society.

John O'Beirne, Director of Products at Bank of Ireland, says his organisation too is held back by its legacy infrastructure, but that this cannot continue to be a barrier to change. He notes that customer demands and expectations are creating the urgency and timescales for transformation.

“There’s the organisation’s time, and there's customers’ time. Once the clock starts from a customer perspective, that's the timetable for transformation,” says John O'Beirne, Bank of Ireland. “In other words, our internal operational inefficiencies should not be getting in the way of a smooth customer journey,” he says. 


Key issue 2 – Hidden costs of inefficiency

Traditional consumer brands, particularly banks and building societies, continue to attract and keep customers because of the trusted relationships they have developed over many decades. Yet, as ‘digital native’ customers come of age, and as fintechs become more established and proven, established players cannot count on that loyalty persisting indefinitely.

Incumbent financial service providers are also under pressure to be more cost-efficient. Old operating models, branch infrastructures and sprawling on-premise legacy IT estates aren’t just compromising providers’ ability to innovate with new customer experiences. They also constitute unsustainable costs, preventing traditional banks and building societies from offering competitive products and services.

There are considerable hidden costs, too – linked not only to the many hours lost to manually tallying payments, but also to responding to customers who haven’t seen transactions go through yet, not to mention a loss of business as disenchanted consumers defect to more modern financial brands.

An independent survey1 of 200 decision-makers in banking and lending, as well as employment services and travel businesses, found that overcoming such issues can help drive significant improvements to the customer experiences and customer satisfaction (not least confidence in payments and trust in their current financial position), boosting business performance improvement by 14%.

Too often, though, banks and building societies focus only on the hard cost savings when looking at scope for transformation.

“Payment processing and the customer experience are absolutely intrinsically linked. If you only looked at the hard costs of manual processing, you’d miss those wider opportunities to make life easier for customers,” notes Bank of Ireland’s John O'Beirne.

Referring to the risk and manual effort incurred each time digital payment requests at the front end are translated to a queue of tasks for legacy systems, and as payment order information is copied from digital messages:

David Lee, Chief Payments SME at Wipro Limited, notes “You just have to look at what happens when payments don’t go smoothly to understand the scope for improvement. The processing steps are still very manual. That is a hidden cost, an inefficiency which rolls up to things like, ultimately, loss of reputation, reputational damage – if banks are unable to process payments, for example.”

Key issue 3 – The accelerating shift to digital payments

As digital payment volumes continue to soar, the urgency for banks and building societies to advance their payment processing capabilities is intensifying.

The pandemic has accelerated the shift, as more commerce has moved online and customers have been unable to make physical payments or visit banks and building societies in person.

In the six months from April 2020, the trend towards digital and instant payments was boosted “significantly”, according to a 2020 global payments report from McKinsey1. The report, published in October 2020, found that the crisis had compressed half a decade’s worth of change into less than a year—and in areas that are typically slow to evolve, including payment operating models.

Rakesh Lakhani, Head of Payments Transformation at Tata Consultancy Services (TCS), notes “The COVID situation, the lockdown, the shift of cash and face-to-face interaction to digital-only payment flows has really driven banks to think about the customer experience; about how they could better support customers.” 

At the front end, in direct experiences with retailers and service providers, customers have welcomed the convenience of accelerated and increasingly seamless payment-related experiences. These include the ability to pre-fill order forms with PayPal payment and delivery details; split payments over time using a fintech service like Klarna; or to donate to charitable causes directly from within social media pages.

As the world starts to travel again, or as people come off furlough and back into employment, having access to a wider range of payment options, payment traceability, and 24/7 self-service update options, will be appreciated by customers keen to track and manage their money closely.

Some sectors are so committed to improving the customer experience along these lines that they have made big changes to their payments infrastructure to support this innovation, a large part of which includes automating manual payment processes.

Banks and building societies now need to assume the same sense of urgency. Where some still feel they don’t have the bandwidth or budget to consider major change right now, they must realise that failure to keep pace with the market could disappoint customers and erode loyalty.

Charles O'Neil, CEO of CoinMode, says "The reality is that things are changing really, really quickly. A high-frequency, low-latency payment system designed for the computer games industry. We’re starting to see value transfer mechanisms being built into communications applications – trials of bitcoin wallets within WhatsApp, for instance. And micro-transactions will become more cost-efficient and practical. And of course we’ve already got virtual debit cards (on people’s phones).

“People's expectations are increasing: they expect instant responses to things; they expect systems to be efficient and to process all of their information in an efficient way,” Charles adds. This extends beyond pure payments activity, to other processes such as regulated Know Your Customer (KYC) checks," says O'Neil. “The process some banks put their customers through can take weeks, if not months,” he says. “It’s a classic example of where inefficiencies creep in.”

Encouragingly, the pandemic does seem to have pushed process transformation higher up the corporate agenda for banks and building societies, as they strive to stay relevant and keep improving the customer experience, according to Rakesh Lakhani at TCS.

“All banks and building societies," he says, "have managed to accommodate the additional load and shift in how they support their customer base. In fact, the last 12 months have almost been the busiest since I joined the company. Banks and building societies have been reaching out for help to assess their environments and find very rapid solutions to some of their challenges; a way to accelerate their existing transformation programmes. Even some of the smaller banks which have spent the last year just ensuring they could support their customers are acknowledging that they have to change things up now; that they can’t continue as before.”

5-point plan to fast-track payments innovation for established banks and building societies


1 Tap into payments innovation for service differentiation

Consider what kinds of payment innovation would give your brand a competitive edge, and a stand-out experience for customers.

Keep in mind that this isn’t about automating manual processes just to cut costs. New payment services could translate into new streams of income. Neobanks, for example, are winning business with strong savings propositions which give customers a clear view of all their money, and offer handy services which sweep out loose change to form incidental savings.

If legacy systems mean it has been hard to introduce such changes, consider the impact of competitors getting ahead with their payments innovation and prepare a response.

“As the challengers build up customer trust, we’ll start to see a shift of the customer base – especially if traditional banks and building societies haven’t kept pace with the customer experience of the newer players,” warns Rakesh Lakhani at TCS. “And once those customers are gone, the incumbents will find it very, very difficult to bring them back.”


2 Consider new business models

External factors, including the demands of the market, new regulations and increases in platform or third-party fees, are changing business models and payment ecosystems.

Look for opportunity in this change. Identify the benefits for your customers, and your own internal business targets, and be ready to change quickly. There may be new potential for innovation, previously stifled by restrictions imposed by larger financial institutions or changing regulations. There may be a chance now to work with new partners and suppliers that can help take the strain and make innovation more affordable and cost-effective.

Progressing with payment innovation and automation presents a chance to be bolder and carve out budget for other endeavours, including new business models. Current accounts could serve as a vehicle to other more lucrative opportunities, for example, while PIS could drive more regular savings or create openings for related new products.

“We can't piggyback on our incumbent bank for faster payments; we’d be better off getting into bed with fintechs,” notes Des Moore at Cumberland Building Society. “How we process payments is having a direct effect on the customer experience. Payment process automation is a top priority when it comes to payment system upgrades.”


3 Be inspired by innovation leaders

In the new era of Open Banking, traditional banks will no longer have ownership and control of payment processes, so need to ensure they are not bypassed as consumers are offered speedier and more intuitive payment services elsewhere.

Start by looking at what other sectors are doing, for instance fintechs and other digital businesses which are already excelling with advanced end-to-end customer experiences – those which increase consumer convenience as well as confidence in those services (e.g. with real-time transaction confirmations.)

As a bank of building society, you’ll already have a natural association with payments innovation, and a loyal customer base ready to impress. Just keep in mind that creating something new and exciting at the front-end in the form of a handy and easy-to-navigate user app is only part of the picture. Without a fit-for-purpose payment infrastructure behind it, plans to transform customer journeys could backfire.

Look externally for solutions that can help bridge the gap between existing systems and desired new customer experiences. An Accenture analyst recently noted that, “By using cloud, robotic process automation and artificial intelligence, banks can plug-and-play new customer-facing apps and processes in existing legacy systems…[an] approach [that] can, through revenue and productivity gains, increase a bank’s return on equity by as much as seven percentage points.”

John O'Beirne at Bank of Ireland, says “I think on the payment side, fintech innovation will force organisations with legacy IT to try to find ways to tackle the real time challenge, both with investment into the core and more rapid adoption of middleware and APIs.”

4 Look for opportunities to boost the payment infrastructure & improve the customer experience

Sub-par customer experiences typically arise from slow, manual and fragmented processes, and a lack of confidence that transactions have taken place as expected – because of a lack of real-time capability and/or poor traceability. Solving this problem is a great place to start in removing customer friction and making people’s lives easier.

Charles O'Neil at CoinMode, says “Speed of payments, of processing - that's going to be a big one. Today, I might transfer money to my father in Spain and it take 24-48 hours to get there, while costing me about anywhere from £3-15 depending on how I transfer it. That’s the kind of experience that’s going to change – it has to.”


5 Release the brakes: tackle legacy lag

To overcome existing IT restrictions and embrace new customer-centric experiences at speed, it’s necessary to be able to connect to and consume real-time, API-based services.

An API-based approach makes it possible to enhance existing infrastructure and improve the customer experience by automating payment processes and offering new payment-based services with real-time orchestration. This is critical to providing the immediate experiences that customers expect now.

Cloud-based API ecosystems, based on a microservices architecture, offer flexible building blocks that can support, extend and modernise existing IT through a process of augmenting or uplifting what’s already there, instead of ripping and replacing it.

David Lee at Wipro, says “You need to separate out the front end, which can be digitised and can look very slick. Many of the legacy banks have used that as a stepping stone in terms of upgrading the customer experience. But now the back end needs to be looked at – so that you’re not trying to put out a silk purse with a sow's ear behind it…

“Incidentally, industry developments will see payments become instantaneous not just in the UK or for consumers, but in business too – and all around the world. Things like shipping, supply chain finance - the possibilities are limitless, once you can link payments to activity as it happens, rather than after the fact. Across different business areas, it will be possible to align propositions to enable a better experience, with less risk for customers, creating value and differentiation for the institution.”



In the instant economy, customers expect instant experiences with instant information and instant reconciliation of transactions. This is especially the case with payments.

Up to now traditional brands - in particular long-standing banks and building societies - have struggled to keep pace with payments innovation for their own customers, and as a result risk falling short of consumer expectations.

It is time to carve out a new path, harnessing existing ecosystems and partnerships to command a place in the innovation game.

Charles O'Neil at CoinMode, says “The point is coming where, within an application like WhatsApp, I’ll be able to flick across five pounds to someone in the same way that I’d send them a text message, almost instantaneously. It will all become much more consumer-friendly. All of which will reset customer expectations.”

The destinies of traditional financial service providers are not set in stone. Simply by focusing on the new products and experiences they want to bring to market and seeking appropriate help, established players can shift their focus, connecting into digital payments as a service to accelerate their delivery of new propositions.

An inflexible payment infrastructure should never be the reason not to push forwards. In the digital age, it isn’t necessary to join a payment scheme directly, or invest in new infrastructure from scratch. Rather, providers can connect into a world-class payment infrastructure via APIs, and start rolling out new experiences to their customers at speed.

About Modulr

Modulr is the Payments as a Service API platform for digital businesses. It integrates into any product or system. Modulr’s new type of payment accounts are built for businesses that need a faster, easier and more reliable way to move money. Once integrated, businesses can instantly set up as many accounts as they need. Getting paid, reconciling and making payments is fully automated and can be managed in real-time, 24/7 through their existing software applications. ​

Modulr’s API makes it easy for businesses to streamline existing services, launch new products and scale more efficiently. Modulr Finance Limited (FRN: 900699) is registered with the Financial Conduct Authority as an EMD Agent of Modulr FS Limited (FRN 900573). Modulr FS Limited is an Authorised Electronic Money Institution, regulated by the Financial Conduct Authority.

In August 2019, Modulr was chosen from 76 applicants to receive a £10m grant from the Capability and Innovation Fund (CIF), part of the Alternative Remedies Package of measures agreed between the UK Government and the European Commission following the failed divestment of RBS' SME arm, Williams and Glyn. The grant is administered and overseen by the independent Banking Competition Remedies Ltd.

We were awarded the grant to drive our firm conviction that SMEs and their accountants deserve simple, secure and reliable payment capabilities. As part of our commitment, we’ll be partnering with accountancy practices and software providers, including Sage, to roll out improved payment functionality, in a multiplier effect to 860,000 SMEs by 2024.


This report benefits from the input of banking industry professionals who kindly shared their insights. We would like to extend particular thanks to those we have cited directly in this eBook, along with the numerous others who contributed more general insights towards the bigger picture.


  1. Commissioned 
  2. State of the CFO role, The Financial Director

Interviewees and Bios

Please find below bios from the interviewees. Their quotes and views informed both this volume of the research and will inform volume 2 which is being released in the Summer.