Outdated systems contribute to rising fraud threats
Clients of banks and payment systems are increasingly becoming victims of fraud. In 2023, nearly 36% of all U.S. banking customers experienced some form of fraud, losing more than $10 billion, three times more than in 2020. Fraudsters exploit vulnerabilities in legacy systems using phishing, account takeover, and payment redirection techniques.
Legacy infrastructure, designed decades ago, lacks the real-time data processing capabilities needed to effectively detect and mitigate cyberattacks.
This outdated technology also stifles innovation, preventing banks from offering the seamless and secure payment experience that customers now demand. McKinsey, a consulting firm, found that 70% of banks' technology budgets are spent on maintaining core systems, limiting their ability to quickly respond to emerging threats and innovate to meet changing customer needs. And this costs banks not only in service. Banks paid more than $10.4 billion in fines for non-compliance in 2020 alone, much of which was due to inadequate systems.
Bank customers want faster and safer payments
Customer preferences for faster payments and better payment experiences are growing. In the US, real-time payments are gaining momentum. A study by the Federal Reserve and PYMNTS found that 62% of consumers If there was such an option, I would choose instant payouts. The introduction of real-time payment systems such as The Clearing House's RTP network has also led to a sharp increase in the number of transactions. The network processed more than 82 million payments in the second quarter of 2024, growth of more than 30% compared to the same period last year. Zelle, a peer-to-peer (P2P) payment service widely used in the US, reported $806 billion in payments in 2023, reflecting increased demand for faster, more seamless payments.
However, many banks still lag behind due to their dependence on legacy infrastructure. Outdated systems prevent these institutions from meeting customer expectations. As a result, fintech banks and challenger banks like Chime and Venmo are filling the gap with more modern and convenient payment platforms.
Another drawback of these systems is their inability to support digital products and services, resulting in poor customer experiences such as slow transaction processing and limited payment options. Therefore, it is critical for these institutions to modernize their systems. Banks that offer the best customer experience have the potential to grow three times faster than competitors who don't. One study found that more than half of customers said they would switch to a competitor if they experienced an unsatisfactory experience.
A modern technology stack enables faster and more secure payments.
The benefit of modernization is the ability to integrate artificial intelligence and machine learning to improve cybersecurity and prevent fraud. Fraud can be detected in real time, identifying suspicious patterns before fraudulent activity occurs. For example, JP Morgan Chase has invested in artificial intelligence-based fraud detection systems that monitor transactions in real time to identify anomalies and suspicious patterns.
AI-powered tools are critical to reducing the risk of payment fraud, which remains one of the industry's biggest challenges. LexisNexis reports that North American financial institutions incur an average of $4.41 in fraud-related costs for every dollar lost to fraud, highlighting the need for robust anti-fraud measures.