Payment Modernization Strategies for Mid-Sized Banks: Preparing for 2025 and Beyond

Heraclitus, an ancient Greek philosopher, famously said, “The only constant in life is change.”

And when it comes to embracing this truth, few are better equipped than mid-sized financial institutions.

The last few years have been a roller coaster ride for mid-sized banks.

In a competitive market, they must balance pressures from large banks, small community banks, and fintech companies.
They face the challenge of meeting customer demands for instant and advanced digital payment solutions.
To make things worse, the fallout from the Silicon Valley Bank collapse made corporate clients switch to larger banks.

But despite these challenges and transitions, mid-sized banks have successfully embraced the idea of payment modernization.

Consider the FedNow Service: over 95% of the 1,000 financial institutions in its network are mid-sized and small banks. This highlights their commitment to adapting their services to meet the needs of the modern customer.

Mid-sized banks are ready to change, but they often struggle to find the best payment modernization strategy.

What Prevents Mid-Sized Banks from Choosing Payment Modernization?

Mid-sized banks want to invest in modern payment systems. However, most of their banking and payment processes rely on old core and payment systems. These systems have been in place for three to four decades.

Old systems designed for batch processing have large, rigid structures and isolated operations. They struggle to connect with modern applications and data sources. This makes it hard to manage real-time payments on networks like RTP and FedNow. As customers now prefer instant and digital payments over traditional ones, outdated infrastructure can hamper customer experiences.

The obvious solution is to modernize the core and payment infrastructure. However, with most of the processes deeply entrenched in legacy systems, a complete overhaul is impossible.

Mid-sized banks must provide modern payment options. However, they also have to deal with old systems that have been in place for years. This situation makes it important for them to think carefully about how to modernize.

Complete Modernization, Orchestration Layer, Modular Approach: How to Choose the Right Payment Modernization Strategy?

Choosing the right payment modernization strategy isn’t easy. Banks have to consider several crucial factors, such as their existing maturity in terms of technology adoption and whether the initiative will align with their business strategy.

Strategy #1: A Complete Overhaul

Banks might be tempted to rip the proverbial bandage off at once, overhaul the infrastructure, and replace the payment infrastructure with a modern one.

Wings, Minnesota's largest credit union, chose to do just that. It wanted to modernize its payments platform, upgrade ACH processing, launch instant payments, unify multiple payment rails, and prepare for the March 10th, 2025, deadline for complying with the ISO 20022 standard for Fedwire. By partnering with Finzly, Wings is all set to modernize its payment infrastructure, scale its business with a complete overhaul, and support multiple payment types 24/7.

This may seem like the easiest solution for payments at any bank. However, many mid-sized banks need to justify their spending. They also have to honor contracts with their current service providers.

The key question is: how can they get the most value from their existing systems? They want to do this without causing major disruptions. At the same time, they need to integrate smoothly with channels and enable centralized payments monitoring. This is where strategy 2 comes in.

Strategy #2: Adding an orchestration layer to existing infrastructure

Risk-averse banks can take their first step toward payment modernization by adding an orchestration layer above their existing infrastructure, often using payment hubs. This unified layer enables modernization without requiring a full-scale transformation.

The orchestration layer acts as a central, cost-effective hub. It streamlines channel management and payment processes. This layer serves as a single source of truth for payment operations. It also makes it easier to connect with other systems, core platforms, and older payment methods, creating a smooth and efficient payment ecosystem.

A Tier 2 bank is gearing up to support ISO 20022 payments for its corporate clients who are ready, while preparing for the March 2025 ISO 20022 deadline by adopting an ISO 20022-native Fedwire platform. The bank plans to move some wire processing to a new platform. It will still send translated wires to older systems. This will use the rule-based and event-based features of Finzly’s payment hub. The bank leverages the added orchestration layer to enable seamless integration between modern and legacy Fedwire systems, while paving a futureproof path toward achieving the ideal state outlined in Strategy 1. This approach exemplifies optimizing legacy investments while preparing for the evolving payment ecosystem.

Strategy #3: A modular approach

A modular approach could be a good start for banks overwhelmed by various payment solutions.

Imagine the modular approach as a buffet spread. Banks can opt for solutions that address their immediate business needs while gradually transforming their payment and core infrastructure.

Many mid-sized banks start their transformation by launching instant payment options on RTP and FedNow. They gradually improve their ACH operations and move away from old systems. They also adopt ISO 20022 for domestic and international wires. This step-by-step approach allows banks to follow their strategic goals while keeping better control over risks.

Metropolitan Commercial Bank started its journey with Fedwire, fully prepared for the March 2025 ISO 20022 compliance deadline. This readiness puts the bank ahead and cuts wire processing times. It gives commercial customers the benefits of fast straight-through processing. Over time, the bank will move its ACH and instant payments to Finzly's payment hub. This will be done in a modular way that fits its internal goals and plans.

Future-proofing payments: How the right vendor helps banks have it all

In the end, mid-sized banks need a payment vendor that understands their current situation. This vendor should provide a strong foundation to meet their immediate needs. At the same time, it should help them prepare for future success. With the right partner, they can have their cake and eat it too — balancing today’s objectives with tomorrow’s opportunities in financial services through new concepts like open banking and open finance, ensuring a smooth journey toward a future-proof transformation.

For more information on transforming the payment infrastructure of mid-sized banks, contact us.