Partnerships Are Key to Unlocking Value in the Payments Space, Says KPMG International

New research from KPMG International is urging banks and retailers to form strategic partnerships—or risk falling behind—as businesses attempt to keep up with the rapid pace of change in the payments space.

The report, Partnering for payment modernization by KPMG International, includes responses from 500 banks and 500 retailers to assess their progress on payment modernization. It identifies that while costs are high and modern technology continues to disrupt; a better ecosystem of partnerships between banks, retailers, technology providers and regulators can help improve operations and enhance the payments experience for customers.

The survey reveals that 54 percent of retailers believe that payment modernization is crucial to the future of their business, including delivering major efficiency and operational gains. However, just over half (53 percent) of retailers believe that their banks understand their payment modernization goals, with 45 percent saying their banks are proactively delivering payment solutions tailored to their needs. With the average retailer planning to increase modernization budgets by 2.5 percent over the next year, there is scope for more cohesion and development in the area. Banks don’t disagree, with 51 percent believing that the future winners in payments will be those with the best ecosystems. 60 percent of banks also indicate an increase in spending this year, with 21 percent reporting expected increases of five to nine percent over their existing budgets.

Furthermore, it was found that common goals across both sectors include the replacement of legacy payment infrastructure, enhancing fraud prevention and meeting customer expectations. High implementation costs and budget constraints were noted as the top barrier for those starting out on their payment journey (66 percent in banking and 69 percent in retail), while 62 percent in the banking sector also noted outdated legacy infrastructure and technical debt as a major frustration. As they mature their payments modernization capabilities, each sector highlighted meeting customer demand as the main concern (41 percent of banking leaders and 35 percent of retail leaders).

Isabelle Allen, Global Head of Consumer, Retail and Leisure at KPMG International, said: “The quest by consumers for ever faster, lower friction and more secure payment options is relentless and fueling innovation and disruption. Banks and retailers cannot afford to work in isolation or indulge in traditional vendor-customer relationships. The future of payments will likely be defined by a broader ecosystem which extends beyond banks and retailers, to include technology providers, regulators, fintech startups and consumers themselves. Success should be measured by the way companies access new technologies, reduce costs, share expertise, fill skill gaps, accelerate time to market, and mitigate risks.”

Investing in the future of payments

The importance of modernizing payment systems is reflected in the level of capital now being channeled into these programs. The data indicates that banks spent an average of US$96.9 million on payment modernization over the past fiscal year, demonstrating the magnitude of the transformation underway across the industry. Full-service and corporate banks lead the investment charge, allocating US$151.1 million and US$146.7 million, respectively.

On the retail side, hypermarkets and warehouse clubs report the highest levels of investment due to their high-volume, low-margin models, which rely on fast, efficient checkout processes. Online retailers also invest heavily to support their digital business models. At the same time, more traditional segments (such as department and specialty stores) invest less, likely reflecting limited budgets and customer preferences. Some of the biggest increases over the next year will be invested by those seeking to catch up; department and discount stores will boost spending by over three percent, while supermarkets are targeting increases of nearly four percent. 

Modern technology is a key disruptor

The report highlights the length to which modern technology, mainly AI and digital currencies, are disrupting payments systems and processes. It states that in three years, the lion’s share of banks will be using AI-enabled biometrics to secure payments and agentic AI to process transactions autonomously. AI is also expected to catapult fraud detection to new levels, with 85 percent of banks saying they will turn to AI for instant risk resolution. Seventy-eight percent of respondents also noted the use of behavioral and contextual data to create personalized services, and 71 percent noted that extracting insights from payment data for pricing and liquidity decisions will be the top AI uses that will grow the fastest over the next three years.

In addition, 60 percent of banks are currently upgrading core systems to support programmable money and digital ledgers, with 76 percent looking to do this over the next three years. The banking industry will also focus much of their attention on using Central Bank Digital Currencies (CBDCs) for atomic settlement for SMEs, alongside efforts to establish stablecoin and token fintech platforms.

Harnessing regulatory shifts

Rather than viewing compliance as a cost or constraint, the report finds that leading retailers are harnessing regulatory shifts to advance their growth strategies. Seventy-nine percent of the leaders (versus 37 percent of those just beginning their modernization journey) say they collaborate with regulatory bodies to help shape effective regulations that foster innovation. Leaders are also highly focused on implementing a range of payments regulations. They are particularly ahead of beginners in anti-fraud regulations and those for new payment types, such as digital wallets and BNPL (Buy Now, Pay Later). The data also suggests they are making more progress meeting international standards such as ISO 20022. 

Geoff Rush, Global Head of Banking and Capital Markets at KPMG International, said: “With the rise of digital currencies, it is increasingly clear that the future of payments lies in dynamic and value-driven ecosystems and partnerships — banks, fintechs, retailers and tech companies, for example — where banks play a key orchestration role in providing a variety of services on top of advanced technology and modern payment infrastructure. Such alliances amongst these sectors should be encouraged by shared goals around operational efficiency, fraud prevention and regulatory compliance. The big question is, who will be the first to tie up some of these strategic partnerships and really differentiate themselves?”