Why Traditional Banks Struggle to Innovate in Supplier Payments

Supplier payments—an essential component of B2B supply chains—have long suffered from inefficiencies and outdated processes. While consumer payments have rapidly transitioned to digital platforms, B2B transactions continue to lag behind. In fact, 75% of organizations in the US still rely on paper-based methods, such as checks. This persistent reliance on outdated methods not only highlights an innovation gap but also underscores the urgency for modernization in supplier payments.

Traditional banks, especially those in North America and Europe, have historically been the intermediaries for these transactions. However, they face significant challenges in transforming their legacy systems, meeting stringent regulatory requirements, and overcoming operational inertia. Meanwhile, financial technology (FinTech) firms have surged ahead by leveraging modern, agile platforms and streamlined processes. This blog explores in depth the reasons behind the struggle of traditional banks, contrasts various payment methods, and examines the responses from banks and FinTechs to these emerging challenges.

The Structural Barriers Holding Banks Back

1. Legacy Infrastructure and Technical Debt

Many banks continue to rely on decades-old core systems built on legacy programming languages such as COBOL. While these systems have provided reliable service over the years, they now serve as a major impediment to innovation.

• Outdated Core Systems: Legacy systems are rigid and expensive to modify. As a result, banks allocate substantial portions of their IT budgets to maintenance rather than innovation. A 2024 industry report found that 75% of banks face significant hurdles in deploying new digital payment technologies due to these outdated infrastructures.
• High Maintenance Costs: In 2024, approximately 64% of corporate banks’ IT spending went toward maintaining existing systems rather than developing new technologies.
• Limited Flexibility: Older platforms struggle to support modern capabilities such as real-time payments, API integrations, and advanced data analytics. Instead of full-scale modernization, many banks resort to layering APIs over outdated systems—a stopgap measure that fails to address the root inefficiencies.

The cumulative impact of these limitations is a slower pace of innovation in supplier payments, forcing banks to weigh the high costs of an IT overhaul against the potential benefits of more efficient digital payment solutions.

2. Regulatory and Compliance Constraints

Banks operate within a complex regulatory environment designed to maintain financial stability and protect consumers. However, these requirements also create substantial barriers to rapid innovation.

• Complex Compliance Requirements: Banks must adhere to stringent regulations, including anti-money laundering (AML) and Know Your Customer (KYC) standards, data privacy laws (e.g., GDPR and CCPA), and strict capital reserve requirements. These layers of compliance slow down internal processes and delay the rollout of new payment solutions.
• Regulatory Flexibility Advantage for FinTechs: Compared to traditional banks, many FinTechs operate under lighter regulatory frameworks, allowing them to experiment and launch new payment products with greater speed.
• Cross-Border Payment Complications: The challenge is even greater in international transactions. Traditional banks rely on the SWIFT network, which requires multiple intermediaries, each introducing additional compliance checks. This process increases both costs and settlement times. By contrast, FinTechs have developed innovative foreign exchange optimization techniques and local payment networks to significantly reduce cross-border transaction times and expenses.

While regulatory oversight is essential, its complexity has inadvertently contributed to the sluggish pace of innovation in supplier payments.

3. Operational Silos and Risk Aversion

Beyond technical and regulatory challenges, traditional banks grapple with structural and cultural obstacles that hinder their ability to innovate.

• Siloed Organizational Structure: Large banks are often divided into departments such as cash management, trade finance, and card payments. These silos prevent cross-functional collaboration, making it difficult to develop integrated, end-to-end supplier payment solutions.
• Conservative Risk Posture: Banks, by nature, prioritize stability, accuracy, and security—qualities that have historically served them well. However, this conservative approach has also led to hesitation in adopting new technologies unless driven by clear market demand. For example, banks were slow to invest in real-time payments until corporate clients explicitly requested them.
• Revenue Model Constraints: Many banks generate significant revenue from traditional payment fees and interest earned on funds in transit. Faster, more efficient payment processes could potentially reduce these revenue streams, creating an inherent conflict between profitability and innovation.

These factors contribute to a reactive rather than proactive approach to innovation, with banks often waiting for market pressures to force change rather than leading the transformation themselves.

The Future of Supplier Payments: Banks at a Crossroads

The landscape of supplier payments is undergoing a profound transformation. Traditional banks, long the cornerstone of B2B transactions, now face formidable competition from FinTech firms that are redefining payment processes through speed, transparency, and automation.

To remain competitive, banks must address their core limitations by:

• Investing in Core Infrastructure Upgrades: Modernizing legacy systems is no longer optional. Banks that embrace cloud-based platforms, real-time payment networks, and API-driven solutions will be better positioned to compete.
• Streamlining Regulatory Processes: While compliance is non-negotiable, banks can leverage AI and automation to accelerate compliance workflows and reduce bureaucratic delays.
• Breaking Down Organizational Silos: A more integrated, customer-centric approach to supplier payments—where cash management, trade finance, and card payment divisions collaborate—can drive more innovative solutions.
• Embracing FinTech Partnerships: Many banks are already partnering with FinTechs, like PrimeRevenue, to gain access to advanced technology without the burden of building it internally. These collaborations can accelerate the deployment of digital payment solutions and enhance banks’ value propositions.

Ultimately, the future of supplier payments will be shaped by institutions that successfully merge the stability and trust of traditional banking with the agility and innovation of FinTechs. Banks that adapt to this shifting landscape will not only streamline B2B transactions but also unlock significant value for suppliers and corporate clients alike—ushering in a new era of faster, more transparent, and more efficient payments.