Posted: 15/03/2023 | Read time: 4 minutes
Payments organisations around the globe have had much to contend with in 2022. The sector experienced rapid growth, high levels of competition, and ceaseless front-end development.
Although the success of the industry has been widely celebrated, many firms are struggling to keep up with its sheer growth and the pressure it is exerting on the back-office.
Our global payments report confirmed this view. It surveyed 500 UK and US payments executives on strategic priorities, operations, regulations and data in 2023.
Analysing the report’s findings, we set out the five key changes payments firms are gearing up for in 2023.
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Firms are bracing for more regulations
Two-thirds of payments professionals said they expect regulation to increase within the next two years.
But there is a clear divide between US firms’ expectations and the expectations of their UK counterparts: 74% of US firms expect more regulations in the future, compared to 53% of firms in the UK.
This difference reflects the approaches taken by UK and US regulators. The FCA in the UK has been quicker to put new regulations in place (such as safeguarding and Operational Resilience), whereas US regulation has developed at a slower pace. It naturally follows that US firms will be gearing up for more regulations soon.
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US organisations are expecting safeguarding rules
Two-thirds of US firms expect new regulations to mirror UK safeguarding rules, which require firms to protect customer assets in the event of insolvency.
If US regulators implement similar regulations, firms will need to develop new reconciliation processes to protect customer funds. They’ll have to undergo annual audits and enhance governance and control procedures to comply.
Yet recent attempts to draft new guidelines for the American payments system have faltered. Two charters failed to strike a fair balance between incumbent banks and fintech firms. So regulation is, for the time being, managed on a state-by-state basis.
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ISO 20022 will improve the reconciliation process
This year, the UK CHAPS system will switch to full ISO 20022 as firms prepare for migration. The new standard has the potential to improve all aspects of the reconciliation function.
Some 40% of large companies (with more than 500 employees) said ISO 20022 would most improve the data transformation and enrichment phase. This is followed by the downstream matching and exception investigation/management processes.
Standardisation is set to reduce incomplete and unmatchable data. This in turn should reduce the labour-intensive downstream steps of the process. As such, ISO 20022 will likely help payments firms scale.
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Payment methods expected to increase…
Firms are preparing for an increase in payment methods this year. While most believe growth in the market will continue, it might not be at the current breakneck pace.
Over 58% either agreed or strongly agreed that there would be an increase in payment methods. Meanwhile, only 15% either disagreed or strongly disagreed with the statement.
And there’s another significant difference between UK and US respondents. Some 69% of US firms expect payment methods to increase, while just 8% of US respondents do not. In the UK, 48% of firms expect an increase in payment methods, while almost one-quarter (23%) do not.
These results suggest that new and innovative payment methods may come from American-based fintechs over the coming years.
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…but rising volumes may correspond to rising back-office costs
The good news is that one-quarter of respondents are forward-thinking firms with scalable back-office operations. Back-office costs, therefore, stay the same even as volumes rise. And one-quarter of firms have some scaling value, so costs rise but at slower rates than rising volumes.
However, 22% of firms said their costs rise when volumes rise. This indicates shrinking profit margins as volumes grow. Nearly 48% of payments firms achieve no scaling benefit in their back-office to accommodate rising volumes.
The ability to scale the back-office is critical to a payments firm’s success, especially as the market grows. Investing in automation will achieve better scalability and prevent back-office processing costs from escalating as volumes rise.
Summary
- Two-thirds of payments professionals expect more regulations in the next two years. Some 74% of US firms expect more regulations, compared to 53% of firms in the UK
- Two-thirds of US firms are expecting new regulations similar to UK safeguarding rules
- Firms believe ISO 20022, expected to reduce incomplete and unmatchable data, will improve the reconciliations process
- Some 58% of firms are expecting payments methods to increase
- One-quarter of firms have scalable back-office operations. But 22% of firms said their costs rise when volumes rise – and 48% of payments firms achieve no scaling benefit in their back-office to accommodate rising volumes
For more insights into payments trends, including why some firms struggle with profitability, read the full Payments Industry Outlook report here. Alternatively, view our dedicated payments hub to discover more about how AutoRek can save your team time, cut costs and increase efficiency.