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A rise in the number of regulations, safeguarding rules, payment methods, corporate costs and the opportunities of ISO 20022 are just some of the biggest considerations for payments firms worldwide in 2023.
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 teams.
AutoRek’s global payments report confirmed this view. In 2023, it surveyed 500 UK and US payments executives on strategic priorities, operations, regulations and data. The findings showed five key changes that payments firms are gearing up for in 2023:
- More regulations
- An increase in safeguarding rules in the US
- The opportunities available through ISO 20022
- Rising number of payments methods
- Risk of increased back-office costs
Firms are bracing themselves for more regulations
Two-thirds of payments professionals expect regulation to increase within the next two years.
However, there is a clear divide between US firms’ expectations and the expectations of their UK counterparts. Of those surveyed, 74% of US firms anticipate 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. In comparison, US regulation has developed at a slower pace. It naturally follows that US firms will be gearing up for more regulations soon.
US organisations are expecting safeguarding rules similar to the UK
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 will also 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.
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.
Payment methods are 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% of those surveyed 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.
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.
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. In addition, 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.
Overall, payments firms would be wise to watch the trends on both sides of the Atlantic as the regulatory and competitive landscape expands.
Nick Botha is global payments sales manager at AutoRek.