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The number of payment methods keeps expanding, driving a higher volume of payments and further complicating data management processes for businesses. The strength of any organization lies in its ability to efficiently manage data, and this is where automation would make the most significant impact.
An AutoRek report, “Payments Industry Outlook 2023,” highlights the findings of an organizational survey, identifying key challenges, priorities, and readiness for real-time payments in the ever-changing payments sector.
Key Findings in the Payments Industry Outlook 2023 Report
One of the top findings of the survey is the need for businesses to accommodate real-time payments. Aside from speed, the key benefits of real-time payments are that they are accompanied by critical data as well as reasons for exceptions.
“Modern consumers expect instant digital payments,” said Nicholas Botha, Global Payments Lead at AutoRek. “As such, real-time payments are set to become ubiquitous for both national and regional payments networks as authorities and central banks alike continue developing real-time infrastructure to accommodate consumer demand.” (Page 25 of the report)
Currently, real-time payment infrastructures can be found live in more than fifty markets, with more than twenty more to come.
“The focus on real-time payments in the U.S. is obviously becoming something that has not been previously looked at,” Botha said. “Whereas in regions like the UK and the EU, this has been a focus for some time. There has been a transition in focus for the next few years into that sort of real-time payments market, shifting attention from customer acquisition to more middle- and back-office focus.”
Botha continued: “What we try to understand through the reports is in terms of payment: where these organizations are depending on the size of their company, how they are managing certain core functions of their business to be effective in the payments market.”
Although many companies recognize the need for real-time payments, with over 85% of them being ready for the technology in less than 12 months, it is no easy task. The biggest bottleneck can be seen in most back-offices, which can be attributed to legacy infrastructures.
A significant imbalance can be seen in the way back-offices now work. Usually, they create batches of fund transfers that will be processed at pre-determined periods instead of in real-time. Therefore, reconciliations and settlements can take place only at the end of one or more intervals of processing.
Growing Data and Payment Volume
As previously mentioned, the range of payments and volumes are expected to escalate, and the AutoRek survey shows that close to 48% of companies have not reached back-office scalability to accommodate this growth. This will certainly lead to a deflation of profit margins.
“There has been a large amount of scale that’s been happening in payments,” Botha said. “I don’t know if COVID was the reason for the scale in these payments and volumes or if it was just a catalyst to speed up to where we saw the market going. I think the latter.
“COVID expedited the process, all the technology, all the platforms have been there, there’s been new developments in payments infrastructure that’s happened relatively quickly off the back of COVID and the pandemic. There has been a dramatic increase since 2020 in payments organizations around the globe, and that’s a common trend across all the different participants in the survey.”
Of those surveyed, 58% agreed or strongly agreed that there will be an increase in payment methods. Among the U.S. segment, 69% expect an increase in payment methods, while only 48% in the UK expected the same. This high level of expectation in the United States makes the fintech companies worth watching to see what new and innovative payment methods may be coming.
The Role of Automation
Automation will be a key factor in significantly reducing the back-office costs incurred in managing the onslaught of payment volume.
It turns out that 25% of respondents had back-office systems with the capacity to scale. For these organizations, regardless of the increase in volume, back-office costs will remain the same.
Conversely, it was found that 22% of respondents experienced rising costs with the increase in volume. These organizations experience a drop in profit margins as payment volumes grow. Investing in back-office automation would be the answer for these situations.
“Automation helps with a number of different things for payments organizations,” Botha said. “What we do within automation of the internal processes in the middle and back-office helps shift a lot of FTE focus within a payments organization from your mundane preparation and data-handling tasks, like reconciliation and time-consuming activities.
“Automation helps shift that focus to more value-adding tasks in terms of analysis: how your product lines are performing, analysis of potential new product lines, how they could benefit them going forward. It’s about moving away from spending many hours a day, a week, a month on preparing cumbersome data that must be managed rather than investigated and analyzed to ultimately add value for the upstream.”
According to the survey, the size of the organization dictated the specific strategy that was prioritized and pursued.
“What we’ve found is that larger organizations typically have had a focus in the last two years on improving their middle and back-office, probably since they already have the market share, their revenue-generating product lines are performing well, and to remain on top, they’ve shifted their attention more to core middle and back-office functions. Automating their processes and creating more robust financial controls platforms will allow them to be more effective in maintaining and growing their market share,” Botha said.
“However, what we saw from respondents from smaller organizations is that, in the previous two years, they’ve remained focused on that custom acquisition, that revenue growth. In a different survey, post-COVID or during the pandemic, there were a lot of layoffs. Most were from the internal middle and back-office function, not in the front-office sales, revenue-generating roles being let off. That says the focus was primarily on customer acquisition, growth, and revenue growth to remain viable and operational.”
Botha offered more insight into how the responses were prompted and where the answers led.
“We asked these organizations the question: What will their outlook be for the next two years?” he said. “These organizations said they will split their focus strategically between revenue-generating activities, more product lines, and internally focusing on regulation, focusing on middle and back-office.
“But the smaller organizations who were predominantly focused on customer acquisition in the previous two years are actually looking at their internal platforms, specifically automation, focusing on governance, risk and compliance. Improving the operational systems they work with daily is seen as a way to build a more robust middle and bac-office over the next two years.”
“The more up-and-coming tech organizations, your PSPs, your fintechs, your insured techs, they were fundamentally focused in the previous two years on customer acquisition, and still remain very focused on that. But through the survey we see a lot of respondents saying the focus for upcoming or trends in the market for the upcoming two or three years is going to be really creating a robust controls process internally.”
The Real-Time and Cross-Border Payments Impact on Back-Office Operations
Although customers worldwide are now inclined, more than ever, to benefit from real-time payments, there are myriad challenges to overcome.
On page 29, the report noted: “As the world becomes increasingly cashless, and e-commerce and international trade continue to expand, there has been a corresponding rise in the demand for cross-border payments. As of 2022, the value of cross-border transactions exceeds $155 trillion per year. But a borderless economy demands fast payments across territories in local currencies, which poses a sizeable challenge to payments firms with fragmented systems.”
“Whether we look at domestic or cross-border payments, we’re moving to a world where the underlying customers are expecting near-real-time settlements of their funds,” Botha said. “There’s several different players and intermediaries across different jurisdictions. They have different settlement times, and so it becomes difficult internally for organizations to offer that service effectively in a more manual world to their clients.”
Botha continued: “There are a couple of key points to consider. One of the main ones is there being trust (i.e., the customers know that this is going to be effective for them). No one really likes to move away from what they know works. However, in this transition, what real-time and domestic and cross-border payments means for these organizations, and ultimately customers, is that they expect real-time responses and settlements by the organizations managing their funds.”
Steve Murphy, Director of Commercial Payments at Javelin Strategy & Research, pointed to a coming merger of capabilities.
“There’s another innovation that’s right on the doorstep now, and that’s combining real-time systems with cross-border capabilities,” Murphy said. That’s something we’re going to start seeing perhaps as soon as this year from some private companies, and certainly we’ve got central bank digital currencies and central banks that are working with each other and that kind of thing as well.”
Although the United States is certainly ready for real-time payments, the report indicated that cross-border payments are more challenging to process.
AutoRek’s Offerings in Automation
Investment in automation might be what the doctor ordered when it comes to easing the strain of manual processes and other outdated, legacy systems. Botha said AutoRek has what companies need to free up more time to dedicate to the things that add value in running an organization.
“We are a financial data control platform, and we manage the end-to-end process in organizations,” he said. “Middle and back-office, whether it be in finance, treasury departments, payment operations, is a key element of where our platform is very successful.
“We automate three elements of the process, which add a huge value to these businesses. The first one being all your data management processes. With many different payment providers and partners working with many different banks, it creates a lot of complexity around your data management. We look after that and automate that process by giving all our clients back a lot of time in their day to shift that attention to more value-adding tasks instead of preparing data ultimately for reconciliations – the second and central part of our automation offering.
“AutoRek is a very flexible platform to meet a lot of their requirements around reconciliation. You can be as flexible and as deliberate as you need in the platform, which is beneficial to payment organizations. Payments organizations shouldn’t be told how they need to do things. They need to have something that adapts to their business models.”
Finally, Botha touted the centralization of reporting to satisfy regulatory requirements.
“The third element is having your audits all in one place and ultimately any type of reporting that you need from your management reporting, audit reporting, and even regulatory reporting,” he said. “We help reduce the potential of regulatory pressure and in some cases, fines as well.”