The global payments industry has experienced stratospheric growth in the last few years, with businesses shifting more of their focus to e-commerce as consumers’ shopping behavior, as well as overall dependence on digital and contactless payments, has increased.
PaymentsJournal sat down with Brian Riley, Director of Credit Advisory Service at Mercator Advisory Group, to get his take on the global payments’ panorama, now and in the future.
According to AutoRek’s “Payments in 2022: Top challenges and operational requirements for the global payments industry” report, changes in the global payments landscape are accelerating, and with them come challenges. In fact, roughly half of payments executives surveyed said “their business is either slightly or highly unprofitable.”
We dive into some of these challenges, as well as look at how businesses are enhancing their current infrastructures to reconcile payments, keep up with regulatory changes, and eradicate any current payments inefficiencies. We also examine the key trends in the global payments space, including real-time payments and cross-border payments.
More Payment Methods Are Accepted, but Transactions Require Quick Reconciliation
Customers have more options than ever to pay for goods and services, and with so many choices at their fingertips, businesses must ensure they offer all preferred payment methods. If a customer fills their online shopping cart and then sees they can’t use a buy now, pay later (BNPL) option, for example, then they’re going to abandon their cart and go elsewhere.
At the moment, this scenario is a challenge for some companies because offering more payment methods means more data they’ll need to process. In fact, 85% of companies surveyed in the AutoRek study “lack confidence in their reconciliation life cycle to withstand this proliferation of data.”
“There’s an art and a science when you present payment options to consumers,” said Brian Riley, Director of Credit Advisory Service at Mercator Advisory Group. “You need to make it simple for the consumer despite the complexity behind the scenes. To be effective and reduce cart abandonment, you must orchestrate the transaction to make it easy to transact no matter how complex the back end is. The burden is on the merchant and processor to manage, not the consumer who is trying to transact.”
“In payments, the devil is in the details,” he said. “You need to reconcile transactions quickly and precisely. The transaction must be irrefutable. Overarching the whole process is data. [However,] you need more than data. Data must be turned into information, and that information must be processed to provide logical meaning for clearance, settlement, and further analysis.”
For Global Payments, Use of Real-Time Payments Is More Widespread
As the digitalization of payments continues to build momentum, central banks and other financial institutions are modifying their current infrastructures to accommodate real-time payments.
Real-time payments are in demand for two reasons: instancy and accuracy.
AutoRek’s findings on real-time payments solidifies their steady growth. In 2020, real-time transactions reached $70.3 billion — an increase of 41% from the prior year. What’s more, 85% of banking executives surveyed said that “real-time payments are the foundation for growth and new product enhancements.”
That said, there are challenges to overcome. Back-office processes are currently not fast enough to handle the real-time capabilities of the front end. Roughly one-quarter of payments organizations still use spreadsheets to manage their payments data. This will pose a problem, as reconciliation with real-time payments will be happening in real-time.
“Spreadsheets are easy,” said Riley. “Everybody knows how to use them, so it’s not rocket science to have to learn a program. That’s an important factor. They’re ubiquitous, they’re on every computer in every business.”
“If you build the business on a spreadsheet, you have not future-proofed it,” he said. “And I think what you see is the ability to be a lot more flexible than what you’re doing in the market chain.”
Many companies are discovering that when it comes to real-time payments, there must be real-time reconciliation solutions. In that same AutoRek survey, 55% of payments executives are focused on modernizing their current infrastructure to accommodate real-time payments. By focusing on these solutions, organizations will resolve the disconnect between the back-office and front-end capabilities in handling real-time payments.
The Staggering Growth of Cross-Border Payments
Cross-border payments come with their unique complexities, including increased risk, the management of more data, and compliance with regulations. And, as payments solutions continue to innovate and improve, cross-border transactions will continue to increase worldwide.
For companies with ill-equipped systems, this growth can prove detrimental. As cross-border payments become more widespread, there are a few trends to look out for:
- In 2022, cross-border payments are expected to reach $156 trillion. During the next few years, they are expected to grow at a compound annual growth rate (CAGR) of 5%.
- The key driver in cross-border payments is business-to-business (B2B) transactions, which by the end of this year will be worth as much as $35 trillion.
- As many as 86% of financial leaders have reported “too much bandwidth tied up” in taking in cross-border payments.
As better payment infrastructures materialize, we’ll see more cross-border payment transactions. Payment firms that have “fragmented systems” will add another layer of complexity. AutoRek’s report cited a study conducted by Flywire, a payments solution company, which found that more than half (55%) of companies lose anywhere from 4% to 5% of monthly revenue because of “fragmented payment inefficiencies.” This includes wire fees as well as the time companies spend tracking and reconciling all transactions.
As cross-border payments become more ubiquitous, payments firms will need to keep an eye on these issues and address them accordingly.
Global Payments Conclusion
Global payments growth has not slowed down, and some organizations are struggling with that rapid growth and its impact on their bottom line. Legacy systems must be replaced with nimbler solutions to capture the ever-growing number of payment methods consumers prefer, along with payment data, and reconciliation requirements.
As payments infrastructures get necessary upgrades, companies will be better positioned to efficiently manage and reconcile their global payments, the wealth of data, and currencies.