The story so far
The Payments boom has taken new shape in recent years, especially with the acceleration of new technologies like Blockchain, digital currencies and Open Banking. In fact, a recent report by IBM suggests that more than 70% of banks and credit unions around the world are either developing or currently implementing a comprehensive range of next-gen applications and modern technologies.
As you would expect, these developments have been met with a variety of regulations. Most notably the second Payment Services Directive (PSD2) regulation, which emerged in Europe in 2015 and has since exceeded initial projections with the influence COVID-19 has had on online shopping trends.
On the global scale, financial authorities have started to review their position on Payments. The European regulators, for example, have introduced the Safeguarding regulation to offer consumers better protection. While over in the US, the Office of the Currency Comptroller has indicated that the current fragmented approach in place across several states is to be superseded by federal regulation in due course.
Payment Service Providers (PSPs) are facing a significant challenge, however, as they look to balance these regulatory developments against the demands of a highly competitive environment in which simple processing and enhanced consumer engagement are more valuable than ever. This need is only exacerbated by recent studies conducted by Siegel+Gale, which find that brands around the world are losing a collective $98 billion each year through consumers abandoning purchases when the payment process is not simple enough.
For PSPs seeking a critical advantage over an ever-growing list of competitors, customer acquisition is likely to become a key focus – something which can only be achieved with superior technology strategies and infrastructure to ensure Payment Service Users’ (PSUs) expectations are met. Firms will need to solidify their end-to-end reconciliation processes if they are to deliver the convenient payment process that users have come to expect.
In the remainder of this article, we explore the issues firms face when they opt for traditional and outdated payments solutions.
What are the shortcomings of existing platforms?
There are a range of tactical or strategic ways in which control functions can be implemented. While the most common starting point is a basic Excel spreadsheet or Access database, some firms have utilised engineers to build in-house solutions for these functions.
Decades of experience in this space have taught us that firms face 5 critical deficiencies when choosing either of these options:
- Manual Intervention: without a purpose-built automation tool, firms run the risk of wasting precious resources on unnecessary and time-consuming manual intervention
- Regulatory Reporting: by relying on outdated legacy systems, companies leave themselves vulnerable to a range of costly regulatory breaches and unavoidable human reporting errors
- Operational inefficiencies: even those with in-house solutions will experience a range of operational inefficiencies, often diverting IT resources to constantly adapt systems to meet evolving rules and regulations
- Poor data control: companies who opt for Excel spreadsheets, Access databases or in-house solutions will lack sufficient control of the underlying data
- Poor scalability and flexibility: with rigid manual systems, firms are likely to fall behind competitors who utilise systems which are both scalable and flexible
Payment operations: what are the challenges?
2020 saw an explosion in the volume of digital payment transactions, with some sources indicating that 56% of online shoppers used a new payment method for the first time since the advent of COVID-19. A recent study conducted by McKinsey echoed this insight, finding that a majority 78% of respondents regularly use some form of digital payment. There have also been significant movements in the percentage of consumers using two or more digital payment methods, which increased from 45% in 2019 to 58% in 2020.
This increase has posed a significant challenge for payment operations and settlement teams, who are also faced with complex data handling and a continuously changing regulatory landscape. Historically, these teams have relied on macro-based spreadsheets or in-house solutions to cope with data management and reconciliations volume. These options are no longer viable, however, given what we now know about the risks of using heavily formula-based spreadsheets.
For many who are still considering traditional solutions, the recent collapse of Wirecard should be a prime example of how not to implement controls and the repercussions this has.
What’s the bottom line for PSPs?
In response to these developments, most firms unsurprisingly rushed to make their products scalable at the front end without full understanding of the impact this would have on operational and settlement teams. Doing this has left many workforces overly stretched and unnecessarily increased hiring costs to backfill these teams. Additional pressures from financial authorities across the geographical reach of PSPs has only added to the need for enhanced data transparency, speed, accuracy and accountability of operational processes.
Meeting these modern challenges will require enhanced risk control frameworks – something which is not easily achieved through outdated technologies. Senior decision-makers should be mindful that, by relying on traditional Excel and Access systems, they run the risk of falling behind in an overwhelmingly competitive environment.
For any Payments firms who might be tempted to utilise internal resources to build control tools, it is worth noting that the opportunity cost of diverting precious resources from core product development is more than a little significant. There is no doubt that those industry leaders who opt for full automation will be the only ones who manage to keep up with a dynamic and fast-moving payments environment which shows no signs of slowing down.