Persistent challenges: How legacy systems are holding payments firms back

Nick Botha, our Global Payments Lead, discusses how relying on legacy systems and manual reconciliation processes is keeping firms from staying competitive in 2024. He explains how this prevents firms from being responsive enough to meet customer needs and regulatory change.


In the past manual reconciliation processes have sufficed but placing heavy reliance on such can lead to inefficiency. Currently, 84% of UK and US payment firms rely heavily on manual tasks and spreadsheets to perform the reconciliation control process, while 86% say their data lacks the transparency and standardisation required for effective reconciliation. This raises the question of what can be done to ensure that effective reconciliation takes place.

Reconciliations are a fundamental control mechanism for finance and accounting but many firms across the financial services sector continue to rely on legacy systems such as Excel spreadsheets to carry out this crucial process. These systems are generally human-error-prone, repetitive, low-value tasks and despite the day-to-day value spreadsheets provide, there is the issue of scalability when it comes to financial reconciliation. With the payments industry being a big growth sector, relying on manual tasks can become increasingly complex and can slow down operations.

Ultimately, businesses need to streamline their operational frameworks to effectively navigate potential disruptions to remain profitable and competitive in today’s demanding, fast-paced environment. Businesses must be able to handle vast transactional volumes and growing payment methods. However, relying on manual reconciliation can hinder this ability, especially when it comes to customer needs which is a key priority for businesses. Despite this, significant investments remain to be made.


Hindering the ability to remain responsive to customer needs

With customer experience and retention (49%) and reducing operating costs (49%) being among the top priorities in 2024, businesses are aiming to balance meeting customer expectations with optimising operational efficiency. In the past, focus has been divided between customer expectations and operational efficiency. However, in today’s landscape, these cannot exist without each other especially as customers now expect to have seamless and personalised experiences and businesses must align their operational capabilities accordingly. This means integrating new technologies to increase efficiency but also ensuring that these tools can work alongside existing legacy systems – something that can be challenging due to outdated infrastructure.

In the payments space, it is crucial not to fall behind with the latest developments and advancements in technology – such as generative AI. To achieve this, companies need to ensure that they have the correct payment tools in place, as well as education and training to encourage new ways of working that align with new technology.  However, when implementing new tools there is a risk that enhancement will not be achieved. This is because legacy tools lack forward-thinking capabilities and should be replaced or used in combination with other tools to complement one another. Failure to do so can prevent businesses from offering new features/ services that meet customer expectations.


Reducing legacy-based costs through modern reconciliation

Upgrading to modern reconciliation can address challenges such as customer retention but also improve compliance and reduce errors in manual tasks. By doing so, businesses can position themselves as a trusted source that is compliant, efficient, and competitive. However, it is important to note that the decision to transition is often influenced by budget considerations.

Companies are showing an increased interest in adopting automation but it’s essential to have a better understanding of the costs and the potential savings involved. Despite resulting in significant benefits, businesses are often reluctant to go through with the transformation due to the high expenses.

However, recent research highlights the urgency of this decision as the number of payments organisations expecting their cost of compliance to increase over the next 12 months has doubled since 2023, jumping from 38% to 80%. The shift reflects the growing regulatory scrutiny on payments firms worldwide and with the FCA looking to announce changes to safeguarding regulations this year, safeguarding is predicted to look more rules-based, similar to CASS regulations. This has led to businesses adopting safeguarding principles to protect customers in the event of liquidation or bankruptcy.

Assuming volumes in the payments market continue to grow, a firm’s ability to scale its back office will be increasingly critical to its business model. In 2023, 22% of businesses acknowledged that their costs accelerate when volumes increase. This number rose to almost three in ten in 2024. These figures suggest that investments in automation usually prevent significant rises in back-office processing costs as volumes rise. By driving higher levels of automation, firms will realise the benefits associated with economies of scale.

To conclude, with the expansion of the digital economy, rising transaction volume, and ever-changing regulatory obligations, there is a need for additional education around reconciliation to help businesses automate manual processes due to these legacy systems no longer being fit for purpose. By transitioning to full process automation is imperative because businesses can focus primarily on growth objectives – all while reducing operating costs and liberating staff from dull, repetitive data work. Furthermore, a commitment to internal education and regulatory compliance is paramount.