Payments regulation: What’s up ahead in 2022?

On March 31, AutoRek’s Nick Botha sat down with the Payments Association and a panel of experts to discuss the challenges of the payments industry, paying particular attention to key topics such as regulation and the back office.

Here’s what they discussed:

Why are payments and e-money firms experiencing challenges today?

Payments and e-money institutions of today must contend with:

  • Unprecedented levels of competition
  • The need for high speed to market
  • New regulations (PSD I, PSD II, and safeguarding)
  • The impacts of COVID-19 accelerating the payment sector as a whole

For many, managing the above factors has meant an increased focus on the front office: firms are developing highly client-centric business models which, although logical, has left the back office lagging.

Pain points in the back office

Data handling is one of the main pain points for the back offices of the payments world. Both externally and internally, firms manage a huge variety of data across many different systems.

Core financial control processes are the glue that holds these processes together, yet many payments organisations continue to perform these control processes manually. This can be especially problematic for operational teams conducting processes like reconciliations on an intra-day basis.

Scalability only adds more complexity to the problem, as adding headcount is the only way for back-office teams to accommodate the rapid growth of the payments industry. As a result, large back-office teams in the payments landscape often spend their time on low-value, repetitive and laborious jobs.

The build or buy software conundrum

It is inevitable that financial organisations will consider building software internally to cope with data-related processes. While this has proved a popular option across other sectors, more payments organisations now realise that homegrown software quickly becomes a long-term liability as years go by.

What was once built for a specific purpose often needs updating as business needs change, which leaves firms with a tough decision: do we update the entire system, or do we incorporate a manual workaround? Neither is an ideal option.

Companies are more likely to partner with a software provider to streamline processes as they expand, which makes the pitfalls of in-house systems more prominent. These firms would have made significant cost-savings if they had gone for a software provider in the first place.

Safeguarding remains a key focus

Financial control for payments and e-money firms is becoming more important as regulators continue to raise their safeguarding expectations.

When the FCA first advised firms to segregate relevant funds at an aggregated level, many took this to be an easy task: comparing aggregated balances against segregated balances. But issues are surfacing now as the FCA expects organisations to communicate more clearly with their customers around fund protection and undergo regular safeguarding audits.

Audits tend to expose poor financial control processes, presenting a particular pain point for those firms still operating in a highly manual world. Continuing down this road will fall well short of policy and procedure expectations for more granularity in the reporting process.

Top tips for firms to meet their safeguarding obligations:
  1. Perfect the safeguarding audit process
  2. Stay on top of the regulation and its changes, make changes internally and externally as required, and include this in safeguarding proposals
  3. Streamline and modernise reconciliation procedures, which are the glue that ties safeguarding processes together
  4. Ensure all measures have been taken to identify relevant funds
  5. Open clear lines of communication with partners and regulators. Internal staff should also be fully aware of their specific role in safeguarding compliance
The future of payments regulation

New rules for operational resilience went live on March 31, 2022. Looking ahead, we can expect guidelines to focus more intently on resilience concerns given recent geopolitical events – such as COVID-19 and the situation in Ukraine – and the impact this has on the wider payments ecosystem.

Above all, firms will require an in-depth understanding of how and why they grade business models on impact tolerance. This is likely to centre around a few core questions:

  • What is our business model?
  • How will we continue running our business model after crises similar to what we have seen in recent years?
  • By what metrics are we judging our future impact tolerance?
  • How do we build stress testing that can accommodate unforeseen crises?
The extension of SMCR to payments and e-money firms

The Senior Managers and Certification Regime (SMCR) aims to improve culture, governance, and accountability within financial services firms by ensuring those in senior roles have the skills and knowledge to carry out their jobs with integrity.

Communication from the FCA indicates its intention to extend this regime to payments and e-money institutions. We can therefore expect regulators to look more closely at metrics to examine staff turnover in senior roles.

Payments organisations can prepare in advance by placing a greater emphasis on getting the right hires in senior positions. If your firm is in hypergrowth – as many payment organisations are – it is imperative that hires in key positions can grow alongside your company as it accelerates the onboarding of new clients.

Visit our payments page to learn more about AutoRek for payments and e-money institutions.