COMMENTARY: Five Key Trends And Changes to Expect for Payment Methods in 2023

With a rapidly growing market, increased competition, and more ways to advance than ever on the front end, payments organizations around the world are finding it hard to keep up with changing consumer demands.

The success of the industry, although often celebrated, does not negate the sheer pressure that back offices now face in having to try and become as efficient as possible.

AutoRek’s global payments report confirmed this view. It surveyed 500 U.K. and U.S. payments executives on strategic priorities, operations, regulations, and data in 2023.

Upon the findings of the report, AutoRek set out the five key changes that payments firms are gearing up for in 2023.

1. More advancements, more regulations

Only one-third of payments professionals didn’t expect regulation to increase within the next two years.

But there is a clear divide between U.S. firms’ expectations and the expectations of their U.K. counterparts: 74% of U.S. firms expect more regulations in the future, compared to 53% of firms in the U.K.

This difference reflects the approaches taken by U.K. and U.S. regulators. The Financial Conduct Authority in the U.K. has been quicker to put new regulations in place, whereas U.S. regulation has developed at a slower pace. It naturally follows that U.S. firms will be gearing up for more regulations soon.

2. U.S. expecting to mirror U.K. safeguarding rules

Two-thirds of U.S. firms expect new regulations to mirror U.K. safeguarding rules, which require firms to protect customer assets in the event of insolvency.

If U.S. regulators implement similar regulations, firms will need to develop new reconciliation processes to protect customer funds. They’ll have to undergo annual audits, enhance governance, and control procedures to comply.

Although the U.S. is headed on this trajectory, recent attempts to draft new guidelines for the American payments system have faltered. Two charters failed to strike a fair balance between incumbent banks and fintech firms. So regulation is, for the time being, managed on a state-by-state basis.

3. ISO 20022 as the future

In 2023, the U.K. Clearing House Automated Payment System (CHAPS) will switch to full ISO 20022 as firms prepare for migration. The new standard has the potential to improve all aspects of the reconciliation function.

Some 40% of large companies (with more than 500 employees) said ISO 20022 would most improve the data transformation and enrichment phase. This is followed by the downstream matching and exception investigation/management processes.

Standardization is set to reduce incomplete and unmatchable data. This in turn should reduce the labor-intensive downstream steps of the process. As such, ISO 20022 will likely help payments firms scale.

4. More ways to pay!

Firms are preparing for an increase in payment methods this year. Growth is expected to continue, but at a slower pace than seen in previous years.

Over 58% either agreed or strongly agreed that there would be an increase in payment methods. Meanwhile, only 15% either disagreed or strongly disagreed with the statement.

And there’s another significant difference between U.K. and U.S. respondents. Some 69% of U.S. firms expect payment methods to increase, while just 8% do not. In the U.K., 48% of firms expect an increase in payment methods, while almost one-quarter (23%) do not.

These results suggest that new payment methods may come from American-based fintechs over the coming years.

5. …but higher back-office costs

The good news is that one-quarter of respondents are forward-thinking firms with scalable back-office operations. Back-office costs, therefore, stay the same even as volumes rise. And one-quarter of firms have some scaling value, so costs rise but at slower rates than rising volumes.

However, 22% of firms said their costs rise when volumes rise. This indicates shrinking profit margins as volumes grow. Nearly 48% of payments firms achieve no scaling benefit in their back-office to accommodate rising volumes.

The ability to scale the back-office is critical to a payments firm’s success, especially as the market grows. Investing in automation will achieve better scalability and prevent back-office processing costs from escalating as volumes rise.

Nick Botha is global payments sales manager at AutoRek, London.