Businesses often recognize that their success hinges on their ability to scale and expand. However, many businesses don’t anticipate the tightening of their profit margins on this journey to expansion.
At first glance, it may seem counterintuitive. After all, one would expect that increased growth translates to higher revenue and greater profitability. Yet the reality is that business growth comes with inevitable challenges. Chief among them are the mounting operational costs that chip away at hard-earned profits.
In a recent PaymentsJournal podcast, Nicholas Botha, Payments Sector Lead at AutoRek, and Brian Riley, Director of Credit and Co-Head of Payments at Javelin Strategy & Research, delved into what businesses must do to mitigate operational lag, how automation is revolutionizing reconciliations, and what the payment sector’s outlook is for 2024.
Addressing Operational Lag and Margin Challenges
Efficiency and keeping operational costs low are paramount considerations for any business. When an organization starts to grow, managing the increase in transaction volume becomes essential.
“What we’re seeing is a lean towards more operational efficiencies—automation, new technology, cloud infrastructure—and that’s there to support this growth at an affordable rate,” Botha said. “This ultimately increases firm’s margins as they grow, and that’s how they can increase their revenues as they scale up.”
A company’s success ultimately depends on how well it optimizes its processes. Leveraging data is another key element businesses should prioritize.
“Rather than just dumping these transactions into the proverbial shoebox, one of the things I see about AutoRek is being able to help organize that and manage the process flow,” Riley said. “That seems to be very important, too, from an operational perspective.
“Certainly, squeezing the dollars and making it efficient makes sense, but also being able to use that data as a competitive weapon.”
The Need for Automated Reconciliations
Most small payments companies initially rely on manual reconciliation processes that are typically straightforward. However, as these companies aim to scale, this once-simple process gains complexity, leading to time-consuming procedures and undue pressure on operations teams.
“When you’re performing data management processes, matching reconciliations, creating workflows, and reporting off the back of any reconciled items, manual processes—while they may work for smaller firms at an aggregate level—become a little bit more complex,” Botha said.
“There are a lot of intermediaries that become involved over time, and new technologies become available. It’s about ensuring that you use all these different elements to your advantage to create seamless, automated reconciliation processes.”
C-suites and external stakeholders, including audit firms and internal teams, require strict control over these processes. Automating these procedures enhances efficiency across the board, ultimately delivering transparent reporting for internal and external stakeholders as well as customers.
“The workflow is really one of the most important pieces here,” Riley said. “Not just matching invoice A to invoice B but making that flow. Whether it needs multiple levels of approval within an organization or whether you split those transactions to route to one area or the other, what struck me as very interesting was how that has been engineered well and ready for setup.”
Incorporating Global Insights
The United States has been behind the curve in adopting instant payments compared with other parts of the world. Although The Clearing House’s RTP Network was launched in 2017 and FedNow followed in July 2023, widespread adoption remains in its early stages.
In contrast, the UK’s instant payment system, Faster Payments System (FPS), has been in effect and widely adopted since 2008. The National Payments Corporation of India launched the Unified Payments Interface (UPI) in 2016. According to the World Economic Forum, this was the most preferred payment method for its citizens.
So what can the United States do to get up to speed with instant payment adoption?
“Communication, creating open forums between the different regulators, leveraging some successes and learning about some failures will make sure there’s widespread adoption across the U.S.,” Botha said. “We are seeing it a little bit in some of the states.
“If you think about New York, they’re a bit more ahead of some of the other states. But that adoption across the U.S. is going to be hugely important for the global payments space.”
Some of the developments seen in Europe and India are significant. “And it becomes a good test bed for the U.S. into faster payments,” Riley said.
The launch of FedNow has marked a pivotal moment for U.S. instant payments. As more financial institutions and networks join, the adoption of instant payments will grow.
The Payments Sector’s Future for 2024 and Beyond
Payment firms in the UK and the EU will face myriad regulatory changes this year, with safeguarding one of the most notable regulations.
Safeguarding is designed to protect customer funds held by payment service providers and e-money issuers in the event of the company’s insolvency. It encompasses a set of practices to ensure that customer funds don’t get mixed in with the company’s funds.
“What (we’ll) see is new jurisdictions picking up on this type of regulation,” Botha said. “We’re already seeing it in Canada, Israel, and Singapore. I don’t think that the U.S. is too far behind.
“In fact, I had a conversation with a client just last week, and they mentioned the safeguarding regulations. I’m not too sure where the Fed is on that. But I think changes to existing regulation, both state and federal, are going to be a huge thing for firms to focus on.”
According to Riley, the big buzzword right now is liquidity. Being able to isolate those transactions is also important. “We’ve seen a couple of big failures in the United States—SVB is a good example,” Riley said. “With the acceleration of payments, something that was not expected is that things like a run on a bank or a run on the institution can happen. It can happen a lot quicker than it ever happened before.
“Being able to have those guardrails is very important. Being in front of those issues and being able to isolate those transactions accordingly to make sure that the risk is minimal is important not only when you’re doing the process but also if you’re involved in the process with those sending those transactions.”