The rising cost of payments innovation
For the last two decades, the payments industry has revolutionised how money is moved. Contactless payments helped us continue to spend during a pandemic, transferring of funds to one another has resulted in the the creation of a whole subset of payments (Peer-to-Peer), our dining experiences are now impacted by how we pay, and much more.
Indubitably, payment firms have had an astonishing impact on everyday life with much of it resulting in positives. In fact, the wide range of payment types now available to consumers means that 90% of people in the UK are now satisfied with what is offered to them at checkout both in stores and online. However, despite the plaudits that payment firms regularly receive, and the pivotal role they have played in making it easier for us all to manage our money, operating within the industry is becoming an increasingly costly affair.
From the implementation of new regulations by the Payment Systems Regulator (PSR) to rising expectations, let’s discover where the increasing prices are coming from for payment firms and how they can excel beyond them to protect their inherent character for innovation.
The price of success
Arguably, two of the most widely applauded and influential feats of the payments industry have been reducing the time for money to move and the cost for it to do so. After all, can anyone now imagine having to wait for a cheque to clear after 2-6 days? The impact this has had is clear – 53% of consumers aged 18-24 are using payment apps more frequently than ever before in a bid to better to manage increasing costs due to inflation. As a result, payments firms have made it cheaper for us all to spend money in both monetary value and time. However, this success is set to come at a price.
Since 7th October 2024 the PSR made the UK the first area in the world where payment firms – along with banks – will be equally responsible for reimbursing people when they are victims of Authorised Push Payment (APP) fraud, up to the value of £85,000. It therefore appears that the PSR assumes that the success of the payments industry means that all firms can afford such reimbursements.
Falling in line with the limit of saving that the Financial Services Conduct Scheme (FSCS) protects per UK-regulated financial institution, this means that they could have to owe up to £42,500 for any individual instances of fraud. Whilst for some payment firms it might be feasible that they have cash reserves to cover these costs, as Tiago Veiga, Aurum CEO, recently stated in The Banker, despite the scheme being well intentioned, smaller FinTechs might no longer have enough funds to innovate in ways which will allow them to compete with established firms.
This is an issue not just for smaller payment firms but the entire payments ecosystem. As an industry which has grown to staggering proportions thanks to the large amount of competition within it driving innovation, a continuous stream of fresh, disruptive startups is a significant contributor towards its success.
With PSR regulations potentially putting smaller payment firms in jeopardy and threatening to snuff them out before they leave their mark on the industry, it becomes more important than ever for these newcomers to be financially astute. Every expenditure must be tracked, cash flow regularly updated, and forecasts perfectly accurate for them to be fiscally responsible. As a result, payment firms will be looking to other FinTechs, namely those providing automated reconciliation platforms, to ensure their budgeting is correct.
ESG costs
Over the last 6 years there has been an explosion in the number of FinTech firms – since 2018 the number of new FinTechs has increased by 147% worldwide to total 29,955. In turn there has been an equally impressive growth of PayTech firms given that they make up 25% of all new FinTechs.
The rise of payment firms has therefore coincided with ESG becoming a defining influence upon the success of businesses. ESG refers to whether a company operates in a manner that is sustainable and ethical. Importantly, it has been found that businesses that prioritise ESG outperform businesses that do not.
However, whilst being environmentally and socially conscious does pay back in kind thanks to increased investment, greater positive press, and more customers, being so is not always easily achievable – a challenge for payment firms. In fact, despite ESG being a long-term initiative, due to the contemporary global economic climate, it fell from being the top priority for business leaders to below sustaining client relationships and driving revenue between 2022 and 2023.
Despite this, it should come as no surprise that leaders still want to invest in ESG even if 78% are “now forced to achieve sustainability results on less money than before”. The reality of this matter leaves 72% feeling that they want to advance sustainability efforts but do not know how to do so.
With many payment firms being conceived into this situation – demand for ESG-focused businesses with less cash available to operate sustainably – they face an uphill battle that longer established firms never experienced in their early days. More costly for businesses than the initial cost of investing in ESG strategies though, is claiming to be ESG-driven when they are not.
Whilst 55% of consumers state they would pay more for eco-friendly brands, over half in the UK would boycott a brand if they found out that they were greenwashing. As a result, it is imperative that payment firms – plus others – are truthful with their ESG data. Unfortunately though, in 2022 55% of finance professionals were still using Excel to manage their ESG data, making it highly likely for errors to arise.
Once again, accuracy is therefore becoming a growing priority for payment firms, this time with regards to reporting on ESG metrics. Fortunately, the best reconciliation software is data-agnostic. Despite ESG metrics being novel and very different from typical financial measurements, they too can therefore be verified in seconds with automation, helping payment firms avoid the cost of inaccurate ESG reporting.
A race to the top or the bottom
As mentioned, the payments industry is a very congested space. Paired with the fact that operating within the space is becoming more costly, payment firms have to find ways to stand out from the competition.
An easy way to do so without finding money for extra innovation is to reduce their prices. Whether that is by lowering transaction fees, offering subscription pricing models, discounts on bundled services, or any other price-saving initiative, this is a proven way to acquire more customers. However, this can also lead to a race to the bottom.
For some payment firms it has paid off. Take PayPal for example. Despite initially having a monopoly in online payments, when competition arose from the likes of Stripe and Square, PayPal slashed their fees. However, many have questioned whether this is sustainable. Arguably it has only been so thanks to their large size allowing them to acquire other companies. However, for the likes of Wirecard that offered low-cost payment processing services, their success was short-lived. After only 21 years, by 2020 Wirecard collapsed due to accounting fraud as a result of lax internal controls; no doubt a symptom of their small margin.
Whilst it might appear that this strategy has a 50/50 success rate, the reality is that it is becoming less and less effective. Why, you might wonder? Simply because new regulations are consistently popping up for payment firms, placing greater emphasis on foundational financial activities such as safeguarding and reconciliation. Paired with the fact that customers expect squeaky-clean operations not only in terms of business’ impact on the environment but also with regards to governance, meeting regulations, and being responsible with people’s financial lives, payment firms cannot afford to make only small margins which will see them struggle on a tight budget to execute fundamental regulatory tasks such as reconciliation correctly.
As a result, payment firms should be looking to innovate and generate greater revenue, rather than falling into the trap of lowering costs and risking their smaller margins being eaten into by fines. This might sound like a highly costly pursuit on paper; however, there is a way to prioritise value creation whilst ensuring compliance. It is of course, through automated reconciliation.
Put simply, automation means that less people are required to engage in the repetitive, time-consuming task of reconciliation. In addition, it is much more cost-effective than hiring more people to manually reconcile more and more transactions. As a result, automated reconciliation software such as Aurum not only produces error-free results and complete audit trails to assist with financial regulations, it also frees up resource (time and money) to be spent on innovation that people will want to spend on.
The price of greatness
Payment firms are having to engage in numerous balancing acts that they never felt the pressure to in the past. However, diamonds are only made through pressure and the new demands payment firms are facing will in time prosper the entire industry.
Fraud will be reduced, financial accuracy will increase, trust in the sector will grow, and more ethical business practices will arise. As with all improvement though, a stable foundation is needed.
To build your payment firm from the ground up for a successful future, look no further than Aurum’s automated reconciliation platform. Take your first step to prioritising innovation, up-to-date forecasts, and accurate metrics by booking your Aurum demo today.
