Voluntarily undertaking operational improvements

Why it pays to improve your financial processes

Valued at over $2.85 trillion and with a CAGR of 10.88% between 2024 and 2029, the payments industry’s stats easily grab attention. The same can be said about the innovations that it continues to produce - CBDC, mobile POS systems, digital wallets, etc. However, customer-facing developments are no substitute for robust back-office financial processes. Given that these are responsible for safeguarding client money, preventing fraud, accurate forecasts, and more, it is therefore imperative that they are developed in tandem with front-end technologies.

Unfortunately, the prospect of gaining more customers and the allure of being Fintech’s “next big thing” can make it rare to find upcoming payment firms proactively investing sustainably in back-office processes. Running before you can walk though, rarely ends well, especially when there are regulators in place such as the FCA to make sure that doesn’t happen.

But still, it happens, seeing the FCA having to impose “voluntary undertakings” upon firms in order to improve their financial processes. Given that these enforcements are usually only “voluntary” in name, can anything convince fintech disruptors to undertake operational improvements before they are nudged by the FCA? We think there are plenty of good reasons. Read on to explore a few:

“Voluntary undertakings [...] are seldom genuinely at the firm’s own initiative.”

James Borley, former FCA Regulator and current Managing Director at Cosegic

Regulatory benefits

Regulatory compliance cannot be overlooked. Considering that fines as large as £126 million have been issued because of failure to reconcile and abide by CASS regulations – they definitely shouldn’t be.

The fact that back-office functions are recognised for playing a key role in determining compliance with CASS 7 and other regulations, paired with the hefty cost of fines for breaches, back-office processes also cannot be overlooked. After all, investing in the likes of reconciliation through automation software to ensure that regulatory demands are hit, is significantly more cost-effective than being hit with fines.  

Moreover, the back-office is a web of functions. As a result, many have mutual relationships with one another. For instance, reconciliation affects journal entries with automation of both often coming as a pairing. This means that if the likes of the FCA spot an issue with client money not being properly ringfenced in designated safeguarding accounts, it is highly likely that they will uncover other issues once a ‘voluntary undertaking’ or even a section 166 skilled persons review begins.

Consequently, conducting back-office operations properly is not just about avoiding one-off sanctions and fines; it is about ensuring that a firm’s entire operations do not get upended.  

Commercial benefits

Although it might not sound exciting to customers, strong back-office operations are exceptionally important to them. For instance, considering that in 2023 34% of shoppers prioritised data security and payment encryption when it comes to having a positive online payment experience, they are also highly likely to want their money to be properly protected on every occasion. For this to be the case, back-office processes such as reconciliation are regularly called upon.

Given recent examples of accounts being frozen and payment services being suspended due to FinTechs’ failure to reconcile correctly and putting client funds at risk, it is not hard to see why back-office operations actually matter to customers. The fact that these instances have seen people being unable to pay their mortgages and vital surgeries only emphasises this point.

Ultimately, any customer concern should be a business concern. Ignoring customers’ opinions will only lead to an erosion of trust for individual firms and the entire industry in which they operate. Hence, the FCA imposes regulations designed to ensure people are treated fairly by payment firms, credit unions, and more, through their application of proper back-office operations.

Internal benefits

As noted above, failure to practice back-office processes optimally has a very real impact on front-end interactions, including losing trust with customers and the FCA publicly listing on their website the restrictions and sanctions that non-compliant firms face.  

However, back-office finance operations actually possess internal influence too, reaching far into the future and into the past. Here’s how:

• Forecasts are only possible through examining what has gone before. It therefore holds true that accurate forecasting is only achievable with accurate data. To reach this position, data integrity is vital. With reconciliation being the only way to assure this, yet again financial processes conducted behind the scenes are proven to be essential.
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• Catching fraud before it happens in a digital world of real-time payments is exceptionally difficult. As a result, fraud is often instead snubbed out and recovered from by spotting it soon after it takes place. Once more, to achieve this, financial data must be examined thoroughly, meaning that accurate and timely reconciliation also plays a role here.  

Finance where no volunteering is needed

Volunteering is usually perceived as an honourable action. However, volunteering to improve fundamental financial processes after regulators have threatened sanctions, sounds less wholesome.  

Ultimately, finance should be a volunteer-free industry. It should operate perfectly the first time around. For this to be the case, all types of financial firms – banks, PSPs, acquirers etc. – must build from the bottom up with a solid foundation. This means deploying robust yet flexible back-office operations that new front-end developments rely upon to drive forward their businesses securely and legitimately.

Let’s do finance the right way. Book your Aurum demo today to discover an automated reconciliation platform that will set you up for success.