Operational Resilience 2023: Trends, Challenges & Best Practices

Innovation has always been the lifeblood of financial services.

As financial service providers have honed their efforts on IT innovation, placing it at the forefront of their agendas, it has become clear that IT innovation must be aligned with operational resilience.

From IT renewal and the development of new services, to optimising interfaces and back-office systems, businesses are striving to become leaner, more efficient, and more responsive to today’s modern and digital requirements for financial services.  

Despite the many challenges and difficulties that the Covid-19 pandemic brought on, it played a key role in pushing small-to-medium-size enterprises (SMEs) to enhance their operations models. A 2023 Oxford Economics research report uncovered that 58% of UK SMEs believed that dealing with pandemic-related challenges helped increase overall resilience.

The research further reveals that these pandemic-related challenges are now being replaced by increasing costs, which are referred to as the “primary challenge facing SMEs” for the coming year.

These increasing costs primarily manifest as IT maintenance and upkeep, reiterating the need for greater alignment between a business’s operational model and its IT innovation strategy. However, these costs can also take the form of supply chain disruptions and global cost of living crises that only further complicate resilience by adding more external pressure to keep costs as low as possible.

So, where do SMEs go from here and how can true operational resilience be established?

To answer this question, let’s begin by defining what operational resilience entails.

What is Operational Resilience?

Operational resilience refers to your business’s ability to maintain stability and continuity in providing critical services to your customers and business partners. In financial services, this resilience is impacted by practically every area of business but especially by:

• IT innovation efforts, particularly those focused on boosting automation and efficiency
• Strategic partnerships with banks and other financial service providers that support global growth
• Supply chain and resource availability
• Funding and budgetary limitations
• Adequate talent and staffing

Achieving operational resilience ultimately comes down to balancing innovation with transparency.

Without the right level of transparent communication, it can be difficult to assess the effectiveness of a current operational model.

For example, in cross-border payments, a business must consider not only the costs associated with international transactions but also the availability of correspondent banking partners and key financial service providers needed to facilitate the process.

By imbuing an operational model with transparency, this business can achieve greater visibility across the entire organisation. In turn, the business is better prepared to seek out the necessary strategic partnerships with banks and providers that enable efficient and cost-effective cross-border payments.

Keeping this in mind, let’s now discuss three of the specific challenges related to operational resilience in the cross-border payment space.

Three Operational Resilience Challenges to Consider for Cross-Border Payments

We’ve already touched on the evolving risks of operational resilience — namely, the ongoing global cost challenges. For cross-border payments, these cost-related challenges can have a massive impact on both payment resilience and the overall customer experience your business provides, as well as your ability to maintain relationships with cross-border suppliers and business partners.

Let’s now examine three additional operational resilience challenges for cross-border payments:  

1. Real-Time Payments: As real-time payments have become more prevalent, SMEs are now facing increased demand for instant payments from customers and suppliers alike. A 2022 PYMNTS report uncovers that Europe is currently home to more than half of the global real-time payment markets, simplifying cross-border payments coming into this region. For those outside the EU, working with European suppliers, establishing international banking connections, and expanding into European markets could be a key part of the solution to establishing greater operational resilience.
2. Emerging Technologies: It’s safe to say that the cross-border payment space is flush with more emerging technologies than ever before. From AI-enabled advanced analytics to blockchain technology and multilateral platforms that help mitigate cross-border payment friction, today’s SMEs have a large pool of technologies to sort through and implement when working to build greater operational resilience. According to a 2023 BIS report, multilateral platforms in particular can help drastically improve cross-border payment frictions by reducing reliance on legacy technology and utilising APIs to connect multilateral platforms to existing systems.
3. Increasing Interdependencies: Both the business and financial sectors are becoming a more interconnected web or matrix, which creates both new opportunities and risks. On the one hand, a more connected business and financial ecosystem can make it easier to expand globally — on the other, this connectivity can result in greater reliance on markets that you have little to no control over. One key resolution for SMEs is to find a means of diversifying their banking relationships through solution providers, giving them more than one option should a bank be inhibited by global conflicts or economic uncertainty, or reluctant to work with SMEs in general.
   

New Operational Resilience Regulatory Hurdles for SMEs

Regulators around the globe are prioritising operational resilience more highly in 2023.

For instance, in the UK, the Financial Conduct Authority (FCA) published the PS21/3 policy statement, which sets new rules and guidance for strengthening operational resilience in financial services.

This regulation applies to banks, financial service providers, and any entities authorised and registered under the Payment Services Regulations 2017 and the Electronic Money Regulations 2011.

As part of the new rules and FCA guidance outlined in PS21/3, the affected firms are required to:

• Identify important business services
• Set impact tolerances for maximum tolerable disruption
• Carry out mapping and testing at a sophisticated level
• Identify vulnerabilities in operational resilience

These requirements must be performed by no later than 31 March 2025.

The UK is far from the only nation currently facing new regulatory hurdles that require updated compliance models and strategies. All over the world, regulatory change is in motion, including:

• Digital Operational Resilience Act: We would be remiss to discuss operational resilience challenges without also highlighting the Digital Operational Resilience ACT, or DORA for short. DORA was published in the EU in 2022 and places a variety of new requirements on financial institutions that are intended to boost overall operational resilience across the EU.
• PSD3: Though not yet officially published, the current iteration of the Payment Services Directive — known as PSD2 — is currently under review, with a new legislative proposal expected sometime in mid-2023. Whether this is an updated version of PSD2 or a wholly new PSD3 proposal is yet to be revealed but what we can say for certain is this is sure to impact the global financial services sector, particularly by way of instant payment requirements.
• T+1 Security Settlements: The S. Securities and Exchange Commission (SEC) published a ruling for security settlements that changes the standard cycle from two-day settlements (T+2) to one-day settlements (T+1). Though this ruling is based in the U.S., it impacts any financial institution or business dealing with investments and trading in the U.S.

This is just a sampling of the many regulatory changes occurring globally as regulators work diligently to address the new digital risks within the financial services sector.

With each new regulation comes the costs of adopting the right solutions and strategies to meet new compliance standards for SMEs, leading SMEs to answer one crucial question:

Should SMEs build their own solutions, buy pre-built custom solutions, or engage in a strategic partnership to meet the variety of operational hurdles we have discussed thus far?

Build, Buy, or Partner: What’s the Best Route to SME Resilience in 2023?

Build, buy, or partner? That is the essential question for SMEs in 2023 — and the answer will vary according to each SME’s current operational model.

For example, an SME with a robust IT department may already have the resources and talent in place to build in-house solutions. Meanwhile, an SME that is focused more on the customer-side of business may require them to rely on buying solutions and engaging in partnerships to meet their operational needs.

When we think about this question in the context of payments specifically, all three options (build, buy, or partner) have both advantages and disadvantages. Let’s quickly cover the basics of each to help shed light on which strategy is best for specific use cases:

• Build: Building in-house solutions only works when there are adequate resources and talent available within the business. Not only this but the resources and talent need to be specifically tailored to payments to ensure a reliable payment infrastructure is created. Costs will almost always be the highest when choosing to build an in-house solution, though it can be beneficial in terms of creating a solution that is extremely specific to one business’s needs.
• Buy: Buying a solution for operational resilience in payments can come in one of two forms — pre-built solutions and custom-built solutions. The former is typically the more affordable option while the latter enables a business to adopt a payment solution tailored to their needs. This once again comes down to the existing availability of resources within a business’s payment strategy, as well as the talent available for implementation.
• Partner: Strategic partnerships are becoming the clear frontrunner when it comes to establishing true operational resilience. Through a strategic partnership, SMEs gain the talent and resources needed to both build and deploy solutions crafted specifically for their business. Plus, the right partnership can even provide an SME with the right mix of payment connections, APIs, and ongoing support needed to achieve long-lasting resilience both on a broad operational level and on a more payment-specific level as well.

How Your SME Can Boost Operational Resilience with Freemarket

To achieve true operational resilience in the coming years, corporates need access to a strong correspondent banking network and localised payment capabilities.

At Freemarket, our cross-border payment platform offers the banking connections and innovative technologies your SME needs to reduce the complexity of operational resilience.

Powered by our comprehensively documented and highly secure API, our platform solution is easy to integrate with your existing system. Regardless of where you are at in your technological transformation as a business, Freemarket’s platform enables you to select the best channels for your payment processing.

From reconciliations to currency exchange, Freemarket has the capabilities you need to build a highly resilient cross-border payment system.

Get in touch with Freemarket today to find out more about our powerful platform and API.