DT, January 2017
January 1, 2017
By Blair Jeffery
The nascent faster-payments space is still working to tie together fractured payment networks and overcome interoperability issues that make it difficult for most SMBs to take advantage of the touted benefits.
As businesses continuously seek new ways to improve efficiency and reduce costs, many companies large and small are working to streamline non-revenue-generating processes like accounts receivable and other financial-reconciliation processes.
In support of these efforts, faster-payment initiatives have been an industry hot topic recently. Federal Reserve Real-Time Payments (RTP), NACHA same-day automated clearing house payments, and fintech-driven initiatives are all working to support faster-payment processing times, eliminate costly paper trails, and improve business-accounting and enterprise resource planning (ERP) system automation by providing the necessary rich transaction and remittance data.
With new faster-payment options available, making the switch to electronic payments appears to be an easy decision for any company looking to be more competitive and profitable. According to the latest Association of Financial Professionals (AFP) Payments Cost Benchmarking Survey, the median cost of sending a paper check is $3. The same AFP study estimates the median cost of receiving a check to be $1.57. Based on these numbers, a company processing 20,000 checks per month could easily save over $360,000 annually by switching to electronic payments.
You would think most companies would take advantage of these cost savings, especially small-to-medium-size businesses (SMBs) that stand to gain so much by making this switch. New reports from the MIT Sloan School of Management and The Harvard Business School provide evidence that faster payments can help small businesses. Assistant professor of finance at the Sloan School, Jean-Noel Barrot, stated: “This is the first time an acceleration in cash collection has been shown to have an effect on hiring in the all-important sector of small businesses. This suggests that increasing the speed of payment to small businesses can effectively stimulate job creation.”
However, a 2016 survey by SunTrust Banks of middle-market and small-business executives found that SMBs still make more than 57% of all payments through paper-driven processes and checks. The AFP 2016 Electronic Payments Survey found that 51% of business-to-business payments are still made by check, which is up 1% in comparison to 2013 levels.
While many positive advancements have been achieved, the nascent faster-payments space is still working to tie together fractured payment networks and overcome interoperability issues that make it difficult for most SMBs to take advantage of the touted benefits, including cost savings, efficiency gains, and faster access to funds.
Here’s a closer look at some of the bigger challenges:
Limited Access: Typically, banks only market ACH B2B payments to their largest business customers. Therefore, the benefits of same-day ACH have been accruing to larger companies that already participate in electronic payments. This will change as fintech companies work with banks to break down the barriers that prevent SMBs from electronically accessing the newest payment methods.
No Support for Automation: Less than 2% of all businesses use bank-offered bill-pay solutions, mainly because solutions are not well tied into business accounting or ERP systems, do not support basic payment controls and workflows, and don’t produce the kind of rich remittance that needs to accompany a payment today. Ninety-four percent of finance professionals surveyed in the 2016 AFP Electronic Payments Survey said it is important that payments carry extensive remittance data. Fintech companies are working with accounting-software providers to close the automation gap for SMBs.
Cost of Custom Solutions: Most available solutions for automating invoice-to-pay have targeted a few thousand large organizations with $1 billion or more in annual revenue. These expensive custom solutions are generally out of reach for most of the 5 million or so SMBs in the U.S. that could really benefit from automation, efficiency, and greater security. As access and automation problems are resolved, industry innovators will address the growing market demand for low-cost invoice-to-pay solutions.
Network Overload: There are some specialized accounting-software and payment-network solutions that aim to help SMBs make the switch to electronic payments. However, these solutions typically require enrollment in a network, which serves a limited number of payors. This can work well for SMBs with established relationships with big, frequent payors that all belong to the same network. But for those that receive consumer-based payments or occasional payments from a larger number of businesses, these solutions don’t deliver the expected return on investment because of the costs and inefficiencies involved with managing multiple disparate networks and fragmented payment processes. Fintechs are working with banks to connect disparate payment networks.
Defining a Path Forward
To eliminate the inefficiency of paper checks and make faster payments a reality for the 5 million SMBs that can benefit most from these initiatives, the industry is collectively working toward solutions that support smart, straight-through processing of payments that carry extensive remittance data.
The key starting points include creating interconnectivity among existing networks and extending innovations beyond payment networks. The faster-payment wave will catch up to the large number of SMBs looking to capitalize on cost savings, efficiency gains, and faster access to funds once the networks have been sufficiently expanded and automated to create economies of scale for the endpoints.
While faster-payment initiatives represent a huge advancement in the world of payments, there is work ahead to make these benefits available to a broader number of businesses. Luckily for SMBs, a prevailing number of players in the payments space are dedicating themselves to the effort. The dependence by SMBs on checks may be finally nearing an end.
—Blair Jeffery is chief operating officer at Noventis Inc., Houston.
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