The case for why businesses need faster payments

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While the data shows that businesses still largely rely on traditional payment methods, many financial professionals believe faster payments boast huge benefits to business customers. Here’s how businesses could put them to good use.

By Colleen Morrison

Sometimes broad, transformational change begins as a whisper. Businesses have started a quiet murmur about real-time payments.

Today, 97% of businesses still use checks to pay their major business suppliers, according to the most recent Electronic Payments Survey Report from the Association for Financial Professionals (AFP), so real-time payments may not be at the top of their priority list. Yet, rumblings of change have begun. The same study notes that more than 60% believe faster payments will have a positive impact on their organizations, particularly when looking at business-to-business transactions.

“In terms of planned adoption, most businesses aren’t quite there yet,” says Deborah Matthews Phillips, ICBA’s senior vice president of payments and technology policy and ICBA Bancard’s senior vice president of industry relations. “But real-time payments systems in other geographies have proven that once the technology exists, adoption will follow. Community banks that want to be ahead of that trend are acting today.”

Case in point: $534 million-asset Royal Bank in Elroy, Wis., went live with The Clearing House’s Real-Time Payments (RTP) Network as a receive-only institution in July. The first transactions out of the gate were consumer-to-business payments via providers like PayPal and Square, but the community bank expects to see increased differentiated volume as it moves into sending payments in late 2020.

For Royal Bank, going live with RTP was always in the cards, which led to the institution becoming a beta testing bank for Jack Henry and Associates, its core provider.

“I had been following [real-time payments] for some time, knowing that customers and businesses want to get their money quicker,” says Jean Thompson, the community bank’s senior vice president of operations and IT. “We’re always on the front edge of technology, and I wanted to make sure that we were in line to move forward.”

A killer app?

Volume for more mature faster payments services continues to climb, but it only represents a minuscule fraction of yearly transactions. In fact, in 2019, more than three years after same-day ACH launched, its volume comprised just 250.4 million of the 24.7 billion annual ACH payments. While adoption and corresponding use of this kind of payment will increase over time, this trend is causing community banks to wonder: Is there an undiscovered killer app for faster payments?

“When I think about a small business, I think it might be that request for payment [RfP] could play a role,” says Kathy Strasser, executive vice president and chief operating officer at $1.6 billion-asset IncredibleBank in Wausau, Wis. “You could have the technology that says, ‘Here’s the request for payment,’ and all the receiver has to do is click, and the payment happens.”

Faster Payments and the Potential to Transform Consumer Bill Pay, a whitepaper from the U.S. Faster Payments Council and Glenbrook Partners, supports this hypothesis, pointing out that RfP functionality has the potential to shift the consumer bill payment infrastructure.

The whitepaper also extols the benefits of leveraging this approach, which would result in greater end-to-end payment transparency, increased satisfaction for consumers, and streamlined payment and exception processing for the biller. Overall, the instantaneous nature of real-time payments opens doors to new bill payment functionality.

Yet, experts agree that RfP is only one area where faster payments may add value. Use cases—including payroll, insurance reimbursements and just-in-time bill payments—emerge as possible avenues to increase use of a more immediate payments rail.

In addition, small businesses present a different flavor of functional need for real-time payments. For example, the good funds model that comes with real-time payments strengthens certainty around the payment. The instant visibility of the transaction and the memo line that can move with it ease the reconciliation process.

This year in particular, small businesses have placed a greater weight on cash flow, with 76% reporting shortages and 37% dipping into personal funds to cover them. This extra layer of urgency has led to a greater demand for more rapid payments; 42% of small businesses have even indicated they would switch providers for real-time settlement.

“Community banks can help keep communities vibrant by supporting healthy cash flow for their small businesses,” Phillips says. “It’s not too soon to engage in discussions with business clients to understand their needs. Some business needs can be met with Same Day ACH. Others may desire a more instant solution. With more than 50% of the U.S. DDAs accessible to RTP, community banks may consider enabling the ability to receive these payments. And with the planned launch of FedNow [the Federal Reserve’s planned real-time payments rail], community banks will have choices for leveraging faster payments to help small businesses succeed.”

And with history as a witness, community banks know they can expect the unexpected from their customers in response to the rollout of new products. Customers are certain to surprise with exactly how they use the functionality provided.

“We don’t have all of the use cases figured out,” Strasser says, “but customers are going to figure out ways to use faster payments.”

How to get started

So, how can an interested community bank prepare for real-time payments? Those who’ve been in the trenches say to start with the core provider, which serves as the connector into any new payments system.

“Make sure you have a strong relationship with your vendor, and you are learning early on about this, even if you don’t intend to implement right away,” says Dan Ravenscroft, president and CEO at Royal Bank. “Watch it closely, and when the timing is right, you can act on this and implement it within your systems.”

Thompson agrees. “Operationally, [our provider] made this very streamlined. It was an easy process. We partnered with our correspondent bank for settlement, and they also were anxious and willing to work through the process, and we turned it around very quickly. From start to finish, it was probably the quickest implementation of any I’ve ever worked with.”

Beyond opportunities with RTP, FedNow sits on the horizon. With estimates that it will be online in 2023 or 2024, another option will exist for community banks to ramp up their faster payments efforts. But given the build time for that system, experts caution against a purely wait-and-see approach.

No matter the rail or faster payments tactic community banks use, by developing a strategy and talking to providers today, they can prepare to capitalize on the momentum of faster payments.

“The time to stay on the sidelines has passed,” Phillips says. “Whether community banks are in planning mode or further down the line in strategy, customer expectations have changed. To remain relevant and competitive, they need to start down that faster payments path now.”

3 payroll challenges that faster payments solve

Faster payments may just be gaining traction, but there are already use cases in business payroll scenarios. They include:

1. Emergency payroll. When a payroll file deadline slips, it can be a headache for businesses. However, with same-day ACH and real-time payments online, that missed window can be remedied immediately—with more efficient outcomes and no employee issues.

“Payroll is the most important thing we do,” says Kathy Strasser, executive vice president and chief operating officer at IncredibleBank in Wausau, Wis. “If I pay my employees on Friday, and all of a sudden it’s Friday at 3:00 and something happened with payroll, and I can now do an RTP and it’s instant? That’s peace of mind.”

2. Gig workers or hourly employees. With new models of work emerging and companies like Uber offering “cash out” instant payment options, a new pay dynamic has developed—one that may create a recruiting advantage. “Businesses are getting creative about employment and trying to find people to work,” Strasser says. “If I can offer a different type of payroll where I pay you every day or pay you for the hours you’ve worked, that could be of interest.”

3. Just-in-time payroll. Cash flow reigns supreme as a chief consideration for businesses. With real-time payments, employers can release pay the exact moment employees anticipate it, not a moment sooner. This keeps the cash in their hands that much longer and supports greater transparency into cash position and resulting investment opportunities.

Colleen Morrison is a writer in Maryland.