Yes, actually, they do. In a time where electronic payments have become commonplace everywhere from online purchases to using your cellphone’s e-wallet to pay it’s hard to believe that many companies still write and accept paper checks. For many small and medium sized businesses it’s difficult to take advantage of the benefits of the faster payments arena. But, consumer’s desire for instant gratification and efficiency has fueled financial technology start-ups that could help to propel these SMB’s into the Real-Time payments space.
Over half of the payments made business to business are still made by check.
Additionally, almost 60% of all payments made by small businesses are still made this way. Per the Association of Financial Professionals it costs on average $3 to send a paper check as payment, and it will cost the business around $1.57 for every check they receive and has to process. This can add up to tens of thousands annually depending on how many checks a business processes.
Over the years it has been difficult for smaller businesses to gain access to most of the faster payment solutions that are offered to larger corporations in a cost efficient manner. Your business bank account may have great bill pay solutions, but they typically will not be integrated with your ERP system or business accounting so you do not have the rich data you need to keep your records.
There are companies out there who offer customized services but they are generally very expensive so therefore are only truly an option for sizable organizations whose annual revenue is in the billions.
Most of the specialized accounting software or payment network solutions available only work with the biggest and most common payors. Because of this they don’t work for businesses that have a lot of accounts with various different smaller payors that may not even be on the same network. On top of that, the networks themselves are completely distinct so there is no cost efficient way to work with all of them. These types of barriers are what has kept smaller and medium sized businesses in the dark ages when it comes to real-time payment area.
But, all of this may be changing for the better in the near future thanks to Fintech.
Fintech refers to financial technology and the technological innovations in the financial sector that are created by fintech companies. Necessity drives innovation. In this day and age there is a heightened demand for enhanced user-friendly payment experiences. Businesses and consumers alike want quicker access to their money. For example, Direct Deposit has become the norm and proof of how employees have gotten used to being able to have access to their pay more immediately than receiving a paycheck and then having to make a deposit to make funds available to them. Financial technology start-ups like PayPal and Venmo have crafted ways for people to pay other people right away, with no fees.
It’s unlikely that a small business would begin to use Venmo to pay their vendors and other operating expenses, but they still have the same desire to be more efficient, have quicker access to their funds and enjoy the cost saving benefits that much of the rest of commerce enjoys through faster payments.
Banks are traditionally the nucleus of the financial sector and being overshadowed by new tech companies that are introducing breakthrough digital capabilities. Banks realize that they need to react earnestly and offer enhanced client solutions or risk losing customers. This has lead to an emerging collaboration between financial institutions and fintech companies to work together to create software that will intertwine these systems enabling them work better together and create a more automated environment.
We are also seeing new regulatory pressure from regulators across the globe.
The Federal Reserve Bank is leading efforts to accelerate payments by partnering with the National Automated Clearing House Association (NACHA) and fintech companies to collaborate on new payment system improvement initiatives.
Together they are creating a roadmap and incentives to accelerate real-time payments in the US as laid out in the Strategies for Improving the U.S. Payment System – January 2017 Progress Report.
This is an important collaboration since financial institutions understand the security standards and regulatory requirements allowing them to offer guidance while fintechs bring in-depth technology expertise and escalated speed of design and manufacture.
Working with fintech companies as well as accounting software providers will allow them to address the automation problems and work to create more cost efficient Invoice-to-pay solutions. In order for small businesses to benefit from these initiatives they will have to focus on solutions that will streamline the process. They will need to develop the language that will allow the existing networks to communicate with each other.
In addition, they will be developing processes able to create rich transaction and extensive remittance data. Non-revenue generating processes such as account receivable and financial reconciliation will need to be streamlined.
Better access to the faster payments arena will allow these smaller businesses to enhance their cash flow management, refine their accounting process, and improve ERP (enterprise resource planning) system automation as well as eliminate costly paper trails and reduce fraud activity.
We have already seen technology play a role in many industry wide improvements to standardization and centralization through the development of innovative solutions. Automation for these smaller businesses can mean a significant cost savings, enhanced efficiency as well as greater security.
Hopefully, through the collaboration between the banks and fintech companies, they will be able to tackle some of the barriers keeping much of the over five million SMB’s from benefiting from the current solutions.