The business value of real-time payments is in how problems are solved and the opportunities that can be created using them. An OnFrontiers expert David Jackson in this blog talks about real, deployed, and live solutions where the business solves issues and part of that solution is real-time money movement.
Real-time movement is not the value in itself. This is the lesson that the banking industry and processors need to understand. Too many times, businesses, especially SMEs, are viewed as targets for product selling. What I’m seeing is the rare cases that a financial institution approaches business clients; they try to “sell” real-time payments. The business doesn’t know how to exploit the value. Instead, my partners and I have found hundreds of cases where value is created for the business, fees for real-time processing are created for the banking function, and deposits increase for participating banks.
I have started in focused cases in small/medium enterprises (SME). SMEs in 2018 represent over 30 million businesses and employ nearly 60 million workers. These are enterprises employing less than 500 employees while representing 99.9% of all businesses in the US. Largely ignored by big I/T, and misunderstood by the very large financial institutions, SMEs suffer from payments solutions designed for large, complex entities that don’t address focused business needs. Because of these inefficiencies and complexities, most payment options are also unaffordable to SMEs. The situation demonstrates why the US still sees stubbornly high check usage. And we see a high usage of cash or credit card for business payments when real-time or more immediate needs arise. All of these represent inefficiencies in business payments.
In building solutions for SMEs, my partners and I have focused on solving business issues for which there is tangible value to the business. In doing so, bank fees are paid, deposits are increased, check usage declines, and cash usage goes away. This article is to introduce just one way this has happened.
To retain employees, some businesses will still pay employees in cash, sometimes daily, and will very definitely use checks, especially for those who are underbanked, unbanked, or want to have closer access to cash. What we all know, but rarely discuss, is that the employee is left with inefficient choices.
If they receive cash, they have to find a means to transport it for deposit without being the target of thieves. And cash handling is very inefficient in business for a list of reasons we can all think about. If the person has no deposit account or needs to avoid the fees associated with low balances in a deposit account, the general process is to issue a check and have them cash that to avoid bank account fees. But those check cashing fees can range widely as percentages of the check itself. And now the employee is holding … cash … exposing the person to the theft again. But this time they have much less cash due to the fees paid to convert from the check to cash for use.
Here is another topic to consider. Many workers live paycheck-to-paycheck. Statistics range but we know it is over half of the US population which would have trouble meeting a surprise $500 expense. This means if the worker has, say a flat tire, and needs access to funds in the middle of a pay period for transportation to/from work … they are stuck asking family, friends, or an employer for an advance. And that employer now faces helping the employee at a cost to the business, or risk losing that employee and having to find a replacement.
The solution that exists today is the cashless movement to known deposit account, payroll cards, and other stores of cash without the actual movement of coin and currency. This is done in real-time on any day of the week and at any hour of the day, so the worker has instant access to those funds. It behaves just like it was cash but without the worry of money handling. And it represents no expense to the employer and can be done by the worker knowing what they can borrow against their own pay and how much it will cost with nothing hidden or unexpected.
Putting these ideas together is exactly what was done to provide a worker-oriented solution that allows for the option of instant payments of wages at the end of a shift, to a known DDA or payroll card with the ability to borrow against that during the pay period if an emergency arises for a known set fee. Nothing in the solution is based on percentage; it is all based on previously known fee structures that can be from zero (absorbed by the employer) to full payment by the worker. And, the nice thing is that the fee structure is significantly LOWER than any option that is generally in practice today. This solution drives down cash handling, drives down reporting and costs of payroll advances, drives down check cashing needs, and increases fees to the participating banks instead of those fees going to non-bank cash and check handling services.
Going into 2019, the solution will be able to perform daily payroll for all or part of a workforce of a business. And at a fee structure that is easily understood and not “hidden” or complex to follow with automated reporting. Best of all, none of this work is based on percent of payroll or other means that drive up expense to the business.
This is only one example of how real-time payments are being placed into a solution for real-world issues. And why fees can be collected when they are known, can be planned around, and demonstrate direct value. Because the banks generally want to see others pave the way, the successes that are in place today should fuel the ideas that will be backed by more common bank brands in the future. But the question is, will people care that a bank brand finally caught up to what is already working? Or will these SME ideas be lost to the early providers?
With the addition of true, real-time payments offerings in the US, we can see how to drop check and cash usage in a significant way. The issue … large I/T vendors and large commercial banks have no ability to drive these solutions to those SMEs. Most community banks would be thrilled to support these SMEs but have their own issues because of applications run outside of the bank making them subject to the provider more than the customers they serve. In my consulting to financial institutions on the topic, it always ends with the same point – banks think customers expect payments to be “free” and wait for the first movers to pave the way. What they miss is that the first movers have already moved and are taking deposits and fee money from the bank brands. And corporate clients are willing to pay for solutions to true business issues. They aren’t going to pay for real-time payments without that context. And the solution creation and selling exists create value in this industry transformation.