Despite offering innumerable benefits, electronic payment adoption continues to face challenges as organizations cling steadfastly to their tried and true paper-based processes.
Fintechs have worked and continue to work hard to change that, however. To learn more about the evolving role Fintechs are playing with electronic payment adoption, we sat down with NACHA’s Rob Unger, Senior Director and George Throckmorton, Managing Director, as well as with Bottomline Technologies’ Bill Wardwell, VP of Strategy and Business Development and Andrea Eaton, VP of Solutions Marketing.
SP: How would electronic payment adoption be different without all of the Fintech innovation that’s occurred in the last five years?
GEORGE: When we look at the challenge for electronic payment adoption over the past five or 10 years, we’ve seen a slow evolution moving away from checks and toward electronic transactions. But it wasn’t until we saw some of the Fintech organizations starting to really get into ERP integration and dealing with issues related to getting the detailed remittance information organizations need that we started to see a big shift in adoption towards electronic payments.
The greatest increase in adoption is of solutions targeted to the small-to-medium-sized business market. Although a lot was going on with corporates, many companies invested heavily in development, moving away from installed software into cloud environments so businesses didn’t have to manage the software themselves, which was something that had always been a challenge for them. They also integrated more features and functionality around electronic payments.
I remember my early days with Quicken and QuickBooks when there was a lot of focus on check writing. Back then, we even heard from QuickBooks users who told us that printing a check was so easy, they just didn’t see a need to move to electronic payments. We’ve since seen those attitudes shift and we’ve seen Fintechs really invest in electronic remittance and payments.
ROB: There are a lot of different integration opportunities throughout different systems such as ERPs and banking systems. Integration is a big thing the Fintechs have really helped to drive.
BILL: I think the Fintech angle also helped drive more recognition and need within the various networks’ schemes to be more open to partnering and allowing more direct integration to the networks. If you think about what The Clearing House is doing, what NACHA and Visa and Mastercard have done with technologies like APIs and developer centers where they let the tech companies access the networks in ways that are beneficial and then create innovation over the top of it, that’s really driven the adoption of all sorts of payment types beyond just the check. I think that’s influenced the ability for networks and financial technology companies to partner to make leveraging capabilities easier, whether that’s on the sending or receiving side.
GEORGE: We shouldn’t discount the impact of mobile on all adoption in the B2B space within the past five years. Mobility for corporates, where they can do all the things they need to do, such as approving payroll, from the airport or wherever they need to be, is so important.
ANDREA: To follow up on the concept of networks, the notion of having an established place you can go to make payments—where your trading partners are already accepting electronic payment formats and you also have the concept of a vendor match—means immediate lift in automation. Removing the need for AP departments to reach out to vendors and collect and verify payee bank account information is a big deal. Businesses really don’t want to have to think about payments and they don’t have the time to take the steps necessary to get vendors securely enrolled in electronic payments. Value added services like vendor enrollment are also a very important piece to help drive adoption.
GEORGE: That’s exactly right. Rob and I have watched payment networks grow pretty rapidly and I think that’s why. They have made it easy for organizations to take on electronic payments with the additional services they offer and that has had a tremendous impact on adoption.
BILL: I think that will be a critical component to the new technologies and the new payment rails being successful—the acceptance angle. Whether it’s B2B networks, whether it’s what we’ve seen happen in the card space where new technologies like Stripe and Square have brought card acceptance to the masses, acceptance will continue to be a lynch pin for any new product or service as well as the growth of existing networks.
SP: What are the areas of greatest potential for additional electronic adoption?
GEORGE: The obvious answer is, we’ve got to get to small businesses because that’s where a lot of the check writing is happening.
At NACHA, we also think about some of the verticals that present an opportunity. One area where there’s opportunity is in the nonprofit vertical. It’s pretty big in the U.S. and we’re actively working to try and eliminate paper for them because there’s still a lot of it.
Another vertical that still offers some potential is in Healthcare. It seems to have been forgotten about a little because the mandates have passed and people are assuming that all the paper has already been purged out of the system. While it’s true that a great deal of work has been done, our experience with providers and insurance companies is that’s there’s still a pretty big hill to climb.
ROB: Healthcare is definitely a vertical where there’s some improvement needed. There was the EFT mandate for insurers to reimburse providers electronically through the ACH Network but there are still a lot of issues around other healthcare payments.
Another thing our research has shown concerns which behaviors organizations need to exhibit to distinguish themselves as best-in-class. There are definitely certain practices that we’ve identified that differentiate organizations with high adoption rates for payments and cash application versus those that are low. We did one specific study with Credit Research Foundation and learned a number of interesting things. For example, companies with high adoption rates tended to negotiate payment type with their trading partners. They track payment metrics, set goals, use standards, and work closely with their banks and vendors. When you see more of these best practices adhered to, you almost always saw higher adoption rates.
BILL: Hearing the themes that George and Rob are talking about, it points to the fact that as you think about the business payments landscape, there’s a whole swath of activity that happens between a business and what could be viewed as non-traditional payees. So if you think about a business, they could be dispersing refunds to patients or handling other types of transactions where they also need to have a really secure, easy way to make payments to entities that might not be paid as frequently or with large dollar amounts. It’s a tremendous pain point for them. As we look forward, that’s going to be an area where the networks and the technology companies will continue to invest because while a lot of checks have been removed from the system, there’s still a large portion that will be used for these non-traditional trading partners that require a new type of approach and experience.
SP: What are the biggest unsolved B2B payments challenges for banks and corporates?
GEORGE: When you think about banks and electronic payments, whether its card or ACH or even wire transfers, it’s a pretty well-oiled machine. They know how to move money between their corporate clients and they know how to minimize risk. We don’t hear much about attacks where data is intercepted in transmission. All that is locked down and seems to be working as it should.
The issue for banks in growing B2B payments is still access. What I mean by that is the struggles that remain around regulation. Onboarding a new business is not an easy thing for a bank to do. It’s expensive and difficult to provide the level of access that clients want. For example, a business can walk into a bank branch and open an account and walk out with checks they can use to immediately begin transacting. That’s not the case to originate ACH. What if that business originates a lot of debits that come back? Should the organization be required to have a certain minimum amount in their accounts to cover that? How should banks manage risks like that? Plus you have regulators who need to ensure that businesses meet all of their requirements no matter what size the organization is. I think that’s the challenge. Small businesses that only initiate tens of thousands of dollars’ worth of payments shouldn’t be held up to the same level of scrutiny that a large corporate that originates millions or billions of dollars.
Tied to regulation in banking is also this kind of “de-risking” exercise where banks are trying to ensure that they have the right companies on the books. We’ve heard legitimate companies say that they’re having a hard time getting banked. The banks certainly want the revenue and they want the client relationship, but regulatory hurdles make it difficult. That’s an issue we’re trying to help banks with by educating regulators and banks about what they can and cannot do. They’re still the ones of course who will make the final decisions for their organizations. But getting access to electronic payment networks is not a slam dunk for banks to offer to corporate clients.
ROB: Another challenge banks face is on the payables side with AP integration. For example, we worked extensively on integrating ISO20022 standards with ACH and we developed a case study with Merck. Prior to them moving to a standard for submitting files to their bank, they were maintaining 400 different connection points, whether that had to deal with formats or methods for submitting low value/high value payments throughout the Treasury connections they had. That’s a lot of overhead. So to the point that they were able to bring that down to one payment initiation standard, they were able to save a lot of costs, increase a lot of efficiencies and gain a lot of insight and control over their payments types, etc.
GEORGE: As far as the challenges on the corporate side, a big concern is data security – what they’re holding, what their risks could be, etc. Remittance is also still a big challenge for them. Some organizations are doing it very well, those that have gotten to a 95 percent cash application hit rate. That does happen but it’s not the norm. We have a lot of businesses still saying that they need better remittance integration solutions. Then there’s the whole idea of routing – maintaining these huge supplier master lists of their trading partners, making sure that data is accurate, etc. I think we’ve seen a lot of progress over the past five to10 years with capabilities that fintechs and other providers have brought to market. The question now is, how do we get to the rest? What’s next?
ROB: When you think about AP, collecting vendor information, having to maintain it, making sure it’s correct and secure and not fraudulent, that’s vitally important for routing payments. It’s a huge task. Cash applications is another big challenge that continues to be a problem. In a recent study we conducted, 60 percent of respondents had less than 20 percent cash application hit rates. With hit rates that low, you know there’s a lot of overhead going into trying to match payments to invoices, closing invoices, etc. It’s a big waste of energy.
I also want to bring up an issue that NACHA views as particularly important, and that’s the fact that corporates don’t really understand their costs with respect to payments, whether it’s the payables or receivables side. We know from our research that the large majority of companies do not track any payment metrics. There’s really a lack of understanding of how to master payments. Sending, receiving, all the internal processes … corporates don’t seem to understand how getting those things wrong can really impact the bottom line. In fact, we just did a big educational campaign to help address this knowledge gap.
BILL: Over the past several years, a lot of focus has been on helping corporates, middle-market companies and small businesses initiate payments. But the cash application and receipt side of payments is just starting to get focus around how technology can help make those processes easier. This is one of the biggest emerging opportunities.
There’s a whole set of processes related to the sending and receiving of money that every organization has to deal with. We need to be able to service that customer end-to-end. Accomplishing that is where banks and tech companies can be really successful.