The Opportunity in Business Payments

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Nonbank competitors challenge the way banks serve small business clients, who are always on the hunt for efficiency. Banks that address key pain points for those customers have a better shot at winning their business — and their loyalty, says Derik Sutton, chief marketing officer at Autobooks. Payments are a particular obstacle, he says. Financial institutions that can help their small business customers simplify accounts receivable and payable can lock in those relationships in 2023.

Topics include:

  • Competitive Pressure From Apps
  • Overcoming the Cash Flow Gap
  • The Advantage in Payments

FinXTech’s Need to Know: Accounts Payable

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When I think of bookkeeping, the first thing that comes to mind is a scene out of “Peaky Blinders:” a sharply dressed man pacing the floor with a heavy leather book, frantically crunching the numbers to figure out which accounts have an overdue balance and of how much.

Today, accounting software digitizes the majority of this reconciliation process. The problem with this? There are hundreds of software solutions a business can choose from — but more poignantly, software offered by a business’ bank seldom falls at the top of that list.

Many banks have historically been slow to service their small business customers. Account opening, applying for a loan or even getting business cards has traditionally forced business owners to head to a branch. The crucial need for bookkeeping software has turned businesses onto disruptors in the space: Intuit’s Quickbooks, Block’s Square software system, PayPal Holdings, etc. These incumbents, and others, are ready to pounce on a market that’s estimated to grow as big as $45.3 billion.

But banks have the chance to claim some of that market.

The Paycheck Protection Program showed small businesses that there were gaps fintechs couldn’t fill — ones that financial institutions could. Bank leaders looking to strengthen the relationship between their institution and their small business customers may want to start with accounts payable (AP) technology.

 If your bank doesn’t already offer small business customers an integrated AP software as a benefit of having a business account, it’s time to seriously consider it.

Some larger banks — U.S. Bancorp, Fifth Third Bancorp — have built in-house AP offerings for their commercial customers. Others, like my $4 billion bank in southeast Iowa, do not — and probably can’t even afford to consider building. Detroit-based Autobooks provides those in-between banks with a platform to help service the AP and invoicing needs of small businesses.

Autobooks lets banks offer its white-labeled software to their small-business customers to manage accounting, bill pay and invoicing from within the institution’s existing online banking system. This eliminates the need for businesses to go anywhere else to handle their AP, and keeps invoicing and payment data within the bank’s ecosystem. More data can lead to better insights, campaigns and products that generate revenue for the bank.

Autobooks receives payments via credit card, Automated Clearing House (ACH) transfers and lockbox transactions. Because small businesses are already working within the bank’s online system, received funds are automatically deposited directly into the business’ bank account.

Paymode-X from Bottomline Technologies is another solution that banks could use. Paymode-X is an electronic, business-to-business payments network that integrates with the existing cash management systems of a bank’s business customers. It eliminates manual initiation and tracking of electronic and ACH payments; its bi-directional connection to accounting systems helps automate reconciliation. Constant electronic monitoring of payments also better traces and tracks payments for banks.

Bottomline Technologies handles vendor outreach and enrollment into the system, and also helps banks identify opportunities to earn additional revenue through the rebates and discounts a vendor may offer to encourage paying electronically, paying early or buying in high volumes.

In addition to offering it to commercial customers, banks can also use Paymode-X for their internal AP needs.

Bill.com has also marked itself as a notable fintech partner. Bill.com Connect is an end-to-end payments management platform that commercial clients access through a bank’s online portal or mobile app. Platform features include a payments inbox to receive, manage and process invoices digitally, automatic forwarding of invoices to the appropriate party, digital signatures and customizable workflows to enable automated approvals.

Bill.com also touts a network of over three million businesses, which could be an attractive benefit for commercial clients looking to expand, partner and more simply get paid.

There is still time and space for banks to plant their flag in the small business space; fintech partners could be an attractive way to break that ground.

Autobooks, Bottomline Technologies and Bill.com are all vetted companies for FinXTech Connect, a curated directory of technology companies who strategically partner with financial institutions of all sizes. For more information about how to gain access to the directory, please email [email protected].

The Great Payments Opportunity

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payments-5-20-19.pngBanks have an opportunity to deepen relationships with their corporate customers facing payment challenges. One promising product could be integrated receivables solutions.

While most business-to-business payments are still done through paper check, electronic payments are growing rapidly. Paper checks remain at about 50 percent of business-to-business payments, according to the 2016 Electronic Payments Survey by the Association for Financial Professionals. But Automated Clearing House payments grew 9.4 percent in 2018, according to the National Automated Clearinghouse Association — a trend that is forcing businesses with high receivables volumes to look for ways to process electronic payments more efficiently.

Electronic payments create unique challenges for bank corporate customers. While the deposit is received electronically at the bank, the remittance and detailed payment information are typically sent separately in an email, document or spreadsheet. The corporate treasurer must manually connect, or re-associate, the remittance information to the deposit, which creates delays in crediting the customers’ account. As electronic ACH volumes increase, treasurers solve this problem by hiring more accounting staff to reconcile these payments.

Corporates also face added complexity from payment networks, which are becoming a more common way for large companies to pay their suppliers. While more efficient for the payer, this process requires treasury staff to log onto multiple payment network aggregation sites and download the remittance information. These downloaded files require manual re-association to the payment in order to credit the customer’s account, which requires adding more staff.

Corporates are also using mobile to accept field payments, like collecting payment on the delivery of goods or services, new customer orders or credit holds and collections. However, mobile payments again force treasurers to manually reconcile them. Moreover, most commercial banking mobile applications are designed for the treasurer of the business, with features such as balances, history and transfers. Collecting field payments needs to be configured so that field representative can simply collect the payments and remittance.

The corporate treasurer needs increased levels of automation to solve these challenges and problems. Traditional bank lockbox processing was designed for checks and relies on manual entry of the corporate’s payments and delivery of a reconciled file. This paper-based approach will be insufficient as more payments become electronic.

Treasurers should consider integrated receivables systems that match all payments types from all payment channels using artificial intelligence. A consolidated payment file updates the corporate’s enterprise resource planning system once these payments are processed. The integrated receivable solution then provides the corporate with a single archive of all their payments, rather than just a lockbox.

Right now, corporate customers are looking to financial technology firms for integrated receivable solutions because banks are moving too slowly. This disintermediates corporate customers from the banks they do business with. But almost 73 percent of corporate treasurers believe it is important or very important for their bank to provide integrated receivables, according to Aite.

This is an opportunity for bankers. The integrated receivable market offers many software solutions for banks so they can quickly ramp up and meet the needs of their corporate customers.

Bankers have a wide range of fintech partners to choose from for integrated receivables software and should look for one with expertise and knowledge of the corporate market. The solutions should leverage artificial intelligence and robotic process automation to process payments from any channel, include security with high availability and be easy for the bank and corporate customers to use.

Bridging The Gap Between Retail & Business Banking

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Speed, ease of use and convenience define the customer experience today for both retail and commercial clients. In this video, First Data’s Christian Ofner and Eric Smith explain what retail and commercial customers expect from banks today—and you might be surprised to find they have similar needs. They also share how banks should enhance the experience.

  • Strengthening the Retail Experience
  • Enhancing Commercial Clients’ Experience
  • Technologies Banks Should Consider
  • Evaluating Your Bank’s Digital Strategy

Four Tips for Choosing a Fintech Partner

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Over the last three years we’ve implemented five strategic partnerships with fintech companies in industries such as mobile payments, investments and marketplace lending. In doing so, we’ve developed a reputation of being a nimble company for fintechs to partner with, yet we remain very selective in who we decide to work with.

We are very often asked–in places like the board room, at conferences and at networking events, how we choose what fintech companies to work with. It is a great question and one that needs to be looked at from a few angles. If you’re a financial institution looking to potentially begin partnering with fintech companies, below are some criteria to consider when vetting an opportunity.

A Strategic Fit: How does this relationship fit into your strategic plan? Finding a fintech that helps advance your goals may sound obvious, but it can be easy to get caught up in the fintech excitement, so don’t allow the latest fad to influence your choice of a partner. Don’t lose sight of your vision and make sure your potential partners buy into it. It’s better to have a few, meaningful partnerships than a host of relationships that may inadvertently distract you from your goals and spread your resources too thin.

Cultural Alignment: Make sure to do some research on the fintech’s management team, board of directors and advisory board. How do they–and their company’s mission-fit with your organization’s mission? Do you trust their team? Our CEO, Mike Butler, likes to say that we have a culture of trying to do things, not trying to NOT doing things. That’s important to us, and we want to work with teams that think similarly. Spending time together in the early stages of the relationship will help set the stage for a solid partnership in the future.

A Strong Business Plan: Is the company financially sound? Is their vision viable? Back to earlier commentary on not getting too caught up in the latest technology trend, consider testing the business idea on someone who isn’t a banker, like a friend or family member. While you might think it’s a great idea, does it appeal to a consumer that is not in our industry? If the business plan passes muster, another issue to consider is the fintech’s long-term plan and possible exit strategy, and the impact it would have on your business if the relationship went away. It’s important to understand both the fintech’s short- and long-term business plans and how those will impact your bank’s balance sheet and income statement today and in the future.

Compliance Buy-In: Does the fintech team appreciate the importance of security? Do they appreciate the role of regulation in banking and finance? Do they understand they may need to modify their solution in light of certain regulations? We know fintechs can sometimes look at banks with impatience, feeling that we’re slow to move. And while some might move at a slower pace than other, we banks know that there are good reasons to proceed cautiously and that compliance isn’t a “nice to have” when it comes to dealing with other people’s money. We are never willing to compromise security and are sure to emphasize that early in the conversation. It’s critical to find a partner with a similar commitment.

We’re in an exciting time; the conversations on both the bank and fintech sides are increasing about collaboration rather than competition. Considering criteria like the above will help banks take advantage of new possibilities in a meaningful way.

Does Mobile Matter?

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5-1-15-Naomi.pngThere are five services via the smartphone that the top five banks in the country all offer: mobile banking, mobile bill pay, mobile check deposit, person-to-person payments, and ATM/branch locator. Does your bank have all five?

The question was posed at Bank Director’s Bank Board Growth and Innovation Conference in New Orleans on Wednesday. With more than 150 bank directors and officers in the room, only a handful raised their hands.

The speaker, Dave DeFazio, a partner at StrategyCorps, which provides deposit account and mobile phone products to banks, said all of these services are necessary. The nation’s population is increasingly in love with smartphones. If people lose their phone, they feel out of sorts, disconnected. It’s the first thing many people touch in the morning when they wake up. They use their smartphones when they’re driving (not a good idea). They check Facebook at work.

The end result is that banks that don’t provide easy-to-use, indispensable mobile apps will increasingly find themselves losing the battle for market share in the years ahead, DeFazio said.

Mobile service vendors are not the only ones who think mobile matters. There are now more mobile phones than landline phones in the United States.  Sixty percent of smartphone or tablet owners who switched financial institutions said mobile played an important or very important role in their decision to switch, according to a survey by the consulting firm AlixPartners.

It’s important not to confuse mobile services with online services for a laptop or desktop. Young people use their phones, and less frequently, their laptops. Your customers shouldn’t have to sign up for mobile banking services using an online portal for a laptop or desktop, he said.

“I have young people in my house who barely touch their laptops anymore,’’ DeFazio said. “Make it your mission to have an app people can’t live without.”

Millennials, the generation that tends to be in their late teens through early 30s, are distrustful of the biggest banks, but a greater percentage of them switch to big banks than older generations, according to the survey by AlixPartners. The reason? Millennials want digital services that are convenient and easy-to-use, and small banks don’t provide the same level of mobile services that big banks do, in general. Millennials aren’t as interested in going into a branch and speaking to a banker face to face as older generations are.

Not everyone in the crowd at the Bank Board Growth and Innovation Conference was impressed. One attendee questioned whether his bank should want to attract millennials. He pointed out that most of the more successful banks profiled at the conference focus on commercial customers. DeFazio answered that whatever its audience, a bank should pay attention to its mobile offerings.

“There are as many digital baby boomers as digital millennials,’’ he said. There are other reasons as well. Those most interested in using mobile services from their banks are the young and those with higher incomes. People who use mobile banking services tend to get a higher number of banking products from their bank than the average customer, according to AlixPartners.

Smaller banks may not have as many offerings as large banks, but some of them have leaders who don’t want their banks to fall behind. Brian Unruh, president and CEO of $600 million asset National Bank of Kansas City, in Overland Park, Kansas, says it’s almost overwhelming how many different technology companies are out there offering services to banks. But his bank is committed to offering mobile banking services. It recently switched Internet banking providers, and went with Austin, Texas-based Q2 Software, a smaller and more nimble company, he said. His bank recently hired a software developer and may hire a second, to develop mobile apps in-house.

Mobile services are definitely necessary, he said. “You have to get it to attract new customers,’’ he said.

Facebook is Hungry for Mobile Payments

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Facebook isn’t just satisfied with having more users than any other social media in the world. They’re craving their piece of the future of mobile payments. With the recent announcement to offer peer-to-peer payments through its Messenger app, Facebook is seeking to establish a deeper connection to users’ finances and to take a bite out of traditional financial transactions.

Facebook Payments is completely free and will first be available via Messenger to users in the U.S. only. The feature can be used on the desktop or within the Facebook Messenger app, which launched last year as a companion to the Facebook app. Once a Visa or MasterCard debit card is linked to the Facebook account, users can open a chat with a friend, tap the dollar sign icon, type in the dollar amount and press send. That money is deposited to the friend’s bank account within a few days.

It’s a similar process to the already extremely popular peer-to-peer payments app Venmo, owned by PayPal, which was one of the first apps to take a social network approach to mobile finance. With Venmo though, you see payment interactions between all of your friends in the app. It doesn’t show dollar amounts, but the captions, comments and likes between users tell a story of what those people are up to and spending money on, and with whom, which is a lot like what you discover scrolling through a Facebook News Feed.4-17-15-SC_venmo.png

The move to make Messenger a separate app from Facebook, disassociating it with the News Feed and adding more privacy, was strategic though. Rather than mixing your payments with everything else you find on Facebook — pictures and posts from friends, games, location check-ins, advertisements — it may make handing over your payment information more appetizing if it’s in a separate app within a private message.

Steve Davis, product manager of Facebook Payments, said in a TechCrunch interview that “conversations about money are already happening on Messenger,” such as people chatting about splitting the check for dinner, travel plans or purchasing concert tickets. “What we want to do is make it easy to finish the conversation in the same place you started. You don’t have to switch to another app,” says Davis.

Introducing peer-to-peer payments into its Messenger app was rumored for months before being officially announced in early March, one of the earliest signs being the hiring of the past PayPal president David Marcus to lead Messenger. That Facebook Payments announcement was soon followed by the Facebook F8 developer conference, where Business on Messenger was also unveiled, a feature that will soon allow customers to chat with merchants directly through Messenger about orders and shipping updates. Plus, Facebook announced software tools that make it easy for third party developers to integrate with Messenger—a move that eventually may lead to accepting payments from users via the Messenger app.

While Facebook may not be charging fees for payments in the beginning, there is potential to generate additional advertising revenue in the future, which already brought in over $3.5 billion during the fourth quarter of 2014. When Facebook gains access to users’ payment details and is able to track what people are buying, it’s likely they can also deliver even more highly targeted advertising.

Facebook Advertising started out small and inexpensive but has spent years nipping away at traditional advertising, until it’s now one of the most sought after methods of targeted advertising, and it is only gaining more traction. So while Facebook may be taking small bites of payments now, it has the potential to be one of the biggest financial disruptors yet, simply because of its reach to 1.19 billion mobile monthly active users, about half of those in the U.S., and already 500 million people using Messenger.

Who knows how Facebook’s introduction to finances will settle with people, but if peer-to-peer payments is only its first course, Facebook has a lot more to devour along its way to disrupting traditional financial relationships.

Mobile Payment Revenue Opportunities for Financial Institutions

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Mobile payments will create the most significant revenue opportunities of the decade for financial institutions.  It’s estimated that mobile payments will reach $20 billion in annual revenue opportunities for financial institutions. PwC’s Mike Heindl discusses the risks and opportunities for industry players.

Download Related PwC Publication:
PwC Viewpoint: Opportunity calls – An update on the evolution of mobile payments 

Digital Wallets: Crossing the Chasm Between Online and Offline Payments

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chasm.jpgDigital wallets are beginning to change how consumers shop and pay. However, the concept can be confusing and daunting. There are over 160 wallets in the market. Some refer to them as “digital wallets”, others as mobile or e-wallets. What should banks do? Should they launch their own wallet solutions? Should they partner? If so, with whom?

The retailing landscape is changing. The growing number of smartphones and ubiquitous connectivity has been pushing the retailing industry towards “online-offline convergence”. Consumers are increasingly using their mobile phones when shopping to read product reviews, compare prices, and sometimes order online, leaving the physical shop empty-handed. Equally, they might order something online via laptop, mobile or tablet, but go and pick it up from a local store. Online commerce, both e- and m-variety, is by far the fastest growing retail segment in many developed markets.

If traditional payment instruments, such as cards, were somewhat clunky but acceptable for e-commerce, they are poorly suited for m-commerce. No one wants to fumble around their mobile phones typing in 16-digit card numbers, shipping addresses, etc. Not surprisingly, both Visa and MasterCard saw the opportunity to develop their own digital wallet solutions, V.me by Visa and PayPass Wallet Services respectively, to help address this market. Other players, such as, for example, Isis have focused on bringing the mobile wallets to physical stores.

There are many different ways wallets can differentiate themselves from each other. However, fundamentally, there are two main types of wallets based on where the payment credentials are stored:

  1. Secure element-based wallets store the payment credentials (e.g. card details) in a secure area inside the phone known as secure element, and communicate those credentials to the physical point-of-sale (POS) terminal typically via Near Field Communication (NFC) technology. An example of such a wallet in the United States is the recently launched Isis.
  2. Cloud-based wallets store the payment credentials in a secure area on a remote server, or “in the cloud.” How those payment credentials are communicated to the merchant depends on the specific implementation. Perhaps the best known example of a cloud-based wallet is PayPal.

While online-offline convergence is rapidly becoming a reality for retailers, the same is not yet true for payments. It remains a challenge today to use online the payment credentials residing in the secure element-based wallet, and to use cloud-based credentials at the physical POS. For example, PayPal, a leader online, is working hard to get to the physical POS, while Visa and MasterCard are using their strength in the physical world to develop cloud-based digital wallets. Google Wallet is one notable example which does combine both secure element and cloud-based credentials, but given the transaction economics, it remains an exception to the rule.

There are a few solutions emerging as potential candidates to help bridge the divide between online and offline payments, however, most of them remain in relatively early stages of development. We believe that the payments industry will continue to try and solve this conundrum and we will see more solutions in this space emerging over the next 12 to18 months.

However, in the end, the desired online and offline ubiquity for any single wallet may prove to be illusionary. I do not share the view of those who think that there will be “one wallet to rule them all.” If anything, the mobile phone itself might become such a “wallet,” with consumers using multiple apps to shop and pay with payment credentials stored in multiple places.

In today’s fragmented world of digital wallets, our advice to banks would be to think twice before launching their own branded independent wallets. Some banks might be successful in doing so, but many others are likely to be better off by ensuring their payment credentials are available with the wallets most likely to win in the market. Supporting traditional scheme wallets, such as Visa’s V.me and MasterCard’s PayPass Wallet, should be a “no brainer” decision for most banks, but other specific market segment leaders, such as Isis or Google in the United States would also merit consideration. Banks should also remember that many already have a great asset in their mobile banking platforms and should focus on enhancing and extending them with rich value-added services, including payment propositions, such as P2P or access to card-based and other payment credentials.