Tailoring Payments for Small Business Clients

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Financial service firms tend to focus their products and services on large companies, ignoring the small and medium-sized businesses (SMBs) that make up 99.9% of all businesses in the US.

These businesses are significant players in the economy, driving growth and operating across all industries. While their impact is huge, the financial needs of SMBs are different from big businesses. There is a growing demand for financial institutions to deliver customized and cost-effective digital solutions for these businesses and their customers. A financial institution that succeeds in meeting SMB needs will increase customer retention, attract new clients and strengthen their reputation.

Many financial institutions serve SMB customers through business banking, savings accounts or business loans. Partnering with a vendor to offer payment processing solutions is a low-risk way that banks can provide added value for their business customers, without incurring additional costs. A payment solutions partner can provide end-to-end service — from sales to account management — while the financial institution focuses on its core business. When a customer has multiple services from one institution, that relationship elevates from a transactional one to a trusted, long-term partnership.

Additionally, a merchant services partner may enhance a financial institution’s reputation in areas such as digital technology or diversity, equity and inclusion (DEI). For example, a financial institution may highlight its own interest in supporting diverse businesses by choosing a merchant services processor with similar values, attracting new clients seeking a more progressive approach.

One of the biggest challenges faced by SMBs is keeping up with rapid technological changes to meet their own customers’ demands. This is especially true in the payment space, where many customers prefer contactless payment methods. Contactless transactions in the U.S. increased by 150% between 2019 and 2020 and is only expected to grow. Customers want convenience, speed, and choice when they buy. Even as a consumer or business client of an SMB, they are still used to the level of service they get from large companies. Barriers at the checkout level can impact customer satisfaction and loyalty. SMBs risk losing clients if there is an easier way to do business just down the street or on a competitor’s website. Customers may also expect merchants to accept mobile wallets, offer buy now, pay later or point-of-sale lending options and accept cryptocurrency as payment. Unfortunately, SMBs often lack the resources — such as capital, infrastructure, technology and staff — to offer the latest payment options to their customers and run their operations in the most efficient manner.

But a payment partnership allows banks to offer a slew of services to help business customers optimize their time, save money and improve customer satisfaction. For example, SMBs can benefit from an all-in-one, point-of-sale system that accepts multiple payment types, such as contactless, and includes features such as digital invoicing, inventory management, online ordering, gift cards, staffing, reporting and more. It can also give business customers access to real-time payments, seven days a week, that can improve their cash flow efficiency and avoid cash-flow lags — a major concern for many SMBs.

Small and medium businesses represent an untapped market for many financial institutions. If a financial institution starts to offer tailored payment solutions and services that help SMBs overcome their unique challenges, they can unlock significant, new opportunities in the small business segment.

In the Search for Efficiency, Rethink Cash Management

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Despite the rise in digital payment options, cash persists as a payment method in the United States. Between October 2019 and October 2021, circulating currency in the United States increased by $423 billion, according to the Federal Reserve Bank of San Francisco. Also, cash accounted for 20% of all payments and continues to be a primary option for a substantial portion of the population.

Even as cash continues to be a vital payment tool, handling it is a headache for banks. Branch managers manually count, log and balance cash, which leaves banks vulnerable to safety issues and cash leakages due to criminal activity or miscalculations. Bankers must evaluate their cash management processes to save time and money.

What is often overlooked, or taken for granted in the cash management process, is the time it takes a bank to move, count and manage cash. Every time cash moves — from the vault to the teller, teller to teller, or teller to vault — it must be counted and balanced. If even $1 is missing, staff can spend hours counting and recounting.

Cash handling costs are rising and are estimated to account for 5% to 10% of bank costs, even as cash use declines, according to McKinsey & Co. Why? Cash distribution, maintenance and processing require expensive manual labor. Depending on the institution, a single branch will need to handle hundreds of transactions and teller-to-teller exchanges a day and, of course, opening and closing counts of cash. From cash vault to end-of-day tally, the process relies on the precision and accuracy of each count. Say your branch has a counting error. This single error from manual labor can add significant time to your staff’s day. Additionally, manual cash handling is vulnerable to counterfeit currency, tracking errors and theft.

Banks are examining every expense for greater efficiencies as the economic environment potentially turns. It’s critical that they assess the technology budget and balance sheet to ensure their investments go as far as possible. There are a proliferation of cash counting and handling processes that banks implement, but these tend to only oversee one part of the overall cash management process. Banks also often grapple with outdated technology, which is vulnerable to outages or cannot automate simple tasks.

Harnessing technology can eliminate redundancies, automate manual processes, reduce labor expenses and streamline workflows. These changes can also improve staff retention at the crucial frontline level, a huge issue for banks. In a competitive employment environment, eliminating inefficiencies and creating a positive work environment is a priority for banks looking to retain staff. Rather than counting cash by hand or dealing with an unexpected recycler outage, bank executives can leverage solutions that enable their tellers, frontline branch staff, and regional managers to worry less about cash management and focus more on customer experience.

Economic uncertainty means banks need to make tough cost-cutting decisions while thinking about investing in operational efficiency and aligning innovation. To meet employee needs, banks should transform each level of branch operations, especially in the cost centers, such as cash handling. Reimagining branch operations and improving the employee experience and bank operations through automated technologies can help unlock new workflows and solutions.

Fortunately, strategic investments in high-return technology with advanced capabilities can offer immediate benefits. Automating labor-intensive processes and increasing cash visibility at enables banks to save time, leverage scarce resources and focus on creating unique customer experiences, while eliminating pain points and redundant work. As banks further automate mundane tasks, they can optimize staffing levels and maximize profits while serving customers better. By implementing specialized technology to count, dispense and manage cash, banks can improve their accuracy and reduce the costs associated with manual cash handling — ensuring that staff are using both the procedures and technology that best meets clients’ needs with the greatest efficiency.

How Banks Can Grab a Slice of the $11 Trillion B2B Pie

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A team of economists at the Federal Reserve has tracked noncash payment trends in the U.S. since 2001, including the number and value of transactions across all major payment methods.

Leveraging their December 2021 Payments Study update, Visa’s Business Solutions team estimates there were 2.9 billion B2B checks for an estimated $11.8 trillion. This represents 26% of all checks paid by U.S. depository institutions and 57% of paid check dollar value, based on the Fed’s 2018 Check Sample Survey. Given the ongoing decline in check use by U.S. consumers, we suspect the B2B share is likely even higher today.

Despite decades of decline in check use, check displacement is still a massive growth opportunity for electronic payments, particularly for commercial card. For context, commercial card rails process an estimated $500 billion in business spend — equivalent to just 4% percent of the value of B2B checks, according to McKinsey & Co.’s U.S. Payments Map estimating 2020 U.S. commercial card spend at $485 billion.

Readers are likely familiar with the traditional challenges to commercial card acceptance by suppliers: card processing fees, manual processing of virtual card payments, accounts receivable reconciliation, among others. These challenges are real, but payments innovators are making strides on these daily. For example, let’s consider the inertia by corporate buyers who write all these checks. According to the Fed’s last Check Sample Survey, 82% of B2B checks were for $2,500 or less; 55% were for $500 or less.

These low-value transactions can be paid via a commercial card, right? Unfortunately, too few buyers feel motivated to pursue these opportunities. Often the return on investment feels too low to track down all the data about where these checks are going and then convince suppliers to accept card. Generating a consolidated spend file may require tapping into multiple systems with disparate data structures. In the end, fewer than half of a company’s suppliers are likely to accept commercial cards. It’s no wonder decision makers don’t jump at the chance when bank salespeople ask for a spend file simply to determine if there’s an opportunity worth pursuing.

A New Operating Model
But what if that weren’t the model? What if we took the burden of finding opportunities away from the corporate client entirely? What if a card salesperson showed up at the door with a credible opportunity already in hand? There’s one model that client banks can tap into that does just that.

Each of the 2.9 billion B2B checks paid every year is paid by a financial institution. Most financial institutions (or their processors) use optical character recognition (OCR) in the daily processing of those checks. By repurposing OCR data from checks, banks can identify which suppliers their corporate customers are paying that already accept commercial card, and then pinpointing which business bank customers have the greatest opportunity to shift check spend with those suppliers to card. These banks’ salespeople no longer begin a client conversation by asking for a spend file. Instead, they present a credible analysis, based on the client’s own payments volume processed by the bank.

What used to be a data mining project for the client becomes a simple, data-driven decision about how to move forward. Banks are in a unique position to approach business customers about these opportunities. Without the deposit relationship, commercial card salespeople must use the old model.

If it sounds too good to be true, it’s not. But it does take work. Some could make the argument that the easy growth in commercial card is over; that commercial card issuers are in a race to the bottom. We are more optimistic than that. We believe there is a tremendous, untapped opportunity out there: an $11.8 trillion pie in the form of 2.9 billion B2B checks.

The Intersection of Paying and Playing in Online Video Gaming

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Video gaming is a vast, fast-growing global industry touching various sectors, including payments.

The global revenue for 2021 was estimated at $175.8 billion, which, represents a compound annual growth rate of 8.7% between 2020 and 2024, according to a Boston Consulting Group analysis. This is a clear opportunity for banks to take advantage of growing card usage and enhance consumer engagement in online video gaming.

The global community of online gamers is set to exceed 3 billion people in 2022, nearly a third of the world’s population, according to the 2021 Global Games Market Report. That’s a lot of goals scored, hazards avoided and quests completed. This community now includes consumers from nearly all demographic segments; with that comes a closer correlation between paying and playing in the online universe.

Visa Consulting & Analytics has outlined the key characteristics of the online video gaming market, including its customer base, revenue models, integration of payments, pain points and opportunities for today’s payments businesses.

Understanding the Value Chain, Revenue Models
In online gaming, there are generally four primary stakeholders and four broad gamer segments, shown below.

There are multiple revenue models in online gaming — all of which can be lucrative for stakeholders. One such revenue model is in-game micro-transactions, which has become a core driver of transaction volume across platforms. Although there is overlap among them, gaming revenue models can generally be codified as follows:

  • Buy-to-play: The gamer buys the game and can play indefinitely. However, the game continues to be supported by the developer or publisher (such as providing downloadable content), which the gamer may need to pay to access.
  • Free-to-play: The gamer does not need to purchase the title to play, but access to some features and content may require a subscription or micro-transactions.
  • Freemium games: These are free to start but are limited in terms of how far the gamer can progress before they must purchase the game.
  • Subscription: The game is typically free to play to entice new gamers, but they must pay a regular subscription to maintain access to all parts of a game.
  • Ad-supported games: These are typically free to play, with the developer or publisher earning revenue from advertisements that the gamer needs to watch periodically to continue playing.
  • Play-to-earn games: These typically incorporate blockchain elements such as non-fungible tokens, or NFTs. Gamers are incentivized to use NFTs to improve their value or to create new NFTs. Gamers may need to pay an upfront fee to participate, but are paid for their contribution to new and/or upgraded NFTs.

How Payments Fit Into Gaming
With the appearance of new revenue models, the gaming ecosystem has become increasingly more complex, with many parties and a myriad of payment flows. There’s business-to-business (B2B) and consumer-to-business (C2B); with the emergence of play-to-earn gaming, there’s also the potential for business-to-consumer (B2C) and consumer-to-consumer (C2C).

The predominance of digital delivery and the rapid growth of freemium models and in-game purchases means there is considerable potential for publishers and marketplaces to influence “top-of-wallet” payment behaviors. This is due to the closed-loop nature of the marketing channels on the platforms, which limits a financial institution’s ability to influence payment behaviors.

How to Modernize Your Payments Strategy

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2020 induced widespread digital transformation in response to the coronavirus pandemic.

In payments, we saw the rise of options for contactless payments, digital wallets, P2P transfers and more. The challenge for banks was that consumers often did not have to go through their bank to use any of these solutions.

The developments in the payment space over the past year make one thing clear: Banks should keep up with the newest available consumer technology to retain and attract customers, and modernize their digital payments strategy for future success as well.

Consumer demand remains strong, and the experience companies provide matters more than ever. After leaning so heavily on digital solutions for the past year and a half, they expect everything to be easy and instant. It is now relatively easy to find payment apps that provide real-time payments, P2P, bill pay and more. Banks that don’t offer similar solutions runs the risk of losing market share to non-banks that do.

Customers are weighing their banking experience against their experience with fintech apps as well as  any other experience they have when shopping online, ordering food or taking a rideshare. Any good customer experience — no matter the industry — is one that the bank must now measure up to.

Take artificial intelligence (AI) and machine learning, for example. While not every financial institution is using AI and machine learning today, retailers like Amazon.com use AI and machine learning to predict consumer behavior, knowing what they need and when they will need it. They estimate when consumers will repurchase a product or try something new. A bank that is not doing the same is falling behind in providing the experiences that many consumers are growing accustomed to.

Where to Start?
By leveraging technologies like AI and machine learning, banks can use the tremendous wealth of customer data at their disposal to provide a more personalized experience. This is a tremendous advantage over non-bank competitors that do not have access to the same consumer information. It can seem like a challenge to effectively put customer data to use, but there are a few steps banks should take to make the change a successful one.

First, a bank must set clear goals for what it wants to achieve when updating its payment platform or adding a technology like AI and machine learning. For most, the goal will be to provide a better experience, but it is helpful to dig even deeper than that. Ask: Do we want better customer satisfaction? More engagement with the platform? More bill pay users? More account-to-account (A2A) transactions? More P2P transactions? Be as specific as possible with goals, as these form the roadmap for the remainder of the process.

Once goals are set, find the partner that can help achieve those goals. Look for a partner that shares the bank’s vision for payments and has the right skill sets and capabilities to achieve those goals. Finding the right vendor partner will ensure the bank is successful in the end.

Clear goals and a like-minded vendor ensure that the tech a bank uses can help meet its goals. Just as Amazon uses AI and machine learning to predict a consumers’ purchases or recommend a product, banks can predict customers’ payment habits or make proactive payment recommendations to manage their financial health. The use cases of AI and machine learning are versatile, and can serve many different purposes to help banks reach their unique goals.

Finally, do not lose sight of the future. It is easy for banks to get concerned with what will make them successful now, but keep looking ahead. Work with your vendor to think about where both the industry and your bank are going. Be sure to choose solutions that can grow and change with the bank and its customers for years to come, rather than focusing too heavily on the here and now.

Change can be intimidating, but following the right steps to implement a tool like AI will ensure success by creating a better customer experience. Revitalizing your bank’s digital payment strategy is a process, but done right, the stronger digital relationships you build with your customers will be worth it.

Can Banks Afford to Be Short-Sighted With Real-Time Payments?

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The industry’s payments ecosystem is developing rapidly in response to increasing consumer demand for faster, smarter payments.

The need for real-time payments was accelerated by the global pandemic — but most banks are moving far too cautiously to respond to market demand, whether that is P2P, B2B, B2C or other segments. Currently, The Clearing House’s RTP® network is the only available real-time payments platform, while the Federal Reserve’s instant payments service, FedNow℠, is in a pilot phase with plans to launch in 2023. FedNow will equip financial institutions of all sizes with the ability to facilitate secure and efficient real-time payments round the clock.

For most banks, operating on core legacy technology has created a payments infrastructure that is heavy-handed, disjointed, costly and difficult to maintain, with no support for future innovation. Most banks, fearing the cost and effort of modernization, have settled for managing multiple payment networks that connect across disparate systems and require the support of numerous vendors. With the introduction of real-time payments, can these new payment rails afford to be a mere addendum to the already-byzantine payment architecture of banks?

Answering “yes” begets more questions. How resilient will the new offering be on the old infrastructure? Can banks afford to be myopic and treat real-time payments as a postscript? Are short-sighted payment transformations elastic enough to accommodate other innovations, like the Central Bank Digital Currency (CBDC) that are in the offing?

Preparation starts with an overhauling of payments infrastructure. If banks are to place themselves at a vantage point, with a commanding perspective into the future of payments, they should consider the following as part of the roadmap to payments modernization:

  1. From transactions to experience. Payments are no longer merely functional transactions; they are expected to provide qualitative attributes like experience, speed and intelligence. Retail and business customers increasingly demand frictionless and intuitive real-time payments, requiring banks to refurbish the payment experiences delivered to clients.
  2. The significance of payment data. The ISO20022 data standard for payments is heavier and richer compared to legacy payments data, and is expected to be the global norm for all payments by 2025. Banks are under increasing pressure to comply, with players like SWIFT already migrating to this format and more than 70 countries already using ISO20022. Payment solutions that can create intuitive insights from centralized data stored in ISO20022 format, while also being able to convert, enrich and validate legacy messaging into ISO20022, are essential. Banks can benefit from innovative services like B2B invoices and supply chain finance, as Request for Payment overlay services is a key messaging capability for customers of real-time payments.
  3. Interoperability of payment systems. The interoperability between payment systems will be an imperative, especially with the ecosystem of different payment rails that banks have to support. Interoperable payment rails call for intelligent routing, insulating the payer and payee from the “how” of payment orchestration, and paving the way for more operational efficiency. Operating costs account for more than 68% of bank payment revenues; centralizing the management of multiple payment networks through an interoperable payment hub allows bankers to minimize these costs and improve their bottom lines.
  4. Streamlining payment operations. Work stream silos lead to fragmented, inefficient and redundant payment operations, including duplicated fraud and compliance elements. This is where payment hubs can add value by streamlining payment operations through a single, consolidated operation for all payment types. Payment hubs are a great precursor for subsequent modernization: intelligent payment hubs can handle omnichannel payments, as well as different payment types like ACH, Fedwire, RTP and FedNow in the future. This takes care of the entire payment lifecycle: initiation, authorization, clearing, settlement and returns.
  5. Future-proofing payment systems. Following the path of trendsetters, banks have to equip themselves with future-proof solutions that can adapt to real-time domestic and cross-border payment systems processing multiple currencies. As open-banking trends gain traction, it is important to consider that the winds of change will eventually find payments, too. It is imperative that banks are cloud based and API driven, so they can innovate while being future-ready.

The opportunity cost of not offering real-time payments is becoming more evident for banks, as they wait for their core providers to enable real-time payments. Calls for banks to modernize their payments infrastructure are swelling to a roar; now is the time for banks to define their payments modernization strategy and begin to act.

Adding Value With Merchant Services

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Leading with merchant services can help a bank acquire new customers, according to a recent Accenture study commissioned by Fiserv. On average, these accounts are more profitable: Compared to other business accounts, merchant account holders generate 2.6 times more revenue. In this video, Michael Rogers of Fiserv explains how these accounts help banks grow and offers considerations for how bank leaders can enrich this valuable product.

  • Leading With Payments
  • Building Relationships
  • Strengthening Your Offering

To access Fiserv’s study, “From Revenue to Retention: Growing Your Deposits With Merchant Services,” click HERE.

Designing an Experience that Empowers Businesses to Succeed

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With more businesses choosing fintechs and neo-banks to address their financial needs, banks must innovate quickly and stay up-to-date with the latest business banking trends to get ahead of the competition.

In fact, 62% of businesses say that their business banking accounts offer no more features or benefits than their personal accounts. Fintechs have seized on this opportunity. Banks are struggling to keep up with the more than 140 firms competing to help business customers like yours manage their finances.

Narmi interviewed businesses to identify what their current business banking experience is like, and what additional features they would like to have. To help banks better understand what makes a great business banking experience, we’ve put together Designing a Banking Experience that Empowers Businesses to Succeed, a free online resource free for bank executives.

A banking platform built with business owners in mind will help them focus on what matters most — running a successful company. In turn, banks will be able to grow accounts, drive business deposits and get ahead of fintech competitors encroaching on their market share.

Understanding How Businesses Bank
No business is the same. Each has different financial needs and a way of operating. Narmi chose to talk with a range of business owners via video chat, including an early-stage startup, a dog-walking service, a bakery, a design agency and a CPA firm.

Each business used a variety of banks, including Wells Fargo & Co., JPMorgan Chase & Co., SVB Financial Group, Bank of America Corp. and more.

A few of the questions we asked:

  1. How is your current business banking experience?
  2. Which tools do you most frequently use to help your business run smoothly?
  3. How often do you log in?
  4. What are the permissions like on your business banking platform?
  5. What features do you wish your business banking platform could provide?

We conducted more than 20 hour-long interviews with the goal of better understanding how business owners use their bank: what they liked and disliked about their banking experience, how they would want to assign access to other employees, and explore possible new features.

We learned that businesses tended to choose a financial institution on three factors: familiarity and ease, an understanding of what they do and competitive loan offers. Business owners shared with us how their experience with the Small Business Administration’s Paycheck Protection Program factored into their decision about where they currently bank.

They tended to log into their accounts between once a day and once a week and oscillated between their phone and computers; the more transactions they had, the more frequently they checked their accounts. They appreciated when their institution offered a clean and intuitive user experience.

We also uncovered:

  • How do businesses handle their payments.
  • What do businesses think of their current banking features.
  • How do business owners want to manage permissions.

Want to read more? Download a free copy of Designing a Banking Experience that Empowers Businesses to Succeed.

Staying Relevant In The Payments Revolution

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A tremendous level of disruption is occurring in the payments space today — and few banks have a strategy to combat this threat, according to Michael Carter, executive vice president at Strategic Resource Management. In this video, he explains how smart home technology like Alexa and Google Home is changing how consumers interact with their financial institutions. He also outlines three tactics for banks seeking to achieve top of wallet status.

  • Today’s Payments Landscape
  • Technologies to Watch
  • How to Keep Wallet Share
  • Threats to Community Banks

 

Defending Commercial Deposits From Emerging Risks

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The competition for commercial deposits has become fiercer in the new decade.

The rate of noninterest deposits growth has been declining over the last three years, according to quarterly reports from the Federal Deposit Insurance Corp. The percentage of noninterest deposits to total deposits has also dropped over 250 basis points since 2016. This comes as the cost of funding earning assets continues to rise, creating pressure on banks’ net interest margins.  

At the same time, corporate customers are facing changes in their receipt of payments. Emerging payment trends are shifting payers from paper-based payments to other methods and avenues. Checks and paper-based payments — historically the most popular method — continue to decline as payers’ preferred payment method. Electronic payments have grown year-over-year by 9.4%.

Newer payment channels include mobile, point of presentment and payment portals. However, these new payment channels can increase the cost of processing electronic payments: 88% of these payments must be manually re-keyed by the accounting staff, according to one study. This inefficiency in manually processing payments increases costs and often leads to customer service issues.

Treasurers and senior corporate managers want automated solutions to handle increased electronic payment trends. Historically, banks have served their corporate customers for years with wholesale and retail lockbox services. But many legacy lockbox services are designed for paper-based payments, which are outdated and cannot handle electronic payments. Research shows that these corporate customers are turning to fintechs to solve their new payment processing challenges. Payments were the No. 1 threat that risked moving to fintechs, according to a 2017 Global Survey from PricewaterhouseCoopers.

Corporate customers are dissatisfied with their current process and are looking to use technology to modernize, future-proof, and upgrade their accounts receivable process. The top five needs of today’s treasurer include: enterprise resource planning (ERP) integration, automated payment matching, support for all payment channels, consolidated reporting and a single historical archive of their payments. 

Integrated receivables have three primary elements: payment matching, ERP integration and a single reporting archive. Automation matches payments from all channels using artificial intelligence and robotic process automation to eliminate the manual keying process. The use of flexible business rules allows the corporate to tailor their operation to meet their needs and increase automated payments over time. A consolidated payment file updates the corporates’ ERP system after completing the payment reconciliation process. Finally, integrated receivable provides a single source of all payment data, including analytics and reporting. An integrated receivables platform eliminates many disparate processes (most manual, some automated) that plague most businesses today. In fact, in one recent survey, almost 60% of treasurers were dissatisfied with their company’s current level of AR automation.

Banks can play a pivotal role in the new payment world by partnering with a fintech. Fintechs have been building platforms to serve the more-complex needs of corporate treasury, but pose a threat to the banks’ corporate customers. A corporate treasurer using a fintech for integrated receivables ultimately disintermediates the bank and now has the flexibility to choose where to place their depository and borrowing relationships. 

The good news is that the treasurer of your corporate customer would prefer to do business with their bank. According to Aite Research, 73% of treasurers believe their bank should offer integrated receivables, with 31% believing the bank will provide these services over the next five years. Moreover, 54% of the treasurers surveyed have planned investments to update their AR platform in the next few years. 

Many fintechs offer integrated receivables today, with new entrants coming to market every year. But bankers need to review the background and experience of their fintech partner. Banks should look for partners with expertise and programs that will enable the bank’s success. Banks should also be wary of providers that compete directly against them in the corporate market. Partnering with the right fintech provides your bank with a valuable service that your corporate customers need today, and future-proofs your treasury function for new and emerging payment channels. Most importantly, integrated receivables will allow your bank to continue retaining and attracting corporate deposits.