Migrating Small Businesses to Electronic Payments
In this digital age, banks could (and should) do more to get small businesses to stop using paper checks, says panelists scheduled to appear at BAI Payments Connect 2014.
“Some businesses under $2 million are being ignored by the banks,” says Tommi Sue Homuth, Jobs Act coordinator at Grayson College’s small business development center and former commercial banker at Wells Fargo & Co. “There is a mindset that people don’t want to pay for services.”
Homuth will speak on March 11 at a panel discussion entitled “Breaking Up Is Hard to Do: Small Businesses’ Love Affair With Checks.” She will be joined by Megan Minich, head of online channels at Santa Clara, Calif.-based Silicon Valley Bank; BC Krishna, president and chief executive officer of Mineral Tree, a business payments company based in Cambridge, Mass.; and Shaundell Newsome, Owner of Sumnu Marketing in Henderson, Nev. Connie Theien, vice president of industry relations at Federal Reserve Financial Services, will moderate the discussion.
While check volume is on the decline, small businesses still rely heavily paying with paper. About 4.5 billion business-to-business (B2B) checks were written in 2012, down from six billion in 2009, representing a 9.2% compounded annual drop, according to a 2013 payments study by the Federal Reserve. These B2B paper checks represent about 90% of all B2B payments volume, a full decade after the Check Clearing for the 21st Century Act (Check 21) enabled imaged checks, according to Krishna.
Yet, small businesses still shun e-payments for various reasons. Wires are expensive. Credit and debit cards are not accepted by many companies, but even so, potential users have been scared off by interchange costs, which can be significant with high payments. And then there are the fees for check imaging.
Banks can allow their small business clients to originate payments through the Automated Clearing House (ACH), but this often is more trouble than it’s worth for small businesses, Krishna says. Instead of just printing a check, a small business has to create an ACH batch, reenter all the payment information from their own accounting software on the online banking website and create remittance information separately. “ACH is a very difficult thing to do,” Krishna says.
On the other hand, paying or receiving paper checks come with high hidden costs. Checks must be printed, physically matched to invoices and then mailed. In fact, paying by paper is more costly than by electronic means for buyers and sellers in B2B, according to a recent presentation by Silicon Valley Bank. For the seller, collecting costs $16.11, versus $6.38 for electronic, when taking into account printing and mailing the invoice, sending a payment reminder, remittance and cash management and archiving the transaction, according to the bank, using research from Billentis, an e-billing vendor, and Genpact, a business-process firm.
Those high costs have motivated vendors to better integrate checking and accounting so banks can offer a solution. Silicon Valley Bank, for example, uses software from Mineral Tree to automate online bill pay and link small business bank accounts with accounting software QuickBooks by Intuit. Branded “PayAbility,” the platform enables owners to view vendors, decide which ones to pay, how much to pay them and then schedule payments. The software also handles the back end requirements with ACH transactions and allows executives to approve payments remotely from an iPad or desktop computer.
“The software automates accounts payable by driving paper out of both invoices as well as payments,” Krishna says. “Banks can position themselves as an innovative, indispensable resource to their business customers by helping them end painful and costly paper-based processes.”
Many small businesses already work with what’s available on the market. For example, businesses with significant payment volumes can get acceptable interchange rates with processors. Newsome was motivated to switch to electronic payments after the financial crisis hit his marketing consulting business in early 2009. Sumnu lost 60% of its revenue, and those clients who stayed stretched out payments to as much as 150 days. So, Newsome shifted his strategy by setting up a retainer for clients and installing an e-payment system that automatically collects funds by accepting debit cards.
Sumnu accepts Visa and MasterCard, and a monthly volume of $20,000 or more allows Newsome to get a processing fee of about 1%. He says that paying $200 for every $20,000 is well worth the cost, considering that it eliminates trips his assistant has to make to the bank and all the effort with collections. Newsome estimates he saves “thousands of dollars” a month with the system. “We came to the realization that we needed the cash flow,” he says. “By having a recurring payment, we know when to expect that cash and we are not on the phone wasting time trying to chase down checks.”
In fact, Krishna says debit card use by small businesses could be at a tipping point. The Durbin Amendment has capped debit interchange at 21 cents a transaction plus 5 basis points and a subsequent ruling in U.S. District Court has called for the limit to be lower, with a decision pending later this spring in U.S. Court of Appeals. “The cost structure of debit cards now allow us to think about an uncapped ceiling on debit card payments,” Krishna says. “This is a real potential driver.”
Fraud and theft are other drivers for businesses to go electronic. Account takeover of small business checking accounts has become commonplace and checks issued for payroll open up companies to potential fraud abuse. “Every time you issue a check, somebody has all the information about your account to make a check,” Homuth says.
By contrast, sending payments through Silicon Valley Bank’s PayAbility offers users an additional layer of security by using safeguards to monitor account takeover attempts and other cyber intrusions. “When you add it all up, what is the cost versus the benefit?” Homuth asks. “Small businesses are operating on limited resources, so they need these services the most.”
That said, many banks need to expand their offerings she adds. Small businesses will seek out electronic payments once they understand the efficiencies involved and will switch banks if they have to, Homuth says.
Mr. Keenan is a contributing writer to BAI Banking Strategies based in Los Angeles.