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The power of payment networks

Banks are now at a pivotal point for incorporating digital payments to save time, strengthen the payee experience and reduce overall costs.

Nov 10, 2022 / Payments

Even as the world goes increasingly digital, financial institutions report that many B2B payments are still being made with printed checks. Possible reasons for this include the cost of implementing new payment solutions and the workload required for banks to update existing check processes.

Amid a push to increase efficiency and expand payment capabilities, banks are now at a pivotal point for incorporating automation and digital payments into their operations to save time, strengthen the payee experience and reduce overall costs.

Digitalizing check payments helps financial institutions reduce processing time and save money by eliminating the cost of mailing, printing and handling paper checks. Taking digitalization one step further, a payment network directory combines the ease of use and established processes of paper checks with the intelligent routing of a payee directory, digitally delivering payments and remittances to lockbox addresses.

The fundamental job of a payment network is to provide a way to send payments and the necessary remittance information to payees or recipients when the payer does not want to collect or store the payment information. The directory is a reference tool in a payments network that makes it easier for network participants to interact with one another.

Simply put, a directory combines data that you have with other data that the network knows about. A directory allows the network to take your instruction file, link it to the right payee and use what the network knows about that payee (a physical address or other personal identifiable information) to deliver an electronic payment.

A straightforward way of understanding payments is by dividing them into two categories: those based on relationships and those that aren’t. A relationship-based payment means that the bank already has information about the payees and has been making payments to them, so it’s easier to run a digital payment. But in a non-relationship-based payment, you haven’t yet established a relationship or gained that information. These types of non-relationship-based payments include one-off payments, less frequent payments or first-time payments. Financial institutions need a solution for both categories.

A directory allows you to use pieces of information to identify the payment delivery instructions needed to effectively deliver a payment. For example, you might have just a name and a physical address for someone. A good directory allows you to use that information to find the person in the directory and access their electronic address. You’re using the physical address to obtain an electronic address in the directory.

With a payment network, your customers have access to quicker settlements, lower costs and easy processing since payments are incorporated directly into their existing digital lockbox.

When it comes to selecting a network provider, financial institutions are likely to be most successful with a frictionless, low-cost option that requires only minimal changes to implement. A significant measure of digital-payment success is the degree to which the new system makes it easier for payers to direct their payment electronically.

The benefits of a payment network go beyond financial institutions to everyone involved in the payment transaction. Payees save valuable time when they only enroll once, using a directory that they know and trust with their information. Their payment experience is improved with broader access to that directory, preferred payment methods and boosted cash flow through efficient digital (and secure) electronic methods.

On the other hand, payers benefit from instant access to a broad database of businesses and consumers without the need to maintain contact and payment information in their internal systems. Payers can also save time and money through automation when they choose to pay digitally.

Finally, the ability to access affiliate directories within a payment network significantly increases the value of a financial institution’s services. These partnerships make it easier for payers to reach specific audiences, such as lockbox users or health care providers.

For financial institutions, payment networks yield value by connecting disparate accounts, payees and payment methods through a single channel. Participating in a digital lockbox network, for example, enables the bank’s business customers to access more B2B payees and reduce the cost and risks of physical checks. Collaborating on payment networks lets banks and credit unions deepen customer relationships and strengthen their receivables offerings.

Michael Reed is division president, payments, for Deluxe.

Relevant insights for financial services organizations, regardless of where they are in their digital journey, can be found in the BAI Executive Report, “Where does digital transformation go from here?”