Open banking, APIs enable payroll tech for temporary U.K. workers

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There are 31 million people in the U.K. workforce, and 5 million of them are freelance, which is significantly up from 2000, said John Whelan, CEO of U.K. payroll services and accounting software provider My Digital, which is working with Modulr to deliver automated payroll services for U.K. contract workers.

One in seven U.K. workers are now on flexible contracts, according to Accountancy Today. This has resulted in U.K. employers and recruitment agencies needing to pay increasingly large numbers of temporary workers on flexible contracts, and handle their taxation. They also have to process multiple timesheets and match payroll accounting entries with bank payments, which involves a lot of manual processes.

My Digital and Modulr aim to provide employers, accountants serving the contractor market, and recruitment agencies with a cloud-based payroll payment service. The fintechs have integrated their platforms using direct API connections, and use the U.K.’s Faster Payments scheme for instant salary payments.

“This is a very good example of how APIs and open banking infrastructure create platforms for collaborative innovation in payments, with each partner using their specialist capabilities to best serve their customer segment,” said David Bannister, a U.K.-based senior analyst for Aite Group specializing in wholesale banking. “Payroll has traditionally been linked to the monthly salaries of full-time employees, where set amounts are paid on set dates. This doesn’t fit well with the needs of part-time workers and contractors and with the growth of the gig economy and its unpredictable income streams.”

Bannister said that, with the addition of Faster Payments, the Modulr-My Digital service allows employers to make both ad hoc and regular payments easily and cost-effectively. In particular, it reduces the need for manual intervention for payments that aren’t in the weekly or monthly batch run.

Another category of client served by My Digital and Modulr is umbrella companies, specialist providers of payroll services which emerged in response to IR35, a U.K. government tax legislation introduced in 2000 to prevent tax avoidance through "disguised employment."

Disguised employees might leave their job on a Friday, returning as limited company contractors the following week and enjoying the tax benefits of incorporation while working in an identical manner to that of an "employee." Because of IR35, many large U.K. companies won’t deal with limited companies, and only work with contractors hired by umbrella companies.

Umbrella companies act as employers of contractors, signing contracts on their behalf and providing payroll services to them; they also provide payroll services to recruitment agencies. However, umbrella companies, like many other U.K. businesses, typically use manual payroll payment processes.

My Digital software automatically calculates the double entries in its clients’ payroll book-keeping systems and integrates their payroll files with their bank payments files. Whelan said My Digital currently calculates payroll involving over 250,000 accounting entries and 35,000 payments each week, at a value of over £1 billion a year.

Modulr is licensed as an Electronic Money Institution by the U.K.’s Financial Conduct Authority, enabling it to provide payment accounts with IBANs (international bank account numbers). My Digital clients using the Modulr platform are provided with a Modulr payments account, which they fund from their own bank account and use to pay their temporary staff. As payments occur via Faster Payments, funds arrive in employees’ bank accounts within 90 seconds

In 2019, U.K. financial regulators granted Modulr direct access to Faster Payments and BACS, the two main U.K. bank payments schemes. This means Modulr can process payments without going through a commercial bank.

Using My Digital's platform in combination with Modulr’s payments technology eliminates the need for customers to manually download payroll files from their accounting system, upload them to their bank, manually set up bank payments, and finally update their accounting system.

Instead, the joint solution submits a client’s payments information via API to their Modulr account, which ensures it matches the payroll calculations. Clients then log into their Modulr account, authorize the payroll payments, and transfer the necessary amount from their own bank account for the payroll.

“Using the Modulr API in My Digital has enabled us to streamline our processing and eliminate downloading and uploading of files,” said Joss Lowery, managing director of Bar 2 Contracting, a supplier of contractors to the U.K. construction sector. “This minimizes the risk of fraud, because bank files are no longer handled manually. There’s also the added benefit of a significant reduction in our per payment banking costs.”

Modulr and My Digital interface with clients’ bank accounts via open banking APIs. Once the payments have been made to employees, Modulr’s API sends confirmation to My Digital so it can keep track of who has been paid and when.

Tom Kelly, Modulr’s strategic accountancy, payroll, and employment services lead, said the new service is appropriate in the COVID-19 environment where accounts department and payroll staff work from home.

“An automated payments process doesn’t allow anyone to interfere with the amount of the payment or where the payment is going,” he said. “The alternative would require staff to download payroll files and email them around, which poses fraud risks.”

According to Kelly, the main benefit to companies using the joint Modulr-My Digital platform isn’t savings on bank payment fees but cost-savings and efficiencies from automating manual payroll processes. “Research we conducted in the U.K. revealed a lot of hidden costs around business payments, such as salaries for payroll staff, which our platform is designed to address,” he said.

According to a survey of 200 executives conducted in July and August 2020 across multiple industry sectors on behalf of Modulr, manual payroll processes cost U.K. businesses 12% of their operational expenditure. U.K. companies spend an average of £1.5 million a year on payroll costs, including hidden costs such as salaries, the survey found.

Another cost-saving from automating the payroll process and removing human intervention is reducing the risk of fraud such as payments to fictitious employees. “Our system provides an audit trail showing who created payroll entries and uploaded fictitious employee bank details,” said My Account's Whelan.

Modulr participates in the Confirmation of Payee scheme operated by U.K. payments systems operator Pay.UK, which enables payors to check if the payment details they’ve entered for a person or business match the details held by the recipient’s bank. This provides reassurance that payments are being sent to the right recipient and protects users against certain types of payment fraud such as malicious redirect payment fraud, also known as authorized push payment.

Modulr’s partnership with My Digital follows an alliance the payments company announced with U.K.-based accounting software vendor Sage in February 2019. The two companies launched a cloud-based service called Sage Salary and Supplier Payments, which enables SMEs and their accountants to manage and process salary and supplier payments directly within the Sage Accounts and Payroll products. The cloud-based service addresses the numerous U.K. businesses still manually processing accounts, invoices, and payroll, and is positioned as an alternative to traditional bank services for business payments and payroll.

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APIs U.K. Gig economy Payroll payments