New technology has made amazing advances in business processes, but there's one common pain point that so many companies we talk to still share: printing and mailing paper checks.
With the increasing number of automated payment options in the market, why are companies still paying by such labor-intensive and error-prone methods? Without being too dramatic, the answer lies in how the business world has evolved, and how payments have gotten left behind.
Technology changes over the past 20 years have revolutionized most if not all business processes. These changes have led to certain fundamental changes such as the increase in freelancers taking market share from established service companies i.e. "The Freelancer Economy."
It's easy for someone to set up shop with just a website, Internet connection, and some mobile devices. In fact, mobile devices have even revolutionized previously immutable, hard infrastructure, such as cash registers.
Unfortunately, the ways to make business-to-business payments have not experienced a similar transformation. This is because the banking institutions serving most individual clients and small- to mid-size businesses haven't had to change how they service business-to-business payments. Account opening and management has essentially moved to online and mobile channels, but actual transactions are still accomplished by check, wire, ACH, or card.
Historically, banks have argued most new payment methods are inherently less safe and secure, but new service models are challenging this argument in completely different ways. In the case of large enterprises, there has been a slow but steady change to "internal" or proprietary services, such as commercial cards, to replace check and wire transactions for things like supplier payments.
As more small businesses and individuals receive payments from other businesses, companies will need to establish new payment platforms to eliminate inefficiencies, while keeping with regulations and compliance, and provide reliable payments across this new group of recipients. With new payment platforms established it will require more active record keeping and auditing for payments leaving the bank and going to entities outside the network. One of the best ways banks can address this need is to move away from the backtesting and audit model and deliver automated payments solutions that collect, validate, and manage all this data up front.
You don't have to look any further than a your average small- to medium-sized business' accounting ledger to see how automated payments will benefit businesses. By simply eliminating the burden of individual bank tracking for each payment issued, automated payment services can help these businesses get around the bureaucracy of banks and reward them with better cashflow. The downstream benefit for banks is better transaction data, controls, and ultimately a network to which they can cross-sell products.
Marketplace companies like Uber, Elance, and Airbnb, who accept payments from customers on behalf of their suppliers, have become a new intermediary in business payments. As a result, marketplace companies have an expanding investment and personnel dedicated to payment operations to ensure the people serving their customers (drivers, freelancers, and homeowners) receive their payments reliably.
Now imagine these companies before their multi-billion dollar valuations and you have the situation for hundreds of marketplace companies that are striving to be the next big one. The need for streamlined and automated payments from their customers at the point-of-sale, directly to their supplier and vendor relationships, is absolute.
In the near future, marketplaces should look to automated payment tools to improve liquidity and cashflow, in the same way that retailers look at inventory optimization tools to cut down product latency. This would lead to greater transparency, better predictive modeling, and even less work at tax time. Many bankers think we need to sacrifice security to get to B2B payment automation, but if we adopt new platforms we don't need to sacrifice security to obtain speed and efficiency.
Jay Bhattacharya is CEO and co-founder of Zipmark.