Online bill pay technology developed with small business users in mind is lacking. But new offerings could provide companies with greater functionality, while also helping financial institutions reduce risk and build stronger customer relationships.
Most small businesses have the same payments needs as retail consumers; they pay electric, utility and phone bills, as well as make credit card and other electronic payments just like individuals do. But while online bill pay has dramatically shaped the way consumers manage, track and pay their monthly bills, it's not had the same level of adoption and impact among small businesses.
The main reason that consumer adoption of online bill pay has so significantly outpaced small business adoption is that small businesses are currently not offered a bill payment system that meets all of their needs. Small businesses can leverage the basic components of consumer-facing bill pay technologies, but their uses extend far beyond the standard function of these consumer tools, and their needs vary widely based on the size of the business.
For example, a micromerchant may need to transfer funds to an external checking account and send out an occasional electronic invoice, while another small business needs to make payroll for its three employees electronically and send expedited payments to a vendor, rather than wiring funds to prepay for an order.
This gap between the needs of small businesses and the lack of availability of online billing and payments products that are developed specifically for small businesses has left the door wide open for nonfinancial companies to come in and take advantage of a large revenue opportunity being overlooked by traditional financial institutions. There are risks involved with small business bill payment services, but there are ways to mitigate them, and this market is proving to be quite lucrative for the firms that have chosen to enter it.
Businesses need to pay employees, quickly provide payment to vendors (who could be based anywhere), perform external transfers of funds between their own accounts, as well as frequently send invoices to customers and collect the payments for them.
Some business bill payment systems offer separate modules for these types of payments, which can generally be turned on a la carte, based on the needs of the individual business. And several of these types of transactions can be accomplished by moving funds via Automated Clearing House transfers.
Paying employees and vendors, as well as making other external transfers, are all transactions that lend themselves well to ACH because funds are delivered directly into recipients' bank accounts. However, the downside to sending payments by ACH is that even after a payment is executed, the funds may not be available in the sender's account to complete the transaction, exposing financial institutions to added risks.
Traditionally, giving ACH direct payment origination capabilities to small businesses without financial underwriting was not possible. It's an issue that needs to be address in order to alleviate these risks and drive wider adoption of bill pay among small businesses. One solution is to leverage a small business bill payment system that uses a "good funds" model. With this method, customers can send electronic payments with guaranteed funds, eliminating the ACH credit exposure risk. Without these risks, the online service can be offered to all small business customers, and ultimately drive higher adoption.
The other major impediment that should be addressed in a bill payment system is a simple one-click enrollment, which is a surefire way to drive higher adoption rates. Every click, phone call, step or signature is another impediment that will hinder enrollment.
ACH direct payments enable a small business to send payments directly without the cost and burden of mailing or wiring payments. Electronic invoicing also allows the business to efficiently send out invoices directly to their customers for services or products. These capabilities serve the majority of the needs of micro- and small-business accounts, which make up the majority of the accounts at an institution.
A bundled, small business bill pay package that provides businesses with these same capabilities will generate more revenue for financial institutions. While additional revenue is an obvious value-add, offering these specialized small business bill pay services will also significantly drive bill pay adoption among the institution's business customers.
Studies show that when a retail customer starts using their institution's bill pay services, their retention rate increases from 88% to 98%, and it is likely that a similar retention rate will exist among institutions' small business customers.
Small businesses are the largest underserved segment and provide the biggest revenue opportunity for financial institutions because they are willing to pay a fee for convenience. In today's economic environment, banks and credit unions are hungry for revenue opportunities and offering small business bill payment capabilities can transform an institution's services for small businesses, which ultimately leads to increased revenue and more satisfied customers.
Gary Daniel is the executive vice president and a board member of Allied Payment Network.