In this episode, Clayton sits down with Erin McCune, a Partner at Glenbrook, to discuss her three-step plan to use request to pay ACH payments to replace checks and how it would benefit both banks and their small business customers.
Don't miss this episode with Erin McCune, listen below.
At Glenbrook, a strategy consulting firm based in San Francisco, we have clients all over the world and I focus a lot of my attention on business payments. Increasingly, the software providers who serve businesses, both on the receivables and payables side, are getting into the payments business. They’ve figured out that payments revenue is a nice compliment to software revenue, and often quite lucrative. So that has become an area of particular focus for Glenbrook in recent years.
In the world of business payments, the information about the payment is just as important as the money moving itself. Your access to that information, your ability to take that information and do something with it and add value based on it is predicated on having intimate participation in the business processes themselves. So that’s what we’re seeing in the industry at large right now.
What’s a problem you see in the industry today?
US consumers write very few checks today, they’ve evolved. However, businesses continue to rely on checks and small businesses, in particular, they are responsible for writing or receiving more than half of the checks that are created in the United States today.
So my big idea for bankers addresses this challenge. It’s a challenge for the bank, it’s a challenge for businesses and it’s a challenge for all of us in the industry that have been dedicated to digitizing transactions for the last several decades.
For the bankers, a real thorn in their side is that online banking bill payments, which is a legacy consumer product, gets used by small businesses. Small businesses will use online banking bill payments as their accounts payable solution.
They enter their payees and create payments using online banking bill pay. It feels digital but the problem is if the recipient is not a major biller (it’s not Comcast it, it’s not your local power utility) on the backend of that process it spits out a check. That solution, that feature of the small business checking account is free. But that check that got spit out of the backend of the digital bill payment process costs the bank money. So this is actually pretty painful for banks.
If you ran the bank, what would you be all in on?
I have a multi-step process to small business check replacement enlightenment.
1. I would auto-enrol my small business customers to receive online banking bill pay payments electronically.
The first thing I would do as a banker is redefining the notion of ‘biller’. I would auto-enrol my small business customers to receive online banking bill pay payments electronically. I’ve clearly got their credentials for ACH and I would work with Fiserv, Transactus, and everybody’s who’s involved in online banking bill pay and Mastercard RPPS which is sort of the master directory. I would get all of these businesses set up to receive an electronic transaction, in the event that another business or consumer for that matter attempts to pay them using online banking bill pay.
2. I would make ACH more accessible for online businesses.
The second thing I would do is to make ACH more accessible for online businesses. Not all financial institutions offer ACH origination by default to their business customers.
We can all receive an ACH, assuming we’ve all given our payment credentials as consumers or businesses to our counterparts, but the ability to originate an ACH is not a default feature of small business bank accounts.
There are reasons for that, there’s risk associated with ACH origination. I suggest to give them access to ACH but to make it so they can only push rather than send money. Give them an account they can only use to receive money, basically debit block an account and then give it to small businesses for ACH. They can say to all their counterparties, this is how you pay me, here’s an RTN and here’s an account number, this is the account I’m going to use to receive payments and it’s debit blocked, so it’s perfectly safe to send to everybody.
These are infrastructures and payment capabilities that exist today, there’s some policy issues and customer service/training elements to this but it’s not rocket science.
3. Move them in the direction of ultimate using the new real-time infrastructure.
The next element to this is to use this engagement with these small businesses and move them in the direction of ultimate using the new real-time infrastructure. Not because it’s fast but because it has some capabilities that are going to be really useful, in particular for small businesses.
Because they’re not necessarily creating super complex invoices, they don’t have to deal with a lot of line items, volume discounts, promotional activity and anxieties that plague large enterprises.
The idea is to then move these small businesses away from checks to ACH. Let’s transition them away from that old online banking bill pay product, to the new way that we’re going to do bill payments. That’s using these request to pay capabilities. Which is in effect, an e-bill or an e-invoice. The small business that wants to get paid would ask for the money, and in response, they would get a payment that was logically tied to the request for payment and it would be a push transaction via the new real-time rails.
What are the risks and why banks currently aren’t doing this?
One of the anxieties around ACH origination is that the way our ACH operators fundamentally works is bi-directional. If I have the ability to create an ACH, I can debit accounts. As long as I have people’s account information, I can originate an ACH to debit someone’s account and businesses have less time - by the rules - to identify issues with their accounts, so that’s part of the problem.
You can mitigate the funding risk. We have multiple batch cut-offs a day, so you can do your funding earlier, set a cut-off.
If we’re talking about small businesses making payments, I’m not worried about all the other things that they can do with a card. The base assumption is that these small businesses have optimized their cardible spending.
How far off are we from doing this?
We’re not there yet. We don’t have widespread, ubiquitous access to the clearinghouse, RTP platform just yet. We have a ways to go in normalizing the manner in which the various payment structures, the bank themselves and the processors are going to use the ISO 202022 formats.
It is not evenly commercialized by the banks that have gone live with RTP rails that the clearinghouse is offering. In many cases, a lot of the early thinking about request to pay has been in a traditional, consumer bill pay model, and so that’s where we’re going to see it first.
Offering request to pay to small businesses has not been the area of focus and if I were the bank I would be clamouring for this to solve the small business check problem. I would be working through Nacha, the clearinghouse, the folks that are responsible for bill payment and working with Intuit.
I would be thinking about everyone that touches small businesses and I would begin to rally them to say we are all in this together and we can’t do it alone, but collectively if we give a consistent message to small businesses about how this might work and if we are very aligned amongst ourselves as industry participants that focus on small businesses. If we can work through industry cooperation and the avenues we have available to us to say we’re going to use the ISO 202022 request to pay messaging in this way, for this use case. Then you could unlock value very effectively at a great scale.
Listen to the full episode on Apple Podcasts, Spotify, Google Podcasts, Amazon Podcasts or by visiting the If I Ran the Bank website.