The Future of FinTech: How Digital Disbursements can Impact Your Bottom-Line
Having spent the majority of my career in the startup world, Mark Cuban’s advice that “sales cure all,” has been (perhaps too) deeply ingrained in my psyche. After all, you don’t have a business unless you have revenue, and nothing else really matters until you do (a wonderful line, by the way, for any product folks out there looking to have their next big revenue-generating idea prioritized).
It would make sense, then, that the digitization of payments that has created more than its fair share of unicorns (see Stripe, Adyen, Square), while sweeping across all major industries over the last ten years, has focused almost entirely on payment acceptance. From restaurants to SMBs, accepting payments in 2021 is as easy as signing up for an e-commerce platform or one of the many popular payment gateways.
But while sales may make the business world go round, organizations must continue to mature in other areas to stay competitive and efficient. As businesses look to optimize their management of capital and cash flow in 2022, moving money out as effectively as you move money in becomes critical, from attracting and retaining talent to keeping suppliers happy to compensating customers, all while reducing operational overhead.
It’s Time to Digitally Transform Your Outbound Payments
What are your options for effectively moving money out of your business and into the hands of your workforce, customers, or vendors? First and foremost, stop writing checks. In the great words of Jerry Lee Lewis in the 2005 biopic “Walk the Line,” don’t think about writing checks, don’t sing about writing checks, and “don’t think about singing about” writing checks. Or something like that. Besides the fact that checks became popularized in the US around the same time as Benjamin Franklin invented the lightning rod, they’re also costing you too much money.
According to the Wall Street Journal, the average check can cost between $4 and $20 when you factor in postage, operational overhead, and reconciliation.
Pair that with the fact that as of 2020, 70% of all consumers are using P2P payment services (PayPal, Venmo, Zelle, etc.) to pay friends and family, as opposed to cash or checks, and the writing would seem to be on the wall. That is, that outbound payments are going digital and that both consumer/employee and business appetite for receiving checks is on the steady decline.
Effectively Shifting to Digital Disbursements
Let’s talk about the available strategies for businesses looking to migrate to digital disbursements in 2022. In this series, we’ll explore the opportunities and potential pitfalls surrounding ACH, prepaid cards, OCT (direct to debit), and RTP. Most importantly, we’ll discuss how businesses can operationalize these methods of disbursement, from off-the-shelf APIs & platforms to building tools in-house. And we’ll focus on why a business might choose one method over another — ultimately coming down to who you’re paying and the nature of the disbursement. Specifically, businesses looking to implement digital outbound payments should first consider whether they will be paying employees and/or customers (B2C) or other businesses (B2B).
Business to Consumer (B2C) Disbursements
There are a myriad of reasons a business might choose to disburse funds to an employee (traditional payroll aside) or a consumer/customer. For employees, you might consider worker tips, 1099 payouts, rewards/bonuses, expense reimbursement, or termination requiring same-day payments. Consumer disbursements include insurance claims, rebates, compensation for service outages, loan disbursements, or gaming winnings payouts, to name a few.
Automated Clearing House (ACH) for B2C Disbursements
Ah, good ol’ ACH. Started in the 1970s by bankers working in check processing automation, the ACH network enables businesses to instruct a bank, or Originating Depository Financial Institution (ODFI for those looking to recommend the next droid name to Lucas Films), to send money to an account holder of a (you probably didn’t guess it) Receiving Depository Financial Institution (RDFI). My goal here isn’t to explain how an ACH transaction works, but there are a few details that are important to understand when considering ACH for your business.
First, standard ACH transactions do not settle for multiple days, and there are numerous factors that can impact settlement timeframes. If all goes well and you manage to submit a NACHA batch file to your ODFI with no issues, you’re looking at 3-4 business days. If all does not go well (e.g. you incorrectly format your file), your transaction will be rejected by your ODFI. Much worse, if your file makes it past your ODFI but is held up by the RDFI (e.g. incorrect account/routing number), you’re looking at multiple days before you even determine there is an issue, and multiple days to handle and settle any disputes.
There are ways to mitigate ACH routing issues that are effectively a must-have for any institution looking to implement native ACH capability for B2C disbursements. A business may choose to implement a micro-deposit strategy in which a recipient “verifies” their bank account and routing number by confirming the precise amounts of a few small deposits to their account. This, as you can imagine, can be a lengthy process, as the recipient must wait for the micro-deposit ACH transaction to post to their account before you can prompt them to verify the values. Once verified, you’re then looking at another few days to send the recipient their first payment to a verified account. Enter a number of companies who have capitalized on this gap, such as Plaid or MX, that provide a fairly simplified, real-time bank account verification flow for consumers (not without taking their fee, of course).
However, this does not eliminate the complexities of processing ACH transactions on your own. Fortunately, there are also a number of companies offering APIs to handle ACH transactions, such as Dwolla, who incidentally integrates directly with Plaid to provide a simplified ACH offering.
Why ACH for B2C Disbursements?
In short, if your use case does not require depository speed, and you don’t mind asking your recipient to verify their bank account and routing number, ACH could be a viable solution. Other considerations include average disbursement dollar values.
Nacha members approved a measure to increase the per-payment maximum from the current $100,000 to $1 million effective March 18, 2022.
While cost-effective from a transactional perspective, businesses looking to implement ACH should consider costs around dispute management and the additional costs of implementing an automated account verification tool (pretty much a must-have for a decent consumer experience). While a standard ACH transaction originated by your FI might be dirt cheap, operationalizing a scalable ACH disbursements process for outbound payments is certainly not as simple or cost-effective.
But wait, what about same-day ACH!? Same-day ACH is, unfortunately, a misnomer that would be more aptly named “Same-day ACH if you submit your batch by 1:45PT” — but that isn’t very catchy. From a disbursements perspective, this makes consumer messaging a challenge — you would be much safer to communicate that funds will be available the next day, regardless of the time of submission in order to avoid confusion and manage expectations. There is also an additional fee for same-day ACH which will differ from provider to provider.
Join us next time as we round out our B2C disbursements discussion with OCT and Prepaid cards before we shift our focus to B2B disbursement options.