August 24, 2007
Viewpoint: Online Business Payments in High Demand
By Jeremy Sokolic
Small businesses are underserved big time by their banks when it comes to payments.
Many financial companies have tried to repackage their consumer payment products to serve small-business customers but quickly learned that small-business owners behave differently when banking online.
The Bank Administration Institute's 2006 Small Business Payment Strategies study, which surveyed more than 1,000 businesses with annual revenue of $5 million to $10 million, confirms the disconnect between what small-business owners want and what banks think they want.
The survey found that small-business owners' interest in new technology-based payment products and services was high. About 80% of the businesses expressed strong interest in a technology-based electronic payment platform, and more than half said they would switch banks for the right products and services.
Small-business owners and their senior managers were most interested in online payments - from their customers, to their vendors, and to their employees.
Bank of America Corp. became the first U.S. banking company to offer electronic invoicing presentment and payment to its small-business customers through its online business suite. The Charlotte company reports that the service has been extremely successful.
Wells Fargo & Co. of San Francisco has 150,000 small-business clients making $45 million of online payments a month with its DirectPay service, which was launched last year.
Though these two top 10 institutions have launched solutions for small businesses in the past year, historically the availability of solutions has been scarce, and therefore the adoption by small businesses has been relatively low.
According to an Aite Group report, "Small-Business Banking: The Value Proposition for Banks to Offer Small-Business EIPP," 67% of small businesses polled expressed interest in the capability, but "until recently many small-business demands have either been ignored or misunderstood, especially by banks."
But the small-business usage data for the institutions that have responded to these demands demonstrates tremendous growth in adoption during a short period of time.
Recent statistics point to three key online functions that are critical to small businesses: online collections, electronic payments, and online payroll.
Online Collections
Small businesses wait an average of six to eight weeks to receive payment from their customers. A lucrative business banking tool, online payments also have the potential to ease cash flow - an ongoing challenge for small businesses - by speeding collection times while increasing accounting efficiency.
This sentiment is underscored by statistics. Over the last year the number of business invoices paid electronically has grown by 20% a month, significantly reducing payment delays.
In Aite Group's April 2006 survey of 278 U.S. small businesses, most of the respondents (67%) expressed interest in electronic invoicing. My firm's survey last year of small-business owners and senior executives found that more than half of all respondents reported medium or high interest in replacing their invoicing process with an online one.
Electronic Payments
Our survey found that 87% of small businesses handle accounts payable by writing checks, but most would rather make these payments online (72% reported a medium or high interest in doing so). Our data finds that small businesses are increasingly making payments online. (In fact, online payments made to vendors and employees by small businesses have increased 61% during the past 12 months.)
Sixty-seven percent of respondents to our survey reported making outbound payments via FedEx. And according to our statistics, 13% of small-business payments are next-day payments, which carry a fee of $10 for the bank.
Online Payroll
Forty-three percent of our survey respondents reported a high level of trust in their bank for payroll and invoicing services. That is more than three times the number who put a high level of trust in their credit card company (13%) and nearly twice as many as those who felt most comfortable using a payroll provider (25%).
More than half of the respondents (57%) reported a medium or high interest in managing payroll online.
Small-business owners appear to have a heightened concern about the security of their accounts and money transfers. According to the BAI survey, 69% of respondents were concerned with identity fraud, 59% were concerned with check fraud, and 52% were concerned with the potential for employee fraud. Over 70% said an identity management platform that safeguarded their business' identity and access to financial and other key accounts when conducting business electronically would be valuable.
In response to the bankers' need for a secure service, technology providers have integrated risk capabilities into their offerings, and some provide complete risk management tools and assumption. According to the BAI, as many as 83% of the executives interviewed reported a need for integrated risk management, and many have begun the integration process.
The case for offering online banking for small businesses is so well supported that institutions should not question if, but rather how, they should develop the services.
Whether you decide to buy or build, you must learn to walk before you can run. Start with the three offerings identified above, and expand later according to user demand. Small businesses are quick to adopt online banking tools once they are available. Implement now before another bank steals a high-margin line of business - and possibly your base of small-business customers - from under your nose.
Mr. Sokolic is the vice president of product marketing at CashEdge Inc., a New York online software vendor.