Digital Payments

02 October 2022 - Ryan Pearcy

It has taken a while but the Open Banking legislation from 2018 has started to have the large impact on business technology that many predicted it would achieve. This has led to several new “players” in the payables space with innovate technology, enabling end-to-end expense management and solving a huge problem for businesses in making supplier payments.

The situation

As a small business owner with a growing business, relinquishing control of the payable process is high risk. Cash flow is normally tight and making the right payments at the right time is key. Traditional payments are also clunky, requiring staff members to be added to bank accounts and payment information to be copied and pasted or re-typed from your finance system to your bank. This poses a huge risk of both error and fraud that is normally impossible to reverse. Trust is key, and so payments are something that is last to be outsourced to the team.

The traditional method

Payments are made either from collating manual documents together before they are typed into a bank and then into a finance system, or from an export from the finance system into a bank. Unless you are running the entire process yourself both of these options require tiered access to the bank system that enable approvals and manual files. What is possible will depend on the bank you are with and may cost extra to enable it. The tiered access requires some comfort over control, but the manual files are easily overridden and can create risk of error or fraud. Add to that the time it takes to run this on a regular basis and the whole area has been rife to be overhauled.

Virtual accounts – a history

Technology companies originally tried to solve this pain by creating intermediary digital bank accounts that they had control over. They could build into cloud based finance systems to pull payables information and enable a central digital approvals that streamlined this process and enabled control and security over supplier bank details, creating comfort that key individuals weren’t able to make changes.

Telleroo, Modulr and Credec were pioneers in this space for small businesses, also enabling accountants and bookkeepers to provide an outsourced finance function that included supplier payments, something that previously had to remain with the business.

The big negative of this process is that money had to be transferred into the intermediary bank account on demand or in advance, separate from the approval process, creating additional steps for the business owner. Xero released “Pay with Wise” as part of its system, but this manual top-up prevented a huge rollout of what was an exciting release at the time.

The final negative was that these accounts were not generally covered by the Financial Services Compensation Scheme which made traditional business owners reluctant to adopt them, preferring to stay with what they knew to be safe, even if it was painful.

Open Banking

Cue Open Banking and the Payments Services Directive 2 which forced banks to open their architecture to securely share financial information. Many banks decided to go beyond the minimum requirements and enable payments to be triggered in bulk. In steps Comma, a payables solution focussed purely on utilising cloud finance systems and the open banking payment rails to provide streamlined payments. By linking the systems together by tech, creation of payment runs can be done simply and payments and be approved and paid via a single click on the phone.

Comma have been driving the banks forward to open up their technology but this has been a slow process and has meant they have been unable to provide a consistent service. What is possible can vary drastically depending on who you bank with and as the banks change their back end systems, operations can drop creating frustrations. This has led them to create a “through and through” account which is a simplified virtual account where money never stays put but solves the issue of the restrictions for certain banks.

Other suppliers such as Libeo and Modulr have also expanded into this space, creating open banking options for their services for banks that are compatible.

The lack of transaction costs for suppliers such as Comma mean they can provide their service for a fixed fee, which is also a relief for those businesses fed up with costs based on percentages.

Payroll payments

Modulr has had embedded payments into some payroll platforms for a while, such as Sage, enabling both businesses and payroll providers to offer a more streamlined approach for a complex and high-stress area. Payroll payments need to be made in a short time window and with highly sensitive data that those normally trusted with running payments unable to see. With Modulr moving into the open banking space and Comma releasing Pay with Comma initially with Keypay, payroll payments are becoming far easier and payroll providers are able to add a service for their clients that they never could before.

Order through to payment

Expense management was the first area to explode, with dozens of options in the market to compliment the huge uptake in cloud finance systems. Purchase Orders, delivery notes and purchase invoices could be created, collected and approved, all in a digitally slick way. But payments were an area that few could provide a great option for. With the boom in the payables management space, expense management solutions are partnering or building options that enable a full end to end solution. Still in its infancy, these solutions are expensive and rare but more options will appear.

What should I use?

Selecting a system that works for the size and intricacies of the business can be challenging but picking the right system can have a significant impact on the risk management and administration burden of the business.

There is no one solution that trumps another, and many are designed for certain sectors or industries or sizes of business. Seeking the advice of an expert can transform how you and your team work for the better. Get in touch with one of the SB Digital team for a chat about taking the first steps towards cloud-based financial management.

What will happen next

Well first the expansion in options will continue to grow. There has been significant investment in tech companies in this space and a huge desire for businesses to solve this pain. We will see new businesses, new ideas and those in the market expanding their offering. Systems that link customers and suppliers together and likely to crop up next, utilising Electronic Data Interchanges (EDI) to share invoices digitally and enables payments as one slick process.

But as a boom happens, a crash is always expected. Admittedly a crash is a bit far fetched, but there are too many players in this space and consolidation is highly likely. With consolidation comes risk for users. Will their software exist in the future, or will it be bought, absorbed and scrapped. It is too early to say who will be the big winners or losers but to ensure continuity of operations it is better to be prepared. Keeping up to date with changes is a way to do this and the SB Digital Newsletter aims to do just that. For more current news check out the Digi-Tools in Accrual World podcast run by the SB Digital director Ryan Pearcy.


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