There is no hotter segment in the industry today than commercial payments. It’s here we find deep pockets of inefficiency that can be addressed through digital payments, creating an economic powerhouse with the capability to generate highly profitable margins. The expanse of this market is also attractive, covering a wide range of potential customers from micro-business to small business to commercial and finally, large enterprise corporates.
This dynamic is fueling investments in emerging fintech solutions, but also breathing new life into established businesses. That’s certainly the case with U.S. Dataworks. Founded in 1997, the company focuses on providing treasury management services to the commercial market. Its deep expertise didn’t save it from facing challenging times in recent years, but under the leadership of David Peterson, who took over the company’s helm in February 2018, it is well-positioned to leverage its assets within a high-growth market. David is a true financial technologist, starting his career at the fabled Kirchman Corporation and diving into fintech entrepreneurship before that became a “thing”. He also sits on multiple boards including Citizens Community Bank (GA) and PaymentsFirst in addition to writing, speaking and teaching on financial technology and innovation topics.
Recently I had the opportunity to speak with David and spend some time talking about how enterprise solutions are integrated by financial institutions and whether he agrees that the time is right for organizations to think seriously about implementing these technologies. It was a really interesting hour and I know you’ll enjoy this summary of our discussion.
From your perspective, how would you define Integrated Receivables and do you believe banks understand this term in the same context?
I define integrated receivables as the ability to systemically integrate payment and remittance information that enables automated posting to accounts receivable. Companies operate in a very complex payment environment and the inefficiencies lie in the gap that exists between the payment and the remittance data. This is where automation is needed and companies want it in order to achieve efficient posting surety.
Now, from a banker’s perspective and even within the larger FI services treasury services, it's all about transactional services that the bank provides. They offer services like sweep accounts, wire transfers, and ACH files. But companies want to streamline their account receivables, not just make payments, so the banker has to think more about what problems a corporate has and how to enable the solving of those problems. The question then becomes, how does a bank think more strategically and less on a transactional basis?
What are the major differences you see between the needs of small businesses and the needs of large corporates when it comes to receivables?
I believe this is where so many organizations fail to understand the value of a true integrated receivables solution. Because the way to look at this market is to understand that it’s really about the volume and variety of payments a company gets, not the size of the business. To assess a company’s need, you start with its payment volume and then move into what types of payments they get. What payment type is being used to make these payments? Are they receiving checks, ACH card and EBPP? The more payment types, the more complex a company’s payment environment is, and subsequently, the more likely they are wasting time manually posting to accounts receivable.
In a payments eco-system where there are an increasing number of available payment types, why is ACH so durable and what are the competitive headwinds and tailwinds B2B ACH payments face?
ACH had some elements that make it durable: first, when it was launched in the1960's, there was a need to create a means by which every financial institution in the U.S. could transmit payments to one another using a set of standardized operational rules. And it was straightforward in its transaction options. So, its durability came from ubiquity and its simplicity. Also, even though faster payments is the new buzzword, ACH still works because it's not fast by design. Meaning, I know in advance that a debit is going to occur or a credit is going to occur, so the transaction participants can plan for funds settlement on a pre-determined date. There are valid applications for same-day ACH but I worry that if the ACH continues to push for real-time or near real-time processing, the efficiencies that make the U.S. ACH network the best most efficient payment system in the world could be lost.
ACH is facing some headwinds now. Overall, there is growth in total transactions, but some types, like check conversions are declining. But the biggest problem I see is that the growth of ACH origination is almost exclusively concentrated in the largest financial institutions. Banks that are under $2-3 billion in assets are greatly under-represented in ACH origination. This problem ties back to bankers not being able to talk to their clients strategically about ACH and why it makes sense for their business customers to use the bank for all their ACH needs. In other words, to position ACH as a strategic payment type, which is highly advantageous to the institution since it is also a very sticky service and tends to bind customers closely to their originating bank.
When I talk with community bankers, a common theme is that ACH is essentially given away, creating a disincentive to get more originators. If FIs are able to make the leap into strategic selling, they could charge meaningful but fair fees for ACH and therefore, create a new profit center. This in turn, creates an environment that can justify investing in enterprise-level payment solutions, which in turn, offers their banking customers as competitive a service set as they can find outside the institution. And that is true for all treasury services, ACH, Cash Management, Integrated Receivables, all of these are components of an FI’s focus on solving common business problems that enable it to become a strategic partner.
Whenever you have an especially active segment, it’s easy to get pulled into conversations with ill-defined terms and opinions based on assumptions. My key takeaway from this conversation was the fact that when one is talking about these enterprise-level payment solutions, the size of the enterprise is not an important factor. Rather, it’s the complexity of their payment environment. My thanks to U.S. Dataworks for making David available for this conversation and for his taking time out to add to the discussion on the opportunities present in the commercial payments market.