Despite the best efforts of many to help the world be rid of them once and for all, the check remains a surprisingly difficult method of payment to completely kill off. Nobody actually likes them, or really has anything positive to say about them in public, but they’ve shown a surprising amount of staying power in various corners of the U.S. economy.
Pushing small and medium-sized merchants away from checks – and toward digital payment methods by firms like Square and Stripe – has been a prominent and popular front in the war on paper payments.
Disbursements, Ingo Money’s EVP and chief product officer Lisa McFarland told Karen Webster, has been another. On some fronts, there’s been a lot of progress made – particularly in areas like direct deposit, which has largely killed the paycheck. According to NACHA reports, 82 percent of workers make use of direct deposit, and 87 percent report being satisfied with the service.
That’s a big win and a big satisfaction bump, but across the board, the picture isn’t as good. On the whole, consumers only report being satisfied with the disbursements process about half the time – which isn’t much of a surprise, McFarland noted.
There’s a lot wrong with that picture, she noted – particularly when those disbursements are loan funds that a consumer or SMB is actually waiting on and needs.
But it’s also an experience that may be set for extinction sooner than most would think.
The Wrong Consumer Experience
The troubles with paper as the payment method for disbursements are many, McFarland noted, but chief among them is their slowness.
Even if one assumes an instantaneous approval for a disbursement – like, for example, a loan or insurance payment – paying that with paper is putting lead weight on the entire process, according to McFarland. A check needs a day to be printed, and then a few days to arrive in the mail, be deposited and clear into an account.
Funds approved “instantly” can still be a week’s wait away, and that’s not an acceptable timetable, she noted.
“Consumers are accustomed to paying in real time. Their expectations for how they will receive funds is really changing. The way they pay for things today is in real time with cards and wallets – and that is really beginning to color their expectations for how they receive money.”
And that preference, she noted, is becoming a more strongly held one that consumers are “becoming more vocal about.”
And as millennials are growing up and making use of a wider range of more sophisticated financial products and instruments, that pressure will be more finely felt.
“Those customers will start questioning the quality of the company,” she said. “It impacts a brand when there are people who could be customers who have an expectation of how their experience should be, and then the reality that is offered to them looks quite antiquated.”
Financial institutions in particular, she noted, have seen this before in another form with P2P payments: Consumers didn’t have an easy way to push payments to each other, non-FIs entered the space and gave them one – and now those FIs have to play catch-up to those who beat them into the space with their own customers.
“There is a greater sense of urgency here,” McFarland told Webster.
And there should be, she pointed out, because the alternative lenders are increasingly amassing around instant push payments to fund loans.
The Two Alt Lender Advantages
Alt lenders, McFarland confirmed, have been much faster to adopt instant push payment technology and usages than their mainstream banking counterparts – for two reason.
The first is ideological. The online and digital lenders are built with immediacy and speed as part of the baked-in value proposition. McFarland noted that these lenders were designed to transform the underwriting process—which had taken days and weeks—into one that takes hours at most and, more commonly, mere minutes. A slow funding process is a mismatch.
“These are lenders who are looking for ways to transform the funding process as well, so they can get their customers what they need on their terms.”
But, she said, they also have a technological advantage: They are new. As a result, they are not weighted down by complicated legacy systems and infrastructure.
“Part of the challenge for large banks, businesses and government agencies is that they have technology and infrastructure that can be really complicated to change,” she said. “Add to that they have processes behind them that are driven by compliance requirements and regulatory needs, and that makes them slow to adapt to any new technology.”
Conversely, alt lenders gain access to push payments through an integration process that involves plugging into Ingo Money’s API. Large players with legacy systems, she noted, have a lot more to think about, and a lot of rightful concern about the costs/benefits ratio when considering making a big migration in how their systems handle disbursements.
Making the Case of the Larger Legacy Players
Alt lenders can – and will – leverage their speed advantage to continue eating away at the margins of the biggest players in the business. But, as Webster and McFarland agreed, the big players have the advantage of being, well, big – and having the collective gravity necessary to move the market toward actually killing off those pesky paper disbursements.
“That is what will really push the entire transformation of industries,” McFarland noted. “When you get these large disbursers, like lenders and insurance, to make the change.”
But selling that to companies can be a complex process.
The first and most important factor is the need to remind firms that being trapped in a cycle of issuing checks isn’t free – in fact, it’s not even cheap. And because they can “bridge the gap” for these large legacy firms by offering batch file input, their process for offering push payments can feel an awful lot like the process they currently use for cutting checks.
“They give us the batch file they would have given to their check printer, and we will parse that and use it to execute a digital disbursement,” McFarland said.
It’s the same process as using checks, but without any of the costs of actually printing checks.
Beyond that, she noted, the path of migrating the larger players in lending and insurance toward digital disbursement is really more about how than why.
“They are beginning to feel that competitive pressure – and not necessarily because they think there is going to be this big shift in volume to the alternative lenders. But they see that pressure coming in other areas of banking, like P2P, and they are seeing big players embracing this technology.”
Chase, she pointed out, is partnering with OnDeck. Increasingly, banks are seeking out trusted partners so they can move into the world of lending these players are pursuing, and profiting from it rather than sitting it out. The alternative, she said, is missing out on the customer entirely by sitting back and waiting for them to come to you. Customers can now apply, be vetted, get approved and be funded for a loan in the same timeframe that some traditional lenders approve or deny a loan to a consumer or SMB.
Customers are becoming less and less likely to wait around, she noted – and banks know that.
Which means in today’s disbursements, check payments are still hanging on – but their days of staying power may actually be coming to an end.
“We are seeing some actual progress in terms of real effort to engage offer solutions,” said McFarland. “I have seen more progress over the last six months than I have over the last couple of years on this.”