B2B Payments

How ACH Business Payments Pave The Way For US Open Banking

In B2B payments, corporates’ continued use of paper checks confounds FinTech firms working to give businesses more affordable, faster and more efficient payment options. Yet, for many business payers, the reason for using checks can be quite straightforward: It’s simply the way payments have always been made.

However, new small businesses (SMBs) being launched by a new generation of entrepreneurs aren’t bogged down by decades-old processes and systems that limit flexibility and evolution. These professionals are entering the market with a demand for digitization, and it’s driving the emergence of digital- and mobile-first banks built for small businesses.

Among this community is Novo, a mobile-first bank connecting entrepreneurs with bank account and debit card services. According to the company’s Co-founder Tyler McIntyre, the breed of entrepreneur that flocks to a digital-first bank is the type of business owner who uses digital payments over checks.

“The majority of our customers are using ACH,” he told PYMNTS in a recent interview. This important discovery lends more weight to the prediction that paper checks are being phased out in B2B payments, not only as a result of FinTech encouragement, but as a result of a new generation of business payers.

However, progress is gradual. McIntyre explained that checks remain a reality, even for the youngest, most tech-savvy businesses. One reason is a lack of awareness that ACH is even an option — an understandable scenario, when the vast majority of businesses that entrepreneurs look to for examples of how to start a successful business have been operating with checks for decades.

“People don’t know what ACH is, and people don’t know what their options are,” he said. “When they need to move money same day or next day, their minds go straight to wire.”

Another reason, he added, is that some vendors, particularly the larger ones, prefer checks because it’s an easier reconciliation process — again, likely the result of operating in a check-heavy business environment for decades. The issue of reconciliation remains one of the largest challenges for companies of all sizes. Yet, the small firms and entrepreneurs embracing ACH payments from the get-go are opening doors for themselves, bringing automation to reconciliation and accounting as a result of access to higher-quality transaction data.

FinTech firms are opening doors, too, finding new ways to use that payments data. For banks like Novo, the biggest opportunity is in application programming interface (API) integrations with third-party solution providers — the firm’s latest interconnectivity initiative was recently announced with cloud accounting platform Xero.

New SMBs’ rising preferences for ACH, and new banks’ emergence as digital-first financial service (FinServ) players, are ushering Open Banking into the U.S., even without regulatory mandates as seen in areas like the U.K. and Europe. It’s a trend that emphasizes a few major differences in how legacy financial institutions (FIs) and young digital banks position themselves in the small business FinServ market, too. According to McIntyre, API integrations with third-party platforms are of growing importance, as some traditional banks turn away from legacy bank data feeds.

He pointed to Capital One, which, in late 2017, discontinued its Direct Connect service that had enabled the FI’s bank feed to connect into third-party platforms. Traditional bank feeds and data scrapers are “constantly breaking,” McIntyre said, often leading to missed transaction data aggregation, failing to provide a complete view of payments.

The embrace of APIs has also introduced a shift in banks’ customer acquisition and product strategies.

“In five to 10 years, [banks] will look around and find it’s not about the cross-sell. It’s all about the integrations,” McIntyre predicted, explaining that, historically, banks have used data integrations to bundle and white-label a range of services for their clients as part of their customer retention efforts. Increasingly, though, satisfying customers means allowing them to use the products and services they want in a seamless manner, even if it’s not coming from the bank.

“Why make it more difficult for a customer to get information into your bank feed, when we’re really not even trying to compete in the accounting space?” he asked. “The difference between new-age companies versus, say, a JPMorgan is that we’re not trying to sell 20 different types of solutions packed into one, and call them best-in-class.”

Promoting cross-platform data integrations enables small business owners to access those best-in-class solutions seamlessly, promoting customer retention by allowing entrepreneurs to use what they want. It’s part of the small business financial service industry’s approach toward a holistic ecosystem of products and services that “just work,” added McIntyre.

As the industry makes progress toward that goal, Novo has more integrations planned in the areas of payments, payroll and cross-border payments. With ACH use on the rise, small businesses are driving the growth of the data pool in the financial services market. Now, banks and FinTech firms must drive the integration of that data between each other to further fuel SMB FinServ innovation, and change the role of the bank with SMB customers.

“It’s about being that platform as a bank, and trusted advisor where people go. It’s about giving them what they want,” McIntyre said.

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Our data and analytics team has developed a number of creative methodologies and frameworks that measure and benchmark the innovation that’s reshaping the payments and commerce ecosystem. The July 2019 Pay Advances: The Gig Economy’s New Normal, a PYMNTS and Mastercard collaboration, examines pay advances – full or partial payments received before an ad hoc job is completed – including how gig workers currently use them and their potential for future adoption.

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