B2B Payments

A Corporate Finance Approach To High-Net-Worth Individuals

The financial services space often encounters the conundrum of trying to fit a square peg in a round hole. This challenge often emerges with small businesses (SMBs) that are not large enough to fit into a bank's corporate and treasury services unit, and are, therefore, forced into being serviced with consumer-targeted products.

Yet, just as SMBs can be too small to be considered corporate, high-net-worth individuals can have financial service needs that are too big to fit into the traditional consumer financial management range of products offered to the Average Joe. These cases include individuals and family offices with business-sized needs, with business-sized challenges in accounts payable, expense management and payroll.

Data from Wealth-X's World Ultra Wealth Report 2018 found that the number of ultra high-net-worth individuals increased by nearly 13 percent in 2017, with combined wealth jumping more than 16 percent to a combined $31.5 trillion. As this population grows, so do the hurdles these individuals and their family offices face in financial management.

According to Anneke Stender, executive vice president at accounting and software solutions provider TAG, this is a growing segment at a time when new, younger millionaires are continuing to emerge from places like Silicon Valley. However, large financial institutions (FIs) and personal financial advisors typically don't want to offer services like accounts payable to this customer segment, she noted, due to liability issues.

"There is a specific need for these families," she told PYMNTS in a recent interview. "A lot of them process 50 to 200 bills a month — it really is like running a business."

In the area of bill payments, for instance, these individuals can quickly become overwhelmed by the volume of invoices they have to pay. Ensuring that credit card or utility bills are paid on time, for example, is a larger burden for these than for the typical individual.

In many ways, these individuals, indeed, are employers, with staff to manage their homes, investment advisors, lawyers and other service providers. Stender noted that many high-net-worth individuals will lean on paper checks and cash to pay their staff, which can quickly run them afoul of laws and regulations.

"From a liability standpoint," she said, "you have the same labor laws that apply to household employees as regular businesses. So, educating them on the risks of not having [staff] on payroll is very eye-opening for these clients."

Cash flow visibility is also a critical component of family office financial management. While some of these individuals would never be able to spend all their money in their lifetime, Stender explained that they want to ensure that they retain enough of their funds for heirs or for donations to nonprofits and charities. While corporates would agree that spend visibility and management are essential, Stender said the emotional connection with individuals to their money makes that visibility even more important than for a typical business.

Beyond the emotion behind the finances, high-net-worth individuals often struggle to find financial service providers they can trust, with fraud and financial mismanagement a significant risk for this area. For example, a family office may be aware that it has $60,000 on payroll per month, but isn't entirely sure where that money is going. That leaves plenty of opportunity for funds to slip through the cracks.

The rising threat of cyberattacks against companies hasn't gone unnoticed by this market, either. Email and wire fraud are the two largest security threats to family office finances, according to Stender — that makes practices like dual authentication an important piece of financial management when a supposed vendor submits an invoice for payment, as cyberattackers continue to view high-net-worth individuals as attractive, lucrative targets.

"We've had clients [who] have had scenarios where they had instructions [to buy a piece of art that were false], and they wired the funds and never got the money back," she said. "Those things are happening — fraudsters are getting more savvy about that."

Managing back-office finances like payroll and accounts payable for these clients not only provides visibility and security for the individuals, but can support their overall financial strategies, as companies like TAG provide that same financial visibility to personal accountants, financial advisors and estate planning attorneys, too, noted Stender.

As for how TAG is able to securely manage finances and make payments, TAG President Robert Scherer explained that the company sets up new bank accounts with TAG as the signor, enabling clients to set up the approval authority workflow to let TAG pay the bills. The company also typically obtains view-only access to a client's credit card accounts to code and process payments, he added.

Due to the complexities of this space, Stender said the financial services firm that is willing to address these points of friction must approach clients as if they were businesses in their own right. However, finding a balance between managing this market as an individual and as an entity is crucial.

"That gives the client the comfort of understanding that we have checks and balances in place, the same ones you'd see in a business accounts payable department," she said. "It is personal, and our clients are much more attached to their money than some of the businesses we work with — it is very emotional. But the peace of mind we provide by having that corporate structure helps."



About: Accelerating The Real-Time Payments Demand Curve:What Banks Need To Know About What Consumers Want And Need, PYMNTS  examines consumers’ understanding of real-time payments and the methods they use for different types of payments. The report explores consumers’ interest in real-time payments and their willingness to switch to financial institutions that offer such capabilities.