The disquieting statistic that every potential entrepreneur must consider before deciding to take the plunge and starting their own small business (SMB) is that half of all small businesses fail in their first year. It’s a rough number, WePay Co-Founder Rich Aberman told Karen Webster for this week’s edition of the Unscripted podcast. Those frequent failures, he noted, often connect to the same underlying problem: cash flow.
“We look at that statistic and say, ‘What is our role in fixing this problem, and what is the industry’s role in fixing this problem?’” Aberman told Webster. “How can we make it so that when a merchant is paid with a card, they are paid as fast, if not faster, than being paid in cash?” — adding that until that happens, cash will remain a relevant payment option for merchants.
Without instant access to sales proceeds, merchants will be denied access to an important lifeline to get them through that first very important year. It’s a lifeline, though, that Aberman said isn’t a pipe dream, as the industry has made big strides for push-to-debit and Same Day ACH payments to clear and settle funds faster, and to move those funds into merchant accounts the same day or sooner. That progress, he noted, is going to persist because merchants want access to their funds faster — and the pressure is going to be on the industry to meet that desire.
“It’s inevitable that, soon, when merchants are paid by card, their expectation will be [that] the funds will be instantly available to them. And they will want that service to be free,” he added.
The Three Main Challenges
The timing, though, Aberman said, is very much TBD, mostly because there are three main areas where big progress must be made to bring the instant payment utopia into present reality: technical, risk and economic. On the moving-money side — getting funds instantly from point to point — he noted, it’s obviously a possibility — one that the card networks and banks have been iterating on and innovating around.
“On some level,” he said, “I am assuming that everything that is both possible and objectively better will come to fruition because there is a market incentive built around it.”
In other words, keeping customers.
However, in regards to the technical aspect, Webster pointed out and Aberman agreed that just because funds can be pushed to a merchant instantly, that doesn’t mean the merchant can do anything with them. If they, as many still do, batch their transactions at the end of the night, that instant payment won’t make a difference. That batching orientation is baked in today, he noted, but will be cycled out tomorrow, pushed out by the demand for faster and instant payments. Batched transactions, though, aren’t the only thing that will likely see extinction.
“I am [willing] to predict that over a long period of time, the line between the merchant account as distinct from their regular bank account will disappear. I think, eventually, individual transactions will show up as instantly in a merchant’s banks account — as soon as the card is authorized and the customer checks out — [and] will show up in real time among a [merchant’s] available funds,” Aberman said.
It’s a strong prediction, Webster said, particularly considering what it would mean for the risk management requirements around card transactions. Once the money is in an account, things get challenging if there is an issue with the transaction, such that those funds need to be reclaimed.
“Managing risk in a real-time environment is full of challenges,” Aberman added. “And when those problematic cases arise, it can be irreconcilable or confusing. It has the potential to turn into a total nightmare.”
There are ways around that problem, involving upgrades in real-time risk management or considering the cost structure of real-time payments. That, he noted, leads into the third main bucket of issues that need to be resolved as faster and instant payments push forward: economics.
Right now, Aberman noted, instant payments represent a cost, and merchants need to balance whether that price tag works. Those difficulties sit on top of preexisting issues in getting SMBs on board with card payments in the first place — since there is a false, but pervasive, perception that cash is cheaper than taking credit.
That economic discussion, he said, needs to take place in a holistic context. A merchant that has run into a critical cash flow problem — some necessary and expensive piece of equipment has broken — has a series of alternatives to quickly access funds to solve that problem. When comparing the cost of an instant payment against something like a merchant cash advance, the cost of an instant payment is significantly lower. Moreover, he noted, as instant and faster payments become more commonplace, the costs will likely go down and further fuel merchant demand.
Though the challenges going forward are real and could take years to full sort through, there are “elegant technological solutions for all of them,” Aberman said.
From Cutting-Edge To Table Stakes
Those solutions are under construction by a variety of financial services players. On the rails side, mainline financial institutions (FIs) are developing new rails to move the funds faster than has previously ever been possible. Some of that, Aberman said, is building old processes to do new things, but some of it involves actually building new rails.
For all that construction, he added, they haven’t done much in the way of commercializing those services. That has come care of the FinTech firms that are iterating on the new faster rails.
“Square is a good example of a firm that has made a lot of progress commercializing the idea that you can get an SMB to pay a marginal fee to get their funds guaranteed a day or two earlier,” Aberman said.
It doesn’t seem likely that firms like Square or Stripe will try to build a new network or set of rails, he said. However, both are in an excellent place, given their position with small businesses, to roll out commercial extensions of the major institutions as a turn-key service. In addition, as more businesses sign on, and as faster rails and competitive interactions roll out, the service will go from being an add-on to something that businesses and financial service providers simply expect as a regular offering.
“A service becomes table stakes the minute your competitor has it in place,” said Aberman.
That is why, he told Webster as their conversation came to a close, segment watchers should probably buckle up, because the next few years in payments is going to see “dramatic changes.”
Businesses want faster payments, he noted. However, though instant payments might be some years away from being universal, the universal need now is for payments to be a known commodity in terms of their arrival. Cash flow is vital to the life of a small business, and not knowing predictably when funds will arrive is a cost that most businesses won’t bear if it’s not necessary.
“I think, in two or three years, the idea of a two- or three-day funding schedule will seem crazy,” Aberman said. “I think next-day will be standard, and there will be a lot of options for a small additional cost to get it faster or instant.”