When it comes to running a small business that accepts electronic payments, there are two words that business owners don't like to hear from their merchant services provider: holds and reserves.
Those words, of course, describe the decades-old standard practice of having merchant processors hold funds in reserve or hold back a small percentage of each sale to reduce the risk of chargebacks and fraud. Holds and reserves can delay a small business' access to revenues on their sales by as much as seven to 21 days — and can create a huge cash flow hole.
Holds and reserves are concepts that PayPal wants to make a part of the merchant services history book, as COO Bill Ready told Karen Webster.
Today, PayPal will formally launch Funds Now, a program that has been running in stealth mode with one million merchants already. Funds Now gives PayPal merchants instant access to funds generated by sales at their establishment. Those funds are deposited into the merchant's PayPal account, in real time, for that business to transfer to their bank account or use within their PayPal account to buy goods and services.
Bye-Bye, Blunt Instruments
“Holds and reserves are a blunt instrument that the payments industry has used for decades to guard against fraud and risks,” Ready told Webster.
It is a blunt instrument because very good merchants and very risky merchants were all treated the same, owing to processing systems that, Ready said, were not equipped to discern the difference.
As Ready noted, PayPal can provide the Funds Now service to small merchants, given their wide view of the payments ecosystem.
The “magic” of Funds Now, he said, is the information and systems PayPal has to evaluate hundreds of thousands of variables, in real time, and make decisions accordingly. This gives PayPal not only a broad, large-scale view of fraud, but also of fraud in small business environments, which PayPal must effectively address in order to deliver the service.
“I think we’ve seen just about every fraudster attack there is," Ready told Webster, “so we can spot a bad actor at a scale beyond almost anyone else."
Spotting those bad actors also means letting more of the good actors shine.
Letting Good Actors Shine
Ready said to think of Funds Now as another way that PayPal is using fraud-fighting tools to deliver a great customer experience. He cites OneTouch as the forerunner of that capability: PayPal tech identifies legitimate users who can have a better checkout experience by skipping passwords and fingerprints.
Funds Now does the same by using the rich data set for the 20 million sellers on the platform with PayPal’s 250 million users. According to Ready, it is one of the inherent advantages of operating a two-sided platform.
“We know what a good risk is and what a seller in good standing looks like,” he noted.
That means saying bye-bye to a one-size-fits-all fraud and risk environment.
Good actors, he noted, don’t deserve to be treated like potentially bad actors with every transaction. And, after a soft rollout to test Funds Now with around a million merchants, Ready said that PayPal is sure they don’t have be treated that way, either.
Putting Working Capital to Work
The Funds Now aspiration isn’t just to change how merchants get paid, but to change the expectations that merchants should have about getting access to their money.
The problem with funds and reserves, Ready noted, is that they hit small, medium and micro-sized businesses the hardest — larger merchants can generally negotiate faster access to funds.
Moreover, the particular flavors and timings on reserves can be all over the map. Some places hold the funds for as long as a week or two, while other places pay faster but hold out 10 to 20 percent of the sale indefinitely to hedge against risks.
Instead of waiting uncertain times for uncertain amounts, PayPal is giving small merchants access to their funds in real time, and then letting the merchant decide how they want to direct those funds — either within the PayPal ecosystem or outside of it.
“We aren’t doing anything to restrict their funds without our platform,” Ready told Webster. “The goal is for the businesses to have their money and do with it whatever is best for them,” adding that only merchants know what’s best for their business.
In its early days of testing, merchants are using the funds in many of the ways one might expect.
They are paying employers, paying their suppliers and re-investing back into their businesses. The difference, Ready noted, is that they are doing it with larger amounts of working capital, and not worrying about how to check all of those operational boxes when their card payments for the last week are held up by a reserve.
“Small businesses are always looking for funds to grow their businesses — and instead of looking for alternative streams, instant payment means they can use the best source, which is funds from their customers," Ready said.
And while PayPal also offers working capital loans of its own, Ready noted they aren’t concerned about cannibalizing that business by offering this service. The needs that this serves aren’t really the needs targeted by their working capital lending product — or at least they shouldn’t be, he added.
“We do think merchants have working capital needs, but we would hope those do not arise from delays from providers," Ready said. "We want to see those loans go toward buying more inventory to boost sales, or the need to bring on more employees to expand, or the funds to grow into that second location.”
By offering instant access to funds, businesses can count on the flow of funds from sales — and can be proactive about which tools they want to use to expand, as opposed to reactively patching the holes caused by lumpy and inconsistent payment flows.
Not every merchant will have access to the Funds Now process, which launches today in the U.S., U.K. and Australia. Ready noted that merchants will be accepted on a case-by-case basis and screened intensely. But they are already out with a million merchants, and are thinking expansively about the product.
“We’re not charging fees for this — we think this should be something that comes as standard fare from a merchant services provider,” Ready said. “Supporting small businesses means supporting their cash flow needs, and we think we can offer a major improvement by making those payments instant."