Existing payment methods for businesses to move money – think ACH, wire transfers, and checks – are slow and costly. But that’s changing – fast. New technology solutions are hitting the payment operations space, creating a well-connected payments infrastructure that allows companies to make and track payments seamlessly, says Shruthi Murthy, head of engineering at Modern Treasury.
Payments systems must support fast, fraud-free, and low-fee transactions. Building such systems is difficult, and most small and large businesses struggle to achieve those benchmarks because of the complexity and cost of building reliable payment systems.Â
Existing payment methods for businesses to move money -such as ACH, wire transfers and checks—are often slow and costly. Checks and ACHs can take days to clear. Wires are faster but more expensive. Also, these payment systems are disconnected and have different implementation specifications, which can lead to errors that are hard to track and automate.
B2B payments are especially complex given the sheer volume of transactions—more than $750 trillion in the U.S. alone each year—and a lack of standardized interfaces that stymie money movement up and down supply chains among vendors, partners, and other parties.Â
Many companies are left to build their bank integrations and payment operations in-house, leading to suboptimal solutions that are costly, error-prone, and manual.
A Translation Layer
New technology solutions, however, are hitting the business-initiated payment operations space, creating a well-connected payments infrastructure that allows companies to make payments and track them automatically.
A payments platform with standardized application programming interfaces (APIs), can help businesses integrate quickly into their banks and move money faster and more reliably. That’s because off-the-shelf APIs help set up a “translation layer†between bank protocols and high-tech money movement infrastructure. This helps to:
1. Reduce Complexity
Money movement over bank rails primarily happens over FTP or SFTP. That stands for secure file transfer protocol, which is hard to use. If companies build payment integrations, they upload and download raw files to the bank and make sense of them. The technical specifications bank payment networks provide extremely complex, running into thousands of documentation pages. Each bank may implement specifications differently. Also, there are several such bank transfer protocols.Â
In contrast, a standardized API for money movement over the bank rails provides an easy-to-use translation layer between the more traditional SFTP protocol covering various technical specifications written by various banking consortiums. With a restful API layer, companies no longer face the burden of wrangling with more traditional banking protocols. The API layer also allows the business to quickly and easily scale its payment operations as it grows by supporting the addition of banking partners and expanding to new markets through a single API.
2. Increase Transparency
A bank transfer from one business to another happens via several systems owned by different entities, which makes transparency in the process difficult.
For example, say Alice’s business sends instructions to its bank – in a text file over SFTP—that contain information about a payment. It will include the originating account, the receiving account, the type of payment, the direction, a description, et cetera. Alice’s bank may consolidate all of these payments from the originator to the same receiver and process the payment according to the terms Alice’s business set up with them. If the bank deems the payment feasible, the network clears the payment to the receiving bank. No unique end-to-end transaction identifier exists in this flow of funds from Alice’s business to the next business. For Alice’s business to know the status of the payment – whether it was completed, failed, or is pending – requires Alice’s business to log into the bank portal, or it can build a deeper file transfer integration with the bank to receive files that contain the transaction fees and bank account balance reports.
In contrast, by using the right platform, all of this information is collected without any work on Alice Business’ part. Such platforms provide automatic reconciliation out of the box so that operational teams at the business can reliably know the payment status in real-time. This reduces the time it takes for finance teams to understand the status of the payment, connect multiple finance ERP systems, and seamlessly perform their accounting and reporting functions. And this gives time back to the business to do higher-value strategic work.
3. Reduce Errors
Businesses not using a modern money movement platform also have higher operational costs associated with managing payments. One main reason for increased costs is the complexity of handling payment errors. Payment errors come in two types: technical and operational errors. To send a successful payment, a number of manual and automated systems need to work as expected for a payment to go through. If one of the systems is down or not responding correctly, there can be a technical error. Operational errors encompass a wide range of instances, such as when people try to send money from an account that has an insufficient balance or to a party whose account number has changed or maybe a payment is duplicated. If businesses use manual systems to resolve such errors, they have to log into a bank portal, check the status of a payment, and then fix it.Â
With an API-automated payments system, the system spots errors and can make improvements. For instance, it can collate the number of payments that succeed and the number that fail day over day and detect anomalies if there is a sudden spike in such behaviors or stop double payments before they occur. That’s because logic is codified into the payment system to work at scale. It works repetitively day after day, hour after hour, and is exposed to many error scenarios.
The system can gain insights from these errors and improve by catching and fixing them in advance. This reduces error-prone manual operations that may have financial implications for the business. Businesses need to find a right-fit platform that reduces the occurrence of these errors and the resourcing needed to perform these manual operations, thereby reducing the cost of running the business.
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