Speed of transactions is one of the biggest problems business owners face with their bank accounts. The current services available to them to perform both B2B and B2C transactions include card payments, realtime payments, and automated clearing house payments, however, these “instant” payments are not instant and take time.
Tyler McIntyre is founder and CTO of Novo, a challenger bank for businesses. McIntyre received his BBA in Entrepreneurship and Management from the University of Miami. He is a Nacha Accredited ACH Professional (AAP), and Nacha Accredited Payments Risk Professional (APRP). Novo launched in 2018, and in April, announced that it surpassed $1billion in lifetime business transactions — more than $600M of which occurred in the first quarter of 2021.
Here McIntyre voices his views on how banks must improve their transaction speeds for business payments:
Building Business Banking Infrastructure for Faster Transactions
Over the last year, a common complaint I’ve heard during hundreds of conversations with business owners about their bank accounts boils down to one word: speed.
In these conversations, we agree that all banks perform three common functions: receiving money, holding money, and sending money. Many founders and CEOs say that banks are great at holding money safely, but have a long way to go when it comes to sending and receiving money as quickly as possible.
Business owners increasingly expect banks to settle transactions at the same speed that they’re used to seeing in their personal lives. Today, Venmo or CashApp are commonplace for sending and receiving payments instantly between friends and family, and they’re increasingly being used for business transactions. In cities across the US, people tap their phones to call an Uber, and have payments settled instantly in the background. More recently, at Amazon Go stores, people shop for what they want and leave without even having to take out a card.
Traditional business banks and challenger banks alike understand the importance of increasing transaction speed. Still, many have significant work to do around building up really great experiences for sending and receiving money.
To give some context around how technology can advance the speed of banking transactions, consider a few types of systems that currently enable “instant” payments: First, you have card payments that debit money from a checking account. Second, real time payments (RTP) clear payments for a large network of local banks through a private clearing house. Third, there’s the clearing house that everyone knows, the Federal Reserve, which offers same-day automated clearing house (ACH) capabilities. These payments aren’t cleared instantly, but they can be cleared within several hours.
With this context in mind, here are a few areas banks can focus on to enable faster transactions:
Speeding up ACH transfers
One of the biggest friction points amongst the business owners I’ve talked to is moving money from a paytech app that they use to accept payments, and into their bank accounts. For example, more than three million businesses use Square and Stripe to accept payments. When it comes to getting money from a Square or Stripe account into a business bank account, the process can be slow because Square and Stripe are both sitting on ACH rails.
Business banks should evaluate how they can speed up ACH payments. In many cases, these banks rely on legacy technology that clears ACH payments in a number of days, even though same-day ACH clearing is possible.
One area that I’ve looked closely at is how to control more of the payment stack, like ACH, to route through faster payment networks. Another area of interest is push-to-card capabilities, also known as an Original Credit Transaction (OCT). Essentially, an OCT creates a return credit on a card, as if you were returning a product at a store, which can increase your available balance instantly. This technology is available now and can be much more widely adopted in the business banking community.
Supporting the launch of FedNow in the US for widespread RTP adoption
The Federal Reserve understands that banks can work to accelerate the speed of ACH payments, but the clearing time will always be measured in a matter of hours instead of seconds. That’s why the Federal Reserve has introduced FedNow to “enable financial institutions to deliver end-to-end faster payment services to their customers.”
FedNow is not yet implemented—it’s currently slated to take effect in 2023. The business banking industry should be very much in support of the launch of FedNow, and check their website for updates around implementation.
Adopting ISO 20022’s “global and open standard for payments messaging” with each passing year, more businesses will have customers in multiple countries, and business bank accounts will have to provide services that allow businesses to quickly and effectively invoice and receive payments from a global customer base.
While there’s much that can be done in this area, one area of particular interest is ISO 20022, which “creates a common language and model for payments data across the globe.” Business banks can use ISO 20022 to allow their customers to create a commonly-understood invoicing language that allows automatic reconciliation of invoices. The more widely adopted ISO 20022 is, the more efficiently businesses around the world will be able to settle their invoices.
The three technology advancements I’ve noted above will go a long way towards speeding up transactions. My hope is that the business banking industry—particularly those that cater to smaller businesses—don’t continue the practice of charging their customers extra for making their money available a little bit faster.
We’re already seeing a growing movement of business banks making same-day ACH payments available to their clients free of charge. As FedNow gets closer to launching, and ISO 20022 becomes more widely adopted, ideally, these services will be part of a bank’s core offering as opposed to premium services that their customers have to pay extra for.