Over the last 15 to 20 years, the world of payments has changed dramatically. We’ve gone from mailing checks and waiting on the clearinghouse to sending funds through Venmo or Apple Pay almost instantly.
But, if you think about it, all these ultra-fast payment methods are typically only used for everyday, consumer functions. Like sending your friend $20 for dinner, or buying an item from an online store.
Businesses aren’t sending payments to suppliers or employees using instant transfers.
Why? Why is it that those on the receiving end of corporate payments seem to always have to wait (at least) a few days to get paid?
Well, it’s not always the case, as you’ll see below.
First, though, let’s look at why this divide – ultra-modern, fast payments in the consumer space, and 3-5 day international wire transfers in the corporate space – exists. Then, we’ll see how API payment processing brings revolutionary change to corporate payments.
A Tale of Two Ecosystems
There’s an obvious reason corporations shy away from instant transfers: internal controls. After all, it’s tough to get a Venmo payment that’s processed in 30 minutes to gel with corporate policy, governance, or compliance standards.
There’s more to it than international statutory requirements or fraud prevention, though.
The split between consumer and corporate payments technology can really be traced back to the early days of e-commerce. When e-commerce first started out, merchants needed a way to be paid online – checks just weren’t convenient!
In response, we saw the emergence of peer-to-peer apps like PayPal that could quickly facilitate transactions between buyer and vendor. Simultaneously, we saw ERPs like Oracle NetSuite fill in all these functions that online businesses required – accounting, supply chain management, etc.
For e-commerce, peer-to-peer and ERPs were a match made in heaven.
And banks sort of accepted this new, digital payments ecosystem. So, as far as digitization, it’s no surprise that – in some ways – banks are still stuck about 15 years in the past.
The success of Venmo (released in 2009) and later Cash App (2013) did provoke a response from banks in the form of Zelle.
Zelle – owned by major banks like Wells Fargo, JPMorgan Chase, and Capital One – pushed for the development of instant ACH payments. When it comes to faster, digital payments, this is the main bank-driven innovation we can point to.
Zelle is still mostly consumer-focused, though.
Banks have simply not had to get on board the digital, faster payments bandwagon until more recently, as the pandemic greatly changed customer expectations, as everyone was doing banking from home. Since they aren’t tech companies, they’ve been comfortable letting these third-party, digital providers focus on that area.
But this has only widened the gap between the banks and the internet – a gap that these third parties have been more than happy to fill.
More Than Just Speed
Consider that these ERPs and third-party providers are not just making payments faster. They’re actually facilitating the payments process, doing the kind of behind-the-scenes “post office” work that nobody else wants to do.
By doing that, though, they’ve filled in a gap between the digital space and the banks that had to be filled. Without these ERPs and third-party providers, the move to e-commerce could have been much slower than it ended up being.
The other thing online businesses need to have? Liquidity. And this is directly tied to the fast payment speeds that were pioneered by apps like Paypal. To ensure there’s always money to be drawn upon by suppliers or creditors, there always needs to be a certain amount of liquidity in the account that’s being drawn from.
And that’s where automation – or programmatic payments – enter the picture.
All online businesses have had to adopt automation in some way, because of the risk that comes with fast payments.
In a recent podcast, Trovata CTO, Joseph Drambarean, came up with this example: Say he starts a T-shirt company on Instagram. To advertise, he makes viral posts. When someone buys one of his shirts, this order is outsourced to a T-shirt manufacturer. They’ll immediately take the cost to manufacture the shirt out of his account to cover the risk of making it.
But say one day, he makes a post that gets a ridiculous amount of traction. Maybe a celebrity picks it up, and suddenly he’s getting tens of thousands of orders. The manufacturer will have to start drawing funds aggressively to manage that risk.
What if there’s not enough money in the account? This is where automation kicks in to move money around without human input. ERPs and third-parties have traditionally offered these automation services, whereas banks have not.
And, because e-commerce businesses need automation, and because they need intermediaries between themselves and banks, they stick with these online-only providers.
But with a financial technology that’s coming to the fore – APIs – that’s about to change.
The Open Banking, API Economy
By now, you’ve probably heard about APIs.
API stands for application programming interface, and they’re a set of rules that facilitate communication between third-party providers and banks. This is known as “open banking,” since bank data is made available to those providers.
Open banking comes with a huge range of consumer to corporate functionality – think offering budgeting advice, presenting customized loan offers or even improving a large company’s cash flow forecasting through artificial intelligence.
With APIs, users can access bank payment rails through third-party platforms. This means they can make an ACH payment or wire transfer without even needing to log into their bank account. Besides setting up that initial connection, there’s no direct involvement with the bank.
The open banking revolution means that banks don’t have to do much to digitize, other than fostering relationships with these third-party providers.
So, open banking results in two major effects:
- Because APIs are seamlessly bringing banks into the digital age, the technology gap between third-party providers/ERPs and banks is starting to close
- Those apps that are used as intermediaries – some of which have been very, very successful – could find themselves obsolete
APIs are set to change the status quo of the past 15–20 years by closing that gap between banks and the digital space mentioned above.
As they gain more and more traction, it’s unclear what the roles of those intermediaries will be going forward.
But most excitingly, APIs are helping real-time corporate payment methods finally become possible. Probably the best example of this is bulk payments.
Batch vs. Bulk Payments
You probably know what batch payments are – these are what you’d use to deliver a large amount of payments to more than once recipient (think payroll). You’d upload a file with all these payments listed to your bank, through SFTP. Then, you’d have to unpack it, process it, and so on.
But batch payments come with a few problems. First, if even one payment is rejected, the whole file could be rejected. Then, the treasury team has to spend time on reconciliation, finding and fixing that one error before attempting to send the file again.
You’re also being charged by your bank to upload that file, and then charged a small amount for each individual payment – this can really add up if you’re making hundreds or even thousands of payments!
Bulk payments, on the other hand, are the API-enabled answer to batch payments. Similar to batch payments, they collect a large amount of individual payments in one file.
But since with APIs, everything is considered just one payment, there’s no fee charged by banks to process the file – from their point of view, you’re just making a normal payment.
Furthermore, bulk payments can be automated. Thanks to this programmatic functionality, the books close automatically as you can tie the transaction to the entry. Once the payment is made, it’s done – no need to wait and see if the payment made it through.
As for accounting, bulk payments still appear as just one line item, same as batch payments.
Best of all? The payments are delivered in real-time. Staff or suppliers don’t have to wait days to be able to use their money. And this will be hugely disruptive.
The Revolution in Corporate Payments
One of the biggest takeaways from all this? Third-party payment vendors are being disintermediated thanks to corporate banking APIs, which makes it a breeze to send mass payments individually.
Trovata CPO, Joseph Drambarean explained it like this:
“Now, we can just go directly to the bank. We can connect with their services. And not just that – we can also itemize our use of their services. Instead of having to collect it, wrap it up in a basket, and put a bow on top, and say, ‘Hey, bank, here are 1,000 transactions that I would like to do,’ now you could just say, ‘I have this one. Take care of it, please. And now I have another one. And I have another one. And I have another one.’ And it can be happening programmatically. It’s just happening as it’s needed, and it’s also happening in a way where it reflects the closing of the books automatically.”
The new payments ecosystem that emerged in response to booming e-commerce was definitely necessary for the time – it filled the gap. But now – by definition – APIs are offering a bridge between third-party apps and older financial institutions.
With regulatory frameworks introduced to make open banking a reality in the United States, as it already is in Europe, the big third party payment vendors will have to rethink their approach. Add to that the fact that banks are rolling out real-time payment rails of their own, and the entire landscape seems set to change.
Trovata is proud to help spearhead the API revolution. There’s no need to go around the bank. Rather, corporate clients can get all the benefits of using banks without any of the drawbacks that come with a lack of digitization.
Looking to experience real-time, corporate payments? With API-backed software like Trovata, they’re now possible – for free.
See it in action! Request a demo or get started today.