By Patti Murphy
If there is one constant in the payments acquiring space, it is change. As someone who has been involved in banking and payments for more than 40 years, I can attest to this fact. Forty years ago, nobody knew what a debit card was. ATM cards were proprietary; shared regional networks were several years off.
As for credit cards, the few merchants who accepted them had to paw through paper reports to determine if a card presented for payment was in good standing. Then about once a week they would bundle and deposit paper tickets, and wait weeks before receiving bankable funds in return. Electronic data capture and authorization were several years off.
Direct deposit via the automated clearing house network, meanwhile, was a brand new concept and not widely used. But if the changes ushered in by technology advances in the late 20th century were big, changes that have occurred in consumer buying habits and merchant expectations in the early 21st century have been nothing short of monumental.
Changes like the move to online and mobile shopping, mobile payments, free terminal deployments, electronic loyalty programs, and merchant cash advances taken together have radically reshaped the competitive landscape.
Now it's beginning to look like another big change is in the offing: instant funding of merchant accounts. Think of it as real-time payments, but in a context that makes the most sense for businesses accepting credit and debit card payments: faster payments for credit card receipts. My sense from conversations with ISOs and merchant level salespeople (MLSs) is that not many merchant acquirers or small business lenders offer instant funding today. But there are opportunities for those that do to take market share from those that don't.
Talie Baker, an analyst with the consultancy Aite Group, discusses this in Business-to-Consumer Disbursements in the U.S.: The Small-Business Opportunity. The report draws on a survey of consumers, which indicated that 28 percent own small businesses, and that 5 percent had received disbursements for their small businesses from a merchant acquirer and/or a lender.
For purposes of this survey, a small business was defined as one that generates $10 million or less in yearly revenues. From the data provided, it's safe to assume that most generate far less than $10 million yearly in revenues. Small-business owners who reported receiving payouts of card payments, for example, averaged 9.4 disbursements in 2018 and received an average total of just over $6,800 in disbursements. Those receiving small business loan disbursements averaged 2.6 disbursements each totaling an average of just over $6,000.
Based on the survey responses and additional research, Baker estimated these types of disbursements to small businesses amount to 96 million transactions totaling $645.2 billion a year. Here are further data points that struck me: 31 percent of small-business owners receiving disbursements from merchant acquirers and lenders received those payments via direct deposit, and 30 percent received payments by check in 2018. In addition, 18 percent received payments via debit cards, 14 percent via digital wallets, 24 percent took in disbursements via PayPal accounts, and 8 percent reported receiving disbursements through Zelle. "As U.S. small business owners become more familiar with the real-time payment capabilities offered through the card networks as well as PayPal and Zelle, demand will increase, making direct deposit and check less relevant," Baker said.
Baker's report was commissioned by IngoMoney, which began as a mobile app that allows consumers to cash checks (using mobile deposit technology) and have the funds posted to a prepaid or traditional debit cards. At 1 to 3 percent of the check amount, the fees undercut those charged by typical brick-and-mortar check cashers.
Ingo recently began rebranding itself as "the instant money company." It has a partnership with Visa, and launched an initiative in 2018, Ingo Money QuickConnect, which leverages Visa Direct. Visa Direct supports near-real-time payments (within 30 minutes of initiation) to traditional and prepaid debit card accounts at Visa-issuing financial institutions. Drew Edwards, Ingo's founder and CEO, told me recently that instant funding solutions are driving much of the company's growth. "We're enabling companies to make digital payments to consumers and micro-businesses," he said.
Visa and Ingo are not alone in the push for faster payments. Mastercard offers a service called Mastercard Send that is similar to Visa Direct. Last year, Mastercard disclosed that Jacksonville-based Florida Capital Bank was using Mastercard Send to support instant disbursements by corporate customers to their customers. More recently, Mastercard established a partnership with MetaBank to support instant payments to prepaid cards for insurance claims, gig workers and other purposes.
Aite's report reveals good reasons for pushing instant payments. Consumers who run small businesses are already familiar with instant funds, for example, since that's how PayPal, Venmo and Zelle work. Perhaps the biggest draw, however, is that it eases the financial management burdens faced by many small-business owners. Fifty-seven percent of respondents receiving funds disbursements told Aite they frequently borrow money to fund payroll or other expenses.
Here's where the opportunities exist for acquirers: 96 percent of those receiving disbursements told Aite they liked the idea of receiving instant payments from their merchant acquirers, and 80 percent said they would select an instant funding option if available.
What's more, 85 percent said they would change acquiring relationships if they could sign with a new acquirer that offered instant funding. Eight out of 10 of those who would select an instant payment option if it were available said they would be willing to pay a fee for receiving instant payments; half of those business owners said they'd pay 5 percent or more of the total value of a disbursement in exchange for instant funds.
Baker's report concludes that to remain relevant in the market, merchant acquirers and processors that support small businesses, as well as small business lenders, need to step up to the plate and help ease small business owners' financial management burdens with instant funding.
"Acquirers/processors and business lenders must evolve their payment strategies to include real-time payments for the timely disbursement of funds to small businesses," Baker wrote. "Offering real-time payments can improve the customer experience and offer a point of differentiation in a crowded marketplace."
Patti Murphy is senior editor at the Green Sheet and president of ProScribes Inc. Follow her on Twitter @GS_PayMaven.
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