The Federation of Small Business estimates that late payments contribute to 50,000 insolvencies annually, costing the economy £2.5bn.
Moreover, the Independent Chartered Accountants of England and Wales’ recently reported that 24% of SMEs have reported late payments to be a bigger issue than they were a year ago.
Nick Raper, Head of UK, Nuapay explains that the impact of this problem on SMEs (which contribute to 99% of the economy) is huge. Not only is the growth of existing businesses stunted, but tomorrow’s entrepreneurs could also be deterred from taking the courageous steps needed to establish their own businesses.
The UK economy will suffer the knock on effect and these are already times of economic and political uncertainty for the UK. As we anticipate a departure from the European Union, with or without a deal, we need the British economy to be at its strongest.
Is open banking the answer?
Since its implementation, open banking has enabled third party providers to access – with customer consent- customer accounts, and with regulations enforced throughout the industry banks have had to comply. In turn, businesses now have greater control over their data and money across accounts. This opens up the opportunity for a multitude of innovative services and products, including open banking-based payments.
As a result, in the not too distant future, we can expect to see an array of alternative methods of paying, online and in the physical world. Indeed, analysts estimate that open banking payments will soon account for nearly a third of all eCommerce spending.
But before examining the benefits of this shift, let’s discuss how it actually works. Instead of sending a traditional invoice, a business that has opted to use open banking-based payments would send their customers a link to initiate the payment. The customer can agree to pay, click the link, and will be taken to a page with the business details and payment amount already filled out. In another click, the payment is authenticated by the customer with their bank, and then the funds are sent directly from the payer’s account to the business’. Where the payments process used to require the payer to go to their own internet banking portal to push money towards the recipient, open banking flips this model on its head.
Late payments: a problem of the past?
Cash flow is not the only damaging issue SMEs face as a result of late payments. Although much less publicised, BACS estimate that the average UK business spends £9,000 in the process of recuperating late payments.
SME leaders, naturally, want to spend every minute possible building their business, and these costs, often caused by staff time and interest in borrowing, are obstructive when it comes to reaching growth targets. On top of all this, they are not recoverable.
The integration of these new open banking based payments will soon become the new normal. But will they have an impact on the late payments crisis SMEs face daily?
SMEs need fast access to funds
Open Banking provides the opportunity for faster access to funds. For UK SMEs, this is perhaps the most enticing reason to adopt open banking-based payments.
Open banking technology, integrated with the Faster Payments Scheme – a UK banking initiative that reduces payment times between different banks’ customer accounts – enables funds to be transferred in a matter of seconds. The funds are freely accessible to the payee to be used to meet the business’s needs, and there is less opportunity for chargebacks to recall/dispute the payments; an issue SMEs often face.
On the other hand, if SMEs accept a card payment, this will typically arrive 1-7 days later. In fact, depending on who the payment service provider is it can sometimes take even longer. Understandably SMEs, who are often managing tight margins and cash flow difficulties, are looking to turn to open banking to take advantage of payment receipt times of just 1-7 seconds.
A customer-led payment experience
The complexity of current payments services is harming business. Indeed, Xero recently reviewed over 2 million overdue 30-day invoice payments, and found that the average late invoice was paid 64 days after issue, more than double the payment term.
Much of this may be working capital optimisation from the payer, but some will likely be down to poor existing payment processes. Given the vast amount of payment methods available today, it’s absurd that payers still need to switch between multiple interfaces, websites or portals to view an invoice and make a payment.
One way in which open banking is making it easier for customer payments to be processed, is in the ease of transaction. Traditionally customers would receive an invoice through one channel, and then transfer into their accounting software or internet banking platform to make the payment.
With open banking, customers can initiate payments in the same platform they received the invoice. The channels through which these are available vary; requests can be initiated via email, text message, or as a plug in to other portals, such as their accounting software or ERP systems. In turn, making it easier for customers to simply click and pay.
As open banking develops, the payer will be able to decide whether the funds should be sent immediately, or at a future date of their choosing in order to maximise their payment terms. The upcoming “Request To Pay” service, which provides a messaging layer to support billers, is an additional functionality which will help businesses gain more control over their payments and lead interactions with their payers.
Businesses will be able to issue their invoices and send reminders through their channel of choice. The customer can then easily initiate a payment using their preferred method (which could be open banking or Direct Debit or another form) and even choose to make a part payment, or pay later.
A focus on payment security
Payment security is a huge priority for SMEs and compared to card payments, open banking based payments offer greater security for both the payer and the payee.
Storing card numbers creates risk, and at present they are often captured and held during card payments. This creates the opportunity for criminals to steal them on a regular basis. Losses on UK-issued cards totalled £671.4 million in 2018, according to a UK Finance report.
To mitigate this risk, card providers impose more and more security measures, such as PCI DSS, CVV, 3D Secure, tokenisation and so on. Each step increases the cost of accepting card payments and adds friction to the payer’s experience.
Enter open banking; customers’ account details and credentials are only ever passed securely between the customer and their bank, and never available to the payee, giving greater security and assurance to all involved in the transaction.
Can open banking catch up?
The late payment crisis is a daily challenge for SMEs the world over, and it extends well beyond the payment process itself. As solution providers wake up to this and begin offering increased security, a smoother customer journey and ultimately faster payment methods, the pathway for SME payments will become less complex.
The benefits are plain to see and there is a clear demand for open banking products. We spoke to merchants throughout the UK and 89% told us they were considering, or actively exploring, leveraging open banking as a payment option within their organisation. The onus is now on solution providers to support these initiatives.