The digitization of payments: why bank debit keeps growing

Digitization: The change is here

The payments ecosystem is digitizing fast. While checks and card transactions are still popular in the US, the writing is on the wall: recent research conducted by YouGov shows that “bank-to-bank payment methods are the most preferred, globally”. And the US is catching on. The annual volume of bank debit (ACH) transactions is growing year-on-year, with Nacha reporting that there were 6.8 billion payments made on the ACH Network during the third quarter of 2020 (a 9% increase over the same period in 2019 - no mean feat given the economic challenges presented by COVID).

At the same time, the 2019 AFP Electronic Payments Summary Report found that major business customers are now more likely to use bank debit than checks for payments: continuing a decline for paper. AFP found that only 42% of B2B customers paid using checks; and this is a trend which is accelerating. Businesses must act now to embrace digital payments or risk falling behind; because customers have made the direction of travel clear. 

Customer sentiment is always the most powerful driver for change, and whilst businesses are generally looking to digitize their processes where possible, the upheaval of 2020 has accelerated the trend in payments – what analyst McKinsey calls “a half decade of change in a few months”.

Let’s use retail as a barometer of that customer sentiment. Digital Commerce 360 reports that “In the first six months of the year, consumers spent $347.26 billion online with U.S. retailers, up 30.1% from $266.84 billion for the same period in 2019”. McKinsey, therefore, suggests that “overall, in retail, the impact was not a decline but a shift in buying behavior… many consumers (in particular, older shoppers) turned to online shopping for the first time. Consequently, all forms of electronic peer-to-peer and consumer-to-business payments have been boosted.” Use and circulation of cash, meanwhile, has fallen off significantly enough that the Federal Reserve has been forced to increase its minting of coins. 

In B2B, the trend has been exactly the same, for several reasons:

• Partly, this is because actors in businesses are themselves consumers, and expect the same degree of digitization in their work lives 

• In the Covid era, they have also had to learn to engage and sell online – often to ensure their very survival 

• And they have been working from home, from where paper-based processes (use of checks, paper remittances etc.) are now not just an uneconomical use of effort, but simply fall apart.

Equally, for SaaS companies – the pioneers of end-to-end digital fulfillment – bank debit already made sense. Processing decline rates for bank debit stand at around 1-2%, depending on the sector and nature of the business, compared with up to 15% for credit cards.

In B2B, the cost of failing to digitize is high. Research for GoCardless conducted by Forrester found that payment recovery costs are of an order which will dramatically affect margins: “Over half of decision-makers say the average cost of recovery for their usage or consumption-based payment model is over 11% of the average payment size. This figure is much higher for B2B-only firms, where lack of payments digitization and automation translates into more manual and time-consuming recovery processes; almost 80% have a cost of recovery at 16% to 20% of their average payment size.

Why digitization of payments matters

 For consumers, it’s about meeting expectations. We live in a digitally enabled world, and consumers expect payments to be as fast as all the other things they do – streaming movies, buying products, etc. Accenture writes, “The need to process payments faster and in ‘real-time’ is rooted in the ‘anytime, anywhere’ demand from the new-age consumer.” Payments which are seamless, always on and pain-free, without failures for arcane reasons like card expiry, are just part of the consumer’s expectations in the digital age. And while payments infrastructure may be hard to put in place, it’s not the consumer’s problem - and they won’t be forgiving of businesses which fail to keep up. In the words of Governor Lael Brainard of the Federal Reserve, “We are committed to closing the gap between the transaction capabilities in the digital economy and the underlying payment and settlement capabilities.”

It’s also about fairness. The traditional time lag in transaction fulfillments is rapidly being seen as a tax, taking money out of people’s pockets, even if it’s just for a few days. Brainard again: “Immediate access to funds could be especially important for households on fixed incomes or living paycheck to paycheck, when waiting days for the funds to be available to pay a bill can mean overdraft fees or late fees that can compound.”

For businesses, the incentive is both monetary and operational. The Mercator Advisory Group says that ACH is replacing check transactions for businesses for several reasons:

1. Bank debits represent better value: not only because banks are increasingly charging fees for processing paper, but because there is an internal cost in the manual processes of handling checks. And that cost increases, because paper transactions are not scalable. As one GoCardless user says, “One of the challenges of business is making things scalable. If taking twice as many customers takes twice as much work then there is an upper bound on your profit. By adopting GoCardless I have been able to significantly increase my customer base without a significant increase in work and without those awkward credit control calls.” That value increases yet further when you factor in the reduction in customer churn achieved by bank debit when compared with checks or credit cards.

2. Bank debits are end-to-end digital, thanks to digital tools across the processing function: “Businesses are adopting more enterprise resource planning (ERP) and accounting software solutions that automate, manage, and reconcile inbound and outbound ACH transactions.” This in turn improves fiscal visibility and cashflow management.

3. Bank debits are hugely less open to fraud: 70% of participants in the 2019 AFP Fraud and Control Survey Report reported experiencing at least some fraud activity on checks, compared with just 33% on bank debits.

The virtuous circle

Mercator is right to point to these reasons for the success of bank debit, but they represent only half the story. Digitization is not just cutting out cost and effort for finance teams; it’s allowing them to create a virtuous circle in which Receivables teams contribute to customer service, which in turn improves both profitability and cash resilience. Finance Digest reports: “To improve the customer experience, it is pivotal that finance departments remove friction from and streamline the payment process… by offering better digital capabilities and more varied payment options, such as via [bank] debit. Additionally, more finance departments are adopting technology which allows them to automate repetitive processes that until now have been done manually.

As a direct result of this, more time can be spent providing better customer service and focusing more closely on the higher value accounts or those experiencing financial difficulties… They are not only then more satisfied with their experience but are also far more likely to pay their bill sooner next time.”

The point is: digital payments are inextricably linked to customer experience. Digitization is not just a way to reduce costs and friction; it’s a way for finance teams to join other back office functions in service of the most important stakeholder: the customer.

Again, SaaS businesses have known this for some time – the SaaS business architecture is religiously designed around the customer. In the words of analysts, Deloitte, “Due to the continuous engagement of customers throughout the as-a-service offering life cycle, the billing operations team has insights on how customers are consuming the service and how much they are willing to pay for the service. These insights can be shared with the customer support, sales, and pricing teams to enhance the overall customer experience, drive cross-sell/up-sell opportunities, and adjust pricing based on demand. This approach also helps retain customers long term and manage churn rate more effectively.”

This will become ever more important as more businesses offer subscription models. Our research conducted by Forrester reports that “US payment leaders understand the role recurring payment solutions play in advancing their payment strategies. Almost 70% plan to

change their business model for selling their products or services. As a result, US business decision-makers [are] looking to adopt recurring payment solutions.”

To support them, bank debit continues to evolve. In March 2021, bank debit is being expanded in the US to support same-day transactions up to 4.45PM ET. As the Credit Union industry’s CUSO magazine reports, “Bank debit is not going away anytime soon. In fact, it’s not even slowing down. Volume has increased by at least a billion dollars every year for several years running, and same-day bank debit volume has more than quadrupled in just the last two years.”

The customer is driving the digitization of payments; thanks to a constant desire for speed and simplicity. That has not only driven a change in payment mechanisms, but also the enterprise accounts payable function and whole new business models like SaaS. It’s an inexorable, one-way process which no business can ignore. To dig deeper into the transition and to understand both the challenge and the opportunity of payment transformation today, see the latest Forrester ‘Spotlight’ report, Recurring Payment Friction In The US.