Small and mid-sized companies are embracing electronic payments. According to a new report, Small and Mid-Sized U.S. Companies Embrace Electronic Payments, from Greenwich Associates, 35% of micro businesses, 43% of small businesses and 55% of large middle market companies expect to increase the number of electronic payments they make in the next 12 months.

What’s driving this migration?  According to Chuck Rogers, Greenwich Associates commercial payments practice leader, “Companies are motivated by the ability of electronic payments to increase cash flow, improve security, and lower costs through enhanced operational efficiencies.” 

(Greenwich Associates defines micro businesses as firms with revenues over $100,000 but less than $1 million; small businesses as those earning revenues between $1 million and $10 million; and middle-market businesses as firms with annual revenues between $10 million and $500 million.  Large middle market companies are those with annual revenue in excess of $100 million).

Importance of Payments Capabilities in Bank Selection
Electronic payments have become such an integral part of business operations that a bank’s payments capabilities have become a key decision making criterion for companies in their selection of a banking partner.  Fifty-five percent of micro businesses say payments capabilities are an important consideration in their selection of a banking partner, as do 63% of small businesses. Payments capabilities take on even more importance among bigger companies, with 72% of large middle market companies ranking them as an important selection criterion.

Cost and security are the two most important considerations companies use to determine which payment method used.  The third most important consideration is speed.   Process driven considerations such as ease of integrating payments data with accounting systems, ease of account reconciliation, and the ability to include detailed remittance data with payments grow in importance as companies increase in size. 

Banks are at Risk of Disintermediation
Despite their enthusiasm for electronic payments, companies express a lack of loyalty to their primary bank relative to the payment services they provide.  Net Promoter Score (NPS®) is a gauge of customer loyalty that measures a company’s likelihood to recommend a provider to a peer. The more likely a company is to recommend the provider, the more positive the NPS score.   The results of the Greenwich Report reveal that small and mid-sized U.S. companies give their primary bank a negative NPS score reflecting their lack of willingness to recommend them for payment services.  This lack of loyalty is underscored by the one third of micro-businesses and approximately one quarter of small businesses and middle market companies that say they are not likely to acquire their next payments-related product from their primary bank.

Opportunities for Banks
The good news for banks: Companies are exhibiting strong and growing demand for electronic payments solutions. The bad news: Reluctance to recommend their primary bank to another company for payment services combined with lukewarm intentions to acquire their next payment service from their primary bank indicates disintermediation risk that should not be ignored.  Greenwich Associates offers the following recommendations to banks that will assist them in capitalizing upon the market’s desire to migrate to electronic payments while reducing the risk of disintermediation and the resulting loss of revenue streams:

  • Educate branch managers, business bankers and middle market relationship managers on the importance of electronic payments in the bank selection process.  Equip them with a simple line of inquiry to enable a payments focused customer dialogue designed to surface leads for commercial payment specialists.
  • Consistently feature the bank’s commercial payments capabilities in proposals for new business customers.  These capabilities are a key decision making variable that can give you a game-changing competitive advantage.
  • Develop ROI centric market messaging beginning with increased cash flow, then tailor messaging as appropriate for each target segment. Place priority on improved security and reduction in late payments for companies with less than $10 million in revenue.  Focus the value proposition on improved security and more efficient account reconcilement for lower-end middle market companies and operational improvements such as better payments data integration with accounting and ERP systems for large middle market companies.
  • Bundle electronic payments and consulting as an integral component of a package of credit and non-credit services to discourage disintermediation.  Companies’ willingness to consider non-primary bank providers for payments products make this an imperative.
  • Measure, manage, and monitor NPS scores and other loyalty metrics.  The reluctance of companies to recommend their primary bank for payment services combined with their willingness to consider non-primary bank payment providers indicates that disintermediation is a clear and present danger.  Furthermore, given the importance of payments capabilities in bank partner selection, what begins as disintermediation risk has the capability to expand into full blown defection risk.