Uncovering the power of payment networks

Strategic Treasurer’s Craig Jeffery recently sat down with Deluxe’s Chris Clausen to discuss the benefits and structure of network capabilities within digital payment solutions in a podcast produced by Strategic Treasurer. We’ve highlighted the top questions discussed during this engaging podcast to share insights the power of networks and directories can have on existing payment processes.

Where is there value in payment networks?

“When we look at the value of a network and where it fits in, particularly in payables and receivables, it’s a group of business or consumer entities that have a general understanding of a common set of rules,” says Clausen, “There’s a known set of value props that those entities can experience by participating in the network.”

Clausen compares a payment network to a phone book directory: “It parallels what a network looks like: You have a phone system, you have a number in there, and all you need to do is look up by name or address the person you’re trying to get ahold of.” This process is very similar when you have a payments network.  

The best networks, according to Clausen, make it very easy to participate. The value of a network is the familiarity it brings, the common language and understanding it has and the easy-to-find participant list. “If you can pull those elements together, you can really simplify the process of making payments,” he adds.

The value of payment networks comes from the digital payments capabilities that are available within a network of payment directories. These benefits include a stronger, positive payee experience, shorter payment cycle times, accelerated settlement, increased cash flow, reduced fraud and simplified storage and handling of personally identifiable information (PII).

How do network capabilities affect AP and AR processes?

When looking at AP and AR processes, the parties that take priority are those that you’re making payments to or receiving payments from. Businesses need to identify if both the people who they need to pay and those who need to pay their business are a part of the network. Clausen adds that small businesses especially want to see evidence of payer/payee participation before they take the time to invest in enrolling in a network.

“A network needs to demonstrate a sufficient reach that it's worth your time to participate, and there's a number of ways to do that, but the easiest one is to actually simplify that enrollment process and make sure that it covers a wide variety of use cases [from large business to small businesses].”

Networks can also improve the payments experience by creating a known relationship for the payer, instead of just a transaction. Even if a business needs to pay a brand new vendor, customer or other entity, a wide-reaching network will have their information already on file. 

A good network, according to Clausen, will cover both sides of the equation: when the payer and payee know each other, they have a relationship, and both parties are already in the network database, or if you have a non-relationship need (like a one-time payment) and one of the two parties is not in the network. A good network simplifies both use cases together and that is where you're going to unlock the real power of a payments network in the AP and AR spaces. 

What does the industry need to do to successfully onboard new customers? 

While historically payment networks have focused on larger businesses, Clausen says there is an opportunity to grow the power of payment networks by expanding to include small and mid-sized businesses.

“If you can start to look for a path to onboarding small- and medium-sized businesses, then you've got really powerful reach. And that's what we believe at Deluxe is one of the biggest things holding back the industry, is that a lot of the networks that exist overlap with each other,” says Clausen.

One of the barriers preventing the enrollment of small- and medium-sized businesses is that the existing onboarding process has to be simple, and it has to be cost effective. “At Deluxe, we believe it has been an opt-in process, it needs to be baked on an existing form of payment that the recipient is familiar with, and the onboarding itself has to be so intuitive and so few steps that it's kind of a no-brainer for that payee to enroll into your network,” explains Clausen.

Many of the network processes for onboarding can be relatively expensive, they require outreach, or they can cause a network's profit and loss statement (P&L) to go pear-shaped very quickly because the cost of onboarding a payee is so strong. One of the biggest tricks that Clausen sees in the marketplace is that you have to have an actual payment happening at the time to provide that extra incentive for the payee to actually take action.

What is the timeline for these type of digital payments?

“One of the biggest reasons I'm optimistic about massive change that's about to hit this industry, because I am seeing networks that have grown dramatically with the advent of the industry focus on that low-friction, opt-in enrollment process,” says Clausen, who predicts that we’ll see these type of digital payments emerge in the next 24 months.

“By focusing on the problem, the opportunity has arisen to actually grow those networks in triple digit rates, and we're talking about millions of participants,” he adds. “It doesn't take long before there's a comfort level participating, and what we're seeing in terms of feedback is that this next generation of payment platforms are intuitive enough and easy enough and frictionless enough that that network grows very, very quickly.”