In its semi-annual Scorecard evaluating the online small business offerings of the twenty largest U.S. Banks, Watchfire GomezPro found that while all of these banks offer much of the functionality required for small businesses to make payroll and to offer associated tax payment services online, most banks do not actively package or promote this online functionality as a solution to payroll and tax payment needs. In certain cases, the online offerings are lacking a critical piece of the puzzle to make a cohesive payroll service, such as an authorization form. But many banks are missing an opportunity to package and market ACH transfers and other online functionality they already offer as a solution for payroll and taxes. If they did, they would attract more small business customers to the online channel and increase usage by existing online customers.
Payroll is a key function for small businesses, as every business with even a single employee pays salaries on a regular basis and is also required to pay federal and state employment taxes, and file quarterly state and federal tax returns. Some small businesses choose to outsource these services; however, many conduct this service off-line, meaning they calculate salary payments and withholdings through their accounting software or manually, and then cut checks to their employees. Most online offerings provide features that enable customers to accomplish many of these same tasks. Banks should consider bundling some of this functionality to provide an integrated payroll service to small businesses.
Account Linkages, Bill Payments and Transfers:
While just a few banks offer full payroll services in their online offerings, 95 percent of the banks on the Watchfire GómezPro Small Business Scorecard offer the ability to transfer funds between accounts, and many offer the ability to link either multiple business accounts or business and personal accounts (85 percent offer linkages with the same tax-identification number and 35 percent offer linkages with different tax identification numbers). Additionally, all of the banks on the Scorecard provide bill payment capabilities that allow an individual to be set up as a payee, and many also provide ACH payments.
As a result of this functionality, a small business owner using one of these offerings can:
- Set up a separate payroll account;
- Link the payroll account to an existing personal or business account; and
- Initiate transfers to this account to cover each payroll and either write payroll checks directly from this account or initiate online bill payments to each employee.
* Set up a recurring transfer and recurring bill payment for each payroll period.
And for those banks that enable ACH payments (approximately 30 percent of the banks on our Scorecard), a customer could also make payments directly into an employee's bank account.
Tax Payment Services:
Tax payment services are among the most popular features banks are adding online. About 30 percent of the banks on the Small Business Scorecard currently offer tax payment services, and many of the banks who have added this service did so in direct response to requests from those customers who process payroll themselves. However, some of these same institutions have been disappointed by the slower than expected adoption of these services.
One of the barriers is easily explained -- a lack of integration with the core online banking offering. Most tax payment programs require customers to use separate user IDs and passwords, and many do not feature real-time synchronization with checking and credit accounts. Additionally, if the tax payment service is integrated with a DDA account, these services tend to lack usability features like contextual balances.
Fundamentally, however, without an online solution for the front-end of the payroll process, it's much harder to get customers online to perform the back-end of paying payroll taxes.
Obstacles and Solutions:
Certainly some barriers exist for banks that wish to provide a payroll solution for small businesses. First, while the functionality exists to pay an employee, few banks provide the ability to calculate the appropriate amounts for federal and state withholdings. Most small business accounting software contains this type of functionality, and many Web sites also offer specific withholding calculators, so adding this information to an online banking offering would not be a huge undertaking.
Additionally, numerous government requirements exist for payroll, such as consent forms for direct deposit, that a small business owner would need to follow. However, since many small business offerings currently have online resource centers, banks could augment these resource centers to provide information about payroll regulations as well as include downloadable copies of any required forms.
Another other key question is whether banks could charge for a bundled payroll service that simply ties together functionality currently available for free to customers. Most banks charge incremental fees to use tax payment services, so one option may be to bundle any payroll services into this additional fee.
It's also important to note the recent upswing in bill-payment enrollments at banks who have switched to free bill pay services as clear evidence that small business customers will embrace free services much more than fee-based services, so any opportunity to offer payroll services for free will likely enhance its adoption. One potentially positive factor for banks is that customers who might use online banking to process payroll will likely keep higher balances in DDA accounts, and may be more eager consumers of credit or overdraft products to help maintain adequate liquidity.
The issue is not whether small business customers need to process payroll and pay the associated withholdings to the state and federal government -- they do. Nor is it an issue of whether the functionality exists in small business online banking offerings to provide these types of services -- it does. What is at issue is whether banks will consider this a big enough opportunity to add the few missing pieces, or to combine the resident functionality to provide an efficient online solution for a financial transaction regularly conducted by nearly all of their customers. Watchfire GómezPro believes it's an opportunity for banks to strongly consider, as it could be a powerful draw to not only lure more small business customers online, but to also encourage greater usage of online small business offerings.
Matt Lehman is a senior analyst for Watchfire GómezPro. Matt covers the financial services industry, specializing on small business banking, mortgages and treasury services. He can be reached at firstname.lastname@example.org