November 08, 2012

There’s another very important yet overlooked reason SMBs should be wary of bill pay: security.

Business accounts do not enjoy the same protections provided to consumer accounts. In particular, Regulation E, which provides protection against certain types of unauthorized electronic transactions does not apply to business accounts—a fact unknown to most businesses. Unauthorized and unnoticed transactions on business accounts can be deadly – expensive to the bank and business, but also potentially resulting in a highly contentious battle between the bank and the business: a battle which can escalate into expensive litigation destroying both reputations and balance sheets.

Few SMBs have security systems in place to effectively protect themselves from the relentless onslaught of malware and viruses. Payment protection from fraud is a distant afterthought in most consumer-oriented bill pay solutions.

Unfortunately, there are internal fraud risks as well. The dual-control regimen adds a layer of fraud protection with an approval step. But with bill pay, any SMB employee with access to the online banking account can embezzle funds with the click of a mouse. Bill pay is highly vulnerable to online account takeover fraud and employee fraud.

The Bank Cost Gap

Bill pay faces another problem: its business offerings are not supported by a sustainable business model.

The cost to a bank for any individual payment made through bill pay is dependent on one question: is the payment settled as an electronic ACH payment or does it result in a Remotely Created Check (RCC)? That in turn entirely depends on whether the payee is in the bill pay provider’s “biller directory.” A payee match in the biller directory results in an electronic payment, the lack of a match results in the creation of an RCC. The most commonly used biller directories have a mere 10,000 payees. This is sufficient for the most common consumer payments, which are concentrated among consumer billers –credit card, utility companies, mortgage services, cable companies, and the like. But business payments are, of course, more diverse, and more likely to be spread out across the 26 million U.S. businesses, rather than 10,000 consumer billers.

It is not uncommon to have 70 percent of all consumer payments settle via inexpensive ACH payments to vendors in the bill pay provider's directory. Business billers, however, are seldom found in biller directories. As the number of payments to unlisted billers increases, the number of expensive paper RCCs that are created by bill pay also increases—at a significant cost of about fifty cents per item. How does this effect a bank’s bottom line? Since banks do not usually charge for bill pay (and cannot charge for it if they wish to remain competitive), the cost to the bank increases dramatically.

Take a Deep Breath

Bill Pay solutions have changed the face of consumer payments, and dramatically cut the number of paper checks issued, with massive aggregate benefits to consumers, billers, banks, and the Federal Reserve.

If we are to want similar benefits to accrue from SMB payments, we cannot expect them to come from the current crop of consumer-oriented free Bill Pay solutions. What we need are SMB payment solutions that are engineered from the ground-up to meet their needs – to be simple, secure, and to deliver value that banks can turn into much needed revenue.

BC Krishna is the CEO of MineralTree