Payroll Demands Could Boost Business Case for Real-Time Payments

We’re moving towards the day when all payments – corporate payments especially – will be done instantly.

Or maybe not.

On the face of it, we all want payments to be made with more speed and better visibility. But drill down a bit, and the corporate embrace of RTP has been uneven thus far.

Recent PYMNTS research, done in collaboration with Mastercard, shows that many U.S. firms choose not to use real-time payments, and many Canadian firms would not want to use them — even if they were available. The data shows that  37% of all U.S. businesses currently use real-time rails to pay or receive invoice payments, and 37% of all Canadian businesses want to use these payments. Those results show that most companies are NOT pivoting to embrace real-time functionality.

Read More: Why Two-Thirds of US Businesses Resist Real-Time Payments Adoption

The gap is most readily apparent when looking at larger firms vs. middle-market companies (the latter group tends to have revenues of $10 million to about $1 billion). Larger companies’ RTP volume is twice as large as their smaller brethren.

We contend that the prime mover — the impetus that gets middle-market firms, especially — for RTP may be rising interest rates.

Rising Rates and a Ripple Effect  

Rising rates make everything more expensive — and make it more costly to run a business. And while it used to be the case that a fairly large chunk of running day-to-day operations could be anticipated, timed and scheduled, that’s no longer the case with the shifting demands of end markets and consumers.

Among those shifting demands: We’re moving away from the traditional two-week payroll cycle, away from the cycle of getting paid every few Fridays. Employees may opt-in to getting paid as work is performed, as wages are earned — and no individual or family wants to have their cash flow interrupted by a bank holiday. Thus, to remain competitive, companies of all stripes and sizes will need flexibility in how they pay workers. RTP can help streamline those activities.

Payroll offers up a microcosm of the value that might be unlocked with RTP. What might be termed the “traditional” payroll model is one where a company contracts with a payroll provider such as ADP, which in turn earns interest on the funds held and paid out to the client enterprise’s employees. Moving funds over, getting them paid out — well, firms pay for that service, as payments are scheduled well in advance. Interest income is significant for the payroll providers: ADP said in its latest results that interest on funds held for clients would be worth as much as $455 million for the remainder of the year.

With the better visibility offered by RTP, companies — especially mid-market firms — can manage these and other (increasingly expensive) operating activities with aplomb. They can move funds over to service providers and other entities in a just-in-time fashion that can shave a few basis points on everyday activities while navigating the changing payments landscape. Bit by bit, the basis points add up, and the money “retained’ by corporates embracing RTP translates to real margin improvement.