Instant Settlement: Disbursements Next Big Thing

In payments, what is new soon becomes standard. Where customers were once eager to pay for speed, convenience and security … well, eventually, all that gets built into expectations and becomes part of what’s on offer all day, every day.

Instant settlement of funds to merchants is a relatively new hallmark of push payments, part of a slew of new offerings from FinTech firms like Square and PayPal, where sales can be settled in real time and pushed to the merchant almost as fast as sales are made. Not the next day, and not even the same day, but the literal instant they are made.

It’s a landscape dominated by digital-first platforms, where a premium can be charged for the service until, it too, becomes just the way things are done.

In an interview with Karen Webster, Ingo Money CEO Drew Edwards said instant settlement will, at some point, be “table stakes” in commerce. In an example of the not-too-distant past, he noted that next-day settlement was a competitive differentiator before just about everybody offered that payment option.

For now, the advantage enjoyed by digital platforms like Square and PayPal boils down to one key asset: Data, and visibility into that data. Each of these firms controls both endpoints with a clear line of sight into the ebb and flow of merchant sales, as well as real-time insight into the risks of pushing money instantly into bank accounts.

This early in the game, the uptake has been considerable. Square noted on its website that it has more than 700,000 sellers using Instant Deposit, launched out of beta in 2015, to get their funds within seconds for 1 percent of the deposit amount, in addition to Square’s standard card processing fees.

The company also announced earlier this year the launch of a debit card for businesses, which allows sellers using the processor to get immediate access to funds generated from sales. The impact is one where merchants keep those funds with Square (rather than with traditional banks), offering more insight into the inner workings and financial strengths of those businesses.

The Ideal Customer And Real-Time Advantage

The ideal customers for such a digital-first offering are the “cash strapped” small businesses (SMBs), said Edwards, which are “perfect customer bases for same-day and instant settlement.” That especially includes SMBs that already interact with, and are part of, the PayPal and Square ecosystems. For those processors, the ecosystems represent a form of competitive advantage.

The (Temporary) Merchant Acquirer Disadvantage

At least for now, the more traditional merchant acquirers are at a disadvantage when it comes to Instant Deposits, according to Edwards. “So many of these more traditional acquirers have no real interaction with their merchants,” he said, noting that the business may have been signed up by an independent sales organization (ISO).

The processing mechanics of these platforms, with cloud visibility into the sales behaviors of their merchants on a daily basis, make visibility about what’s happening in real time, even in the middle of the day. This real-time data visibility also allows for risk control, such as giving processors the ability to get their fees daily when funds are settled — limiting the risk that a fraudulent operator may forge receipts and make off with the cash paid out on fictitious sales, or a business that simply fails and disappears. It’s a matter of “not letting the horses out of the stables before you’ve counted them,” he said.

The more traditional merchant acquirers, Edwards explained, “[have] different layers of control … so this notion of instant or same-day settlement is more difficult to execute. It doesn’t mean it cannot be done, but there are challenges for them to overcome. Challenges that these players are, no doubt, devising strategies and new models to overcome.”

That creates, for now, Advantage FinTech — also a potential Achilles’ heel. As instant settlement moves to the new normal, the big question is how long it will remain a feature that commands a fee, and one that serves as a sticky competitive advantage. At that point, Edwards said, getting sales same day will become free, ultimately, and become table stakes.

The question then becomes whether instant settlement remains the sticky feature that attracts and keeps merchants. On that point, he added, it comes back to data. More of it, and a direct line of sight into it, builds the history and insights that power instant payouts for merchants. The fear of having to build that history and data trail over a period of months may just be enough to keep merchants from playing the field.