In this era of ever-increasing pressures on cash and cash flow, holding on to cash and putting it to work are key factors in staying ahead. Other than perhaps payroll, no portion of your business consumes cash like your Accounts payable (AP). Over the last two decades the AP automation software industry has recognized this fact and have built several hundred-million dollar businesses by taking advantage of the cash hoard that makes up AP. Add to this the slow-adoption of real-time or same day payments by the US banking industry and now these AP automation companies earn almost 50% or more of their revenue from short-term interest on customer funds. Interest that belongs in the hands of their customers. They do this by asking customers to pre-fund vendor payments long before invoices are due. The ask that they pre-fund ACH, check and card payments, telling customers they need 7 – 10 days to execute their vendor payments. If the question is, “how can companies hold on to more of their AP cash longer, waiting until the very last moment to execute payments?”
AP automation with embedded banking is the answer. Among other benefits, embedded banking represents a tremendous opportunity for companies to take control of their float and have the same opportunity to keep earning interest. With its groundbreaking embedded banking capabilities, PaperTrl alone provides a next generation AP automation platform that will help companies to realize this benefit. This article explores how embedded banking is at the core of the next generation of AP automation and how PaperTrl is leading the way with to accelerate innovation.
Understanding Embedded Banking
Embedded banking is a term that has gained prominence in the realm of financial technology (FinTech) in recent years. It refers to the integration of banking services directly into software applications, enabling seamless financial transactions and data exchange. In the context of AP automation, embedded banking allows businesses to streamline their payables processes and access funding directly without the need for intermediary accounts, known as FBO accounts (see below), or third-party financial institutions. Embedded banking is enabled through the use of Open Banking API’s. APIs or Application Programmer Interfaces are software programs published by the bank that allow highly secure access the banking systems to perform common functions such as money transfers, balance checks and account reconciliations. While APIs have been used in the software industry for decades, they’ve only recently become available in banking – and only with a few larger banks and their regional affiliates. Developing embedded banking capability requires significant investment and commitment by the bank, and therefore, not all banks have developed this capability.
FBO Accounts in AP Automation
FBO accounts, short for “for benefit of” accounts, are intermediary accounts that hold funds on behalf of the organization for specific purposes. FBO accounts have long been used in every industry from trust management, escrow and brokerage accounts to 401k and payroll. The majority of the current generation software companies also use FBO accounts to fund customer payments for vendors. In this way, software companies could manage the risk of vendor payments and ensure checks written and ACH payments made would be covered. Over the years, these FBO accounts have become a great source of income for AP automation companies. As they hold customer funds, they move the cash into high-yield interest bearing accounts. Prior generation AP automation companies like BILL and AvidXchange report that more than 40% of their income each year comes from these interest payments, great upside for BILL and Avid. The downside of FBO accounts is that they introduce delays of anywhere from 3 – 10 days in the execution of vendor payments. The delay is necessary for the BILL to ensure the funds are legitimate and cannot be clawed back by their customer.
Open Banking enables PaperTrl’s Embedded Banking Capability
As mentioned above enabling embedded banking requires significant investment on the part of the financial institution. PaperTrl’s Open Banking partners have all led the way in developing and promoting their integration capabilities. The banking functions enabled by Open Banking allows PaperTrl to set itself apart by offering a comprehensive and competitive AP automation solution while enabling the direct funding of AP transactions. This means that businesses using PaperTrl can fund payments directly from their own bank accounts and credit lines to their suppliers without the need for FBO accounts.
Benefits of Direct Funding with PaperTrl
- Improved Cash Flow Management: One of the most significant advantages of PaperTrl’s direct funding capability is improved cash flow management. By making payments directly from their own bank accounts, businesses can hold onto their cash longer, optimizing the timing of payments to suppliers. This is crucial for companies, as it provides flexibility and liquidity to allocate funds where they are needed most and take advantage of investment opportunities.
- Reduced Administrative Overhead: With traditional AP automation solutions that require pre-funded FBO accounts, companies must manage these accounts separately, leading to increased administrative overhead including account reconciliation. PaperTrl’s direct funding eliminates the need for these intermediary accounts, simplifying financial operations and reducing the complexity of reconciliation and account management.
- Enhanced Security: Direct funding with PaperTrl also enhances security. FBO accounts can create an additional layer of complexity and potential vulnerabilities in the payment process. By sending payments directly from their own bank accounts, businesses can minimize the risks associated with managing FBO accounts and ensure the security of their financial transactions.
- Real-time Transaction Visibility: Direct funded transactions have real-time transaction visibility. Since there’s no third party, businesses are able to track the status of payments and gain insight into their financial operations. This transparency allows companies to follow their standard business processes for tracking, voiding and even stopping payments on transactions.
- Keep your cash: Utilizing PaperTrl’s embedded banking capability means that you can hold on to your cash until the payment is actually due. This gives you all of the inherent opportunity that exists with mature treasury management functions, not the least of which is keeping cash in a high yield interest bearing account…enjoying the same income opportunity as BILL and AvidXchange. 😉
Real-time Payment Capabilities with Embedded Banking
In addition to the benefits mentioned, embedded banking also equips PaperTrl with enhanced payment capabilities. Businesses using PaperTrl can access same-day and real-time payment (RTP) capabilities, which are not typically offered by the current generation of AP automation providers. RTP allows for swift and efficient transactions, providing a level of agility and responsiveness that is essential in today’s business landscape. Whether it’s taking advantage of early payment discounts or accommodating urgent payment needs, PaperTrl’s embedded banking capabilities ensure that businesses remain competitive and adaptable.
Some of our competitors see real-time payments as a threat to major portions of their revenue streams telling their shareholders “Widespread adoption of new forms of electronic payments, such as real time payments, could also negatively impact the revenue ($198.6 million) we receive from electronic payment transactions (like virtual cards and ACH)”. Unlike some competitors who earn tens of millions of dollars each quarter by earning interest on their customers’ cash often referred to as “float”. At no point does PaperTrl directly or indirectly receive (or hold) your money or its equivalents. Your payments stay in your control and move directly from your bank to your vendor’s bank or whatever path you choose. In other words, your funds remain your own, and we don’t profit from the interest they could generate.
PaperTrl: The Next Generation of AP Automation
PaperTrl represents the next generation of AP automation, leveraging embedded banking to enable direct funding of AP transactions. This innovative approach challenges the conventional use of pre-funded FBO accounts. By allowing businesses to send payments directly from their own bank accounts, PaperTrl empowers organizations with greater control over their cash flow, reduced administrative overhead, enhanced security, real-time transaction visibility, and holding on to cash. As businesses continue to seek more efficient and agile financial operations, PaperTrl’s embedded banking capabilities mark a significant step forward in the evolution of AP automation.