Even in an era of transformative technological advancement in the payments space, small businesses face stubborn challenges in managing their payment processes: manual processing, working with older legacy systems and supply chain management, to name a few. In a conversation with host Jim Marous on the Banking Transformed podcast, Jeff Horowitz, EVP of Transcard, a payment solutions provider, shares insights on how third-party providers can help financial institutions modernize their payment offerings to address the specific needs of small businesses.
Q: What are some of the biggest pain points small businesses face when managing payments?
Jeff Horowitz: There are many. A recent article in Forbes magazine cited 33-plus million businesses in the U.S., representing around half of the workforce. We think of the big Fortune 500s and they’re important, but the small business is the backbone of the United States and that also holds true in many other markets worldwide.
Customers tell us a few things. First, they’re dealing with a lot of manual processing. They may be working off old legacy systems, which is an issue. They’re dealing with reconciling information as payments come in. As they look at their supply chain, who paid me? What was it for?
If I’m paying a supplier, there might be some kind of error, or they thought they would be getting paid a certain amount, but it wasn’t. It goes back and forth.
One of the largest items we hear is related to payments, but access to working capital concerns business owners and CFOs of small and medium-sized enterprises. Interest rates are high; they remain high. We’ll see what happens.
Q: How do the challenges of small businesses differ from those of consumers or Fortune 500 companies?
Horowitz: That’s interesting; I’ll separate the two between consumer and the Fortune 500.
First is the consumer.
Look, Jimmy, you and I are consumers. What are we looking for? Immediacy. We want a car to take us somewhere in minutes.
We want a car to pick us up wherever we are. We want our groceries, or you know the drill. We want our food. It should also come in minutes. Packages, texts and messaging seem to come in minutes or seconds — consumers want immediacy. Small businesses have to start thinking that way about their customers and suppliers. The answer to your question of Fortune 500 problems is the same for large corporations.
Manual processing, reconciliation of payments and access to capital — although they get to have access a little bit better than a small business — the problems are bigger for them. If there are a few hundred payments in a given month, there are a few thousand, maybe millions of payments, you can imagine. But they do have some of the resources available.
Transcard’s Role in Modernizing Payment Systems
Q: How are third-party providers like Transcard helping financial institutions improve their payment offerings for small businesses?
Horowitz: Let’s start by discussing the banks and small businesses. I’ll keep the context within the U.S. for banks in the U.S. I read something years ago and I recently did a little research to prepare for this discussion.
Five banks hold 57% of the balances in banks in the U.S. The top five banks hold 57% of the balances, which is probably true. Last I checked, it did around that. It may be even higher in market share if you would.
And then yet there are 4,000 plus banks in the U.S. Frankly, 569, according to the FDIC, have failed since 2000, about 25 per year. So, banks have to be careful about how they operate, how they compete for business and “shelf space.”
Q: What does the Transcard payment platform do to help financial institutions compete with fintech firms?
Horowitz: I met Transcard seven or eight years ago when the bank I was working for partnered with them. They process millions of payments through their system each year.
What we’ve built is a hub. We call it a smart hub. Over the years, it’s handled, like you just described when you mentioned PayPal and how you collect funds, the matter in which you pay your suppliers. So, Transcard has built a platform to support that is called smart collect and smart disperse, which are all in one ecosystem.
But what they’ve done that really differentiates itself is to link together in an automated way, an integration with those back office, small business and large corporate platforms — the Oracles of the world, the QuickBooks of the world — I’m naming a few just as examples.
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What Are Key Innovations in the Payment Ecosystem?
Q: What innovations have you seen across the ecosystem in the last few years that improve payments for banks and small businesses?
Horowitz: On the technical side, I’ll give you the acronym API and your audience may or may not know. So, the application programming interface is what it stands for. The way I like to think of API is real-time information that’s shared between systems.
The ability to move information from one robust system to another 24/7 is probably one of the biggest innovations of the last several years.
The non-technical innovation is, frankly, fintechs working with banks. When fintechs started to come of age, the banking community was a little freaked out. What are these guys doing? Then, the larger technology companies started thinking: “Hmm, I can compete against the banks.”
There were interesting conversations at various conferences and meetings that I would go to. Now, it really isn’t that way — it’s collaboration. So, what we’re going to see for innovation is fintechs working with banks to solve the problems of small businesses and large corporations.
Q: What role do artificial intelligence and machine learning play in improving payment processes for small businesses today?
Horowitz: Well, you know as well as I would you say artificial intelligence, you know as well as I do, once you stick those two initials AI in front or behind anything, it’s a whole other conversation, right? So, AI has been around for many, many, many, many, many years.
It certainly has generative AI, etc. and has really become popular and powerful for the amount of data involved. But let me give you a few examples to answer your question.
So, where did AI originate in the payments world? I don’t know, but I’ll tell you when I first had the experience with AI, if anyone in your audience knew what a lockbox is, where a check goes to a post office box, you must process all the associated paperwork.
But years ago, AI or machine learning found ways to look at that information, pull out that data and try to see, “Well, does this invoice look like that invoice?” If there’s an explanation of benefits, EOB, in the healthcare vernacular, is there similar information we can extract?
How to Address Security and Fraud in Payment Systems
Q: How does Transcard help financial institutions eliminate fraud and security risks with regard to both domestic and international payments?
Horowitz: So, the first thing out of the gate we’ll talk about with any counterparty that we speak with is looking at security and how the regulatory authorities view what we’re trying to accomplish. I mentioned the 21 billion in check fraud. So, that’s sort of the low-hanging fruit, as I see it.
Do you know over 11 billion checks are processed in the U.S. each year? Still, 11 billion is a lot. It’s less than a year ago or a year before that. So, we first look at how you move away from those checks with all that fraud into a digital payment.
But let me define that if I could because some people will think of digital wallets when we talk about security. My friends think, “I don’t want to do that; that’s a problem.”
So, a digital payment on the front end is a value transfer from one entity to another. It could be from a business to a business, business to consumer, et cetera. But the payment still has to clear.
Top Global Payment Trends for Small Businesses
Q: What global and domestic payment trends should small businesses be aware of?
Horowitz: So, a few things. So, if it’s a small business looking to source overseas versus sell overseas, there’d be a different answer to that question. Ultimately, from a payment standpoint, things are changing rapidly.
According to MasterCard, over 70 countries now have real-time payments. As I described earlier through the greenhouse and FedNow, 70 plus countries, that wasn’t the case 10 years ago or even five years ago.
So, the ability to move money — I wouldn’t say in real-time, but one of my colleagues likes to use the term near time — is now available in same-day transactions. So, when a U.S. company is looking to sell overseas, it might want to think about the platform it’s using today. Does it accommodate that? If not, it should.
Challenges in Implementing Advanced Payment Technologies
Q: What is the biggest challenge for financial institutions in implementing more advanced technology payment systems?
Horowitz: So, it’s different depending on the FI, the financial institution; if they’re a non-bank financial institution, it’s a whole other world because they’re not regulated the same way. But let’s take to the regulated banks, those 4,000 plus commercial banks that are regulated and even beyond the top five, say the top 25.
There are three general things banks are dealing with. One is legacy platforms. Now, with the advent of AI — you mentioned AI earlier — the data centers are starting to shift, et cetera, but they’re not going to shift off those legacy platforms.
So, how do they adopt newer technology on top of those legacy platforms? That’s what we tend to talk to them about. As I said earlier, those platforms could support small businesses, consumers, or large corporations.
They could be four, five, six, or seven platforms and we look to integrate into each one where it makes sense.
Quite frankly, the issue for the smaller banks is not only competing with those larger banks but also ensuring that their underwriting can support the small business community without creating undue risk to the bank.
As the payment landscape evolves, small businesses and financial institutions must adapt to new technologies and processes.
By leveraging the expertise of third-party providers like Transcard, banks can offer innovative payment solutions that address small businesses’ unique needs while staying competitive in an increasingly digital marketplace.
For a longer version of this conversation, listen to “Modernizing Payment Solutions for Small Businesses”, a podcast with Jim Marous, available here. This Q&A has been edited and condensed for clarity.
Justin Estes is an award-winning writer, strategist, and financial marketing expert with expertise in banking, investments, and fintech. His clients include the NYSE, Franklin Templeton, Credit Karma, Citi and, UBS, and his work has appeared in Forbes, Barrons and ThinkAdvisor as well as The Financial Brand.