Can we really remove the friction from payroll?

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As payment technology gets more sophisticated, actually making payments is going backwards and getting more complicated. With a growing number of methods from Open Banking to 'buy now, pay later', paying for things becomes more confusing, not less.

But at least we can rely on our wages being paid on time, right?

Not so – from Asda to EY, companies large and small are regularly messing up on paying wages.

Is there a solution to the problem of wage friction?

Well of course there is – and it will suit the companies as much as the employees. Currently, if you are employed, your wages go through a process where the company that you work for calculates the tax on your earnings and sends this off to the tax collector. The remaining money is then deposited into your bank account from your employer’s bank account using an age-old banking process that takes 3 days to arrive in your account after instruction. With the rise of more secure technology, and particularly the increasing digitisation of tax, there is huge potential for innovation in this space.

But why are we still using banks as the payment conduit?

The simple answer is that it’s embedded into the psyche of every payroll processor out there. Banks are a trusted mechanism for payment and bacs provides a bullet-proof method of paying wages. Or are they? Two things are needed from a payment conduit for your wages – it needs to be safe and efficient. We need to be sure that the money is going to arrive in the right account at the right time. And it needs to be speedy and low-cost. And undoubtedly banks can provide this. But why couldn’t your employer be that trusted, robust conduit? Your employer – or, in the case of a smaller employer who doesn’t have the resources, an embedded finance company which provides these services white labelled for the company – could easily be that conduit. Working with an embedded finance company (like.. er… Caxton) would allow those employers to offer both the security of a well regulated service, as well as the guarantee that your card will be connected and you will be able to use it as you’re used to. The impact on treasury is huge and instantly positive. If a company has a treasury with an embedded finance company, as well as employee accounts within this, payments are instant and cash flow is secure. Rather than having to pay the bank days in advance to ensure that your employees get their money on time, moving the money is pretty much instant. No genius prizes for understanding the positive impact this can have on cash flow. The potential benefit to your employees is also huge as you as a business will be able to offer your employees plenty of benefits that are currently out of reach. You can offer benefits like low cost loans and a huge amount of benefits. Imagine, for example, being able to offer your employees a pre-tax earnings mortgage, similar to the Cycle to Work scheme? Especially with the market as it is, top talent is looking at who can offer the most benefit to them and their career, and by using embedded finance you open up the possibilities for what those benefits could be and what that could look like. And that’s not even getting into what I see as one of the main benefits of embedded finance, which is earned wage access. Consumers today want convenience over all, and consider money earnt to be their money – rightfully so, as they have done the work that wage is being paid out for. Someone who is a part time teacher, for example, may not be able to wait until the end of the month to get the money they have rightfully earnt in the first two weeks of that month. Earned wage access is a huge opportunity to help people, especially those who are on or close to the bread line, stay out of debt and not have to rely on predatory lending. With the cost of living crisis especially it will be so important that people are able to access their money immediately. This is a much bigger topic than can be covered in a few sentences, so next month I will do a deep dive into what this means for the future of payments.