Inefficient and Often Late Ad-Hoc Payments Account For 38% of SMB Sales

Look up “ad hoc” and the definition is simple: created, as needed.

Ad-hoc payments, then, serve a simple purpose. They’re created, as needed, frequently on a one-off basis, to satisfy, say, a refund, or to adjust payroll — and frequently, they don’t even have to go through invoicing channels. In some cases, ad-hoc payments may boil down to paying a supplier only a few payments in a given month.

To that end, said Ingo Money CEO Drew Edwards in a conversation with Karen Webster, the ad-hoc payments tend to be done by paper checks, but they are anything but efficient. Paper checks take time to cut, are expensive, have to wend their way through snail mail and may languish for days before being deposited in the bank.

For small- to medium-sized businesses (SMBs), ad-hoc payments represent 38% of sales, according to PYMNTS research. Of that amount, 30% of those payments are late, and the majority of those late payments are more than a month past due.

The problem lies with the larger buyers, said Edwards, who noted that the “we’ll pay you by check or nothing” credo works because of a confluence of frictions — namely, it’s been hard to deliver payment choice to suppliers. The check is universally accepted, and upending such a ubiquitous payment method can be a challenge.

There’s a lack of supplier leverage, too, because these are the smaller companies that cut the grass or provide freelancing services or may be on a project one day and be done the next. The checks represent a path of least resistance of sorts, and suppliers have limited tools with which to close that late payments gap.

At a high level, said Edwards, the practice might at first glance seem “like bullying. It’s just built into your accounting department’s DNA to ‘slow pay’ everybody they can.”

In terms of mechanics, there may be a simple reason that the checks are the default option, as SMBs get lost in the shuffle. Edwards noted that “when they’re not part of the regular flow,” there’s not a lot of effort to onboard these smaller firms into larger buyers’ back-end processes, which would provide more consistent and scheduled payments.

But, as Edwards noted, with the rise of accounts payable (AP) automation for more “regular” relationships — and with the rise of online experiences and expectations — the tide may be moving (slowly) away from the paper check. Engaging with suppliers on a one-to-one basis — and on a transaction-by-transaction basis — costs time and money.

Paying for Speed

With firms like Ingo, Edwards said, “there’s actual technology in place with a one-to-many payments solution, where a company can choose to say, ‘Hey, let’s get more efficient here. Let’s get more modern here. Let’s engage digitally with our suppliers and find out how they want to get paid and pay them.’”

And people will pay for speed. The presence of platforms creates the opportunity for dialogues between buyers and suppliers, and even for discounting, he noted. This creates alignment with the struggling smaller firm and the larger buyer.

In a nutshell, said Edwards, “it’s a redesign of the financial supply chain.”

Savvy buyers can actually turn ad-hoc payments into a sort of revenue generator (although, as Edwards noted, there is not much elasticity at the small supplier level — they need the money).

“You’re monetizing speed,” he told Webster. “The method we can use to pay instantly is cheaper for them than the check. So, they paid less, they have a happy supplier and they paid with a cheaper method.”

Beyond the choice to get paid early (for a discount), Edwards noted that platforms and digital payments also open the door to ask suppliers how they want to get paid. Using technology that lets suppliers benefit from self-enrollment processes — and a streamlined transaction — means that larger firms can “scale” these ad-hoc payments without human intervention. In the meantime, “dead time,” where companies are sitting on accounts payable or sitting on an approval process, or when checks are in the mail, is eliminated.

For the moment and looking ahead, the redesign of financial services is concentrated within the payments networks like Visa and Mastercard, and a range of FinTechs.

“They’re going back and forth with the suppliers, and figuring they’ll work their way down the food chain,” said Edwards. “We see it mostly playing out in the accounts payable automation and the [enterprise resource planning (ERP)] integrations schemes.”

That will lead to silos, much like the peer-to-peer (P2P) landscape of today. But the more efficient movement is toward the network of networks (they’re valuable but not ubiquitous yet) and the platforms that let recipients choose where they want the money.

It’s important to decouple the sender and how they want to pay from the receiver and how they want to get the money because those can be two different decisions altogether. The network effect can connect far-flung buyers, suppliers and directories and make it all interoperable, and we’ll likely see critical mass in the next few years, particularly as real-time payments gain traction.

As Edwards told Webster, “The beauty of using fast payments, instant payments and digital experiences is that there’s immediate gratification. People come back for that.”