JUST RELEASED: The 2022 Corporate Bank API Power Rankings. Visit our Fintelligence page to view the report.
Best Practices

Instant Payroll: How it Works — and Who Needs It?

Branson Low | October 28, 2022

Introduction

For any company, the most important payment is payroll. Employees rely upon their paychecks for necessities, so timing and certainty are paramount. Any failure related to payroll dramatically decreases employee morale, and dramatically increases reputational risk – how your corporation is viewed by employees and outsiders alike. In today’s world of payday loans and daily interest, settlement a day earlier can make a significant impact. But are instant payments for payroll really an option for the companies today? Let’s dive in.

Understanding Payroll Team Priorities

The payroll team’s top priority is to pay employees accurately and on time. From there, they must ensure the security of employee data and banking information. This must be accomplished at rest in the source of truth, and in transit when the data is being used to pay employees – both are equally important.

Ensuring the security of employee data and banking information includes limiting access to HR systems and masking data where possible, end-to-end encryption limiting exposure, and replacing sensitive data with less sensitive alternatives using modern technology.  For example, leveraging emails and Payee IDs.

Also crucial to a successful payroll team is maintaining efficient payment operations around the globe. From this lens, balancing the right mix of speed, reliability and cost is vital. Speed is achieved by leveraging the latest technology, and properly maintained communication rails and formats ensures reliability according to current processes and procedures.

While the cost of the method used for sending payroll doesn’t impact the employee, employers are always on the lookout for ways to reduce costs without sacrificing in any other priority area.

Get the free eBook: The Essential Guide to Bank APIs

Payroll Processing Today

Today, the standard for payroll processing is ACH settlement via SWIFT, or host-to-host. Around 20 years ago, these methods replaced paper payroll checks. Judging based on speed, reliability and cost, ACH via SWIFT and host-to-host was certainly an improvement compared to paper checks, but today these methods fall short when compared to the speed standards expected by employees in our instantaneous world.

Processing payroll with ACH settlement via SWIFT or host-to-host involves several layers of requirements:

  • Employee banking data, payment formats and payment transmissions must all be maintained
  • Banking data, the payment itself and the highly sensitive information in the payment must all be made secure
  • Employee data must be masked
  • Due to sensitivity of data, payroll formats in many cases are managed entirely separate to payment formats for core payment operations leading to unnecessary dual maintenance.
  • Tedious exception handling and time-consuming corrective actions are the norm
  • Batch responses for payment status make individual errors hard to isolate, often resulting in delayed secondary processing including a fix

As you can see, there’s a significant amount of initial and ongoing maintenance, slow, cumbersome exception handling and considerable security risks throughout the process.

Payroll Processing with Instant Payments

In the last 20 years since ACH via SWIFT and host-to-host became standard, technology has advanced immensely, and instant payroll payments are actively being used by corporations around the world.

Payroll is now being processed via direct, immediate communication through bank APIs , rather than a delayed, file-based process.

  1. Reduced risk. This eliminates the maintenance and storage of employee bank details, and instead opt for using email addresses to send payments. This shift dramatically reduces the risk inherent to HR systems and processes and is a welcome change for HR, finance and IT.
  2. Focus on core work. Another benefit to the HR team is reducing or eliminating the time spent on bank connectivity needs and formatting. Leveraging instant payments for payroll means HR can focus more on their core activities.
  3. More-timely information. Technology advancements also support more-timely information – like immediate payment failure notifications – so the finance and HR team can reprocess failed payments and still get the payment there in the same-day, avoiding reputational risk.
  4. Scalable. Considering all the advantages above, instant payroll processing is also more scalable. As a company grows, there is no increase in complexity or effort in order to process payroll.

Ultimately, instant payroll is a way to retain the accuracy, security and on-time nature of a successful payroll process while improving on the speed, reliability and cost vs. legacy methods.

Get the free eBook: The Essential Guide to Bank APIs

How Instant Payroll Works

To advance to truly instant payroll, a company must be using API connectivity.  How does advancing to bank APIs impact payroll? To evaluate this, let’s return to the payroll priorities we established earlier: payroll must be processed accurately and delivered on time, and security must be ensured. From there, the factors are: speed, reliability and cost.

  • Improve Accuracy. Eliminating the need to monitor payments for returns, final status of crediting bank is received with RTPs within minutes. With no masking necessary, payment status is easily matched and reported for clear payment reporting.

  • Faster. Instant payments are faster than a wire because bank APIs enable direct, synchronous communication with banks and even the underlying network is faster. Sending a payment via bank API delivers speed previously seen only with urgent wire transfers. A payment sent via bank API is delivered in seconds, improving the likelihood of it arriving on time. This is in contrast to an ACH payment which requires processing through the ACH network which even after recent improvements is same day at best. Accelerate the process even more by leveraging a corporate bank API aggregator which will automatically assess the payer and payee bank country, currencies and payment amount and route it via the fastest payment method.

  • Greater Security. Moving bank data via API is the most secure method available today, and fully encrypts payments throughout the entire payment journey. File-based methods such as host-to-host and SWIFT are vulnerable to data manipulation or malware injection attacks due to being written out normally in an unencrypted state prior and subsequently encrypted soon after to ensure a limited window of risk. Beyond the increased security of the API connection itself, there’s no longer a need for the employer to store employee bank data, this limits the storage of sensitive information and reduces the overall risk for the employer.

  • Improved Reliability. API connections are known to be more reliable than other types of connectivity, with many SLAs at 99.99% uptime. In addition to being direct synchronous communication with your bank, bank payment APIs are high availability.

  • Optimize Costs. Inexpensive like an ACH, but fast like a wire – instant real-time payments are the best of both worlds, bringing a new level of faster reconciliation, but also traceable throughout every step of the payment process with confirmation within minutes from receiving bank, leading to better, more accurate cash flow management.

And one bonus:

  • Boost Certainty. Gone are the days of unreliable status messages or depending only on knowing that the money has departed the employers’ account. Within moments of sending, employers receive notification that the employee has successfully received their paycheck. The same holds true for payment failures – failure notifications are triggered immediately so the team can reprocess a fix the same day, streamlining exception handling. This too improves the ability for the paycheck to arrive on time.
 

Conclusion

In their personal lives, people have grown accustomed to instant information. Whether that’s tracking their food delivery in real-time, or talking to a physician within minutes of requesting a video appointment. The same expectations have already begun to bleed into their work lives. There are several benefits of instant payroll for employees, and, in turn, several benefits it brings to your company.  As the wheels of change continue to advance, will your organization be an adopter of instant payroll?

Essential Guide to Bank APIs

Mitch Thomas

Mitch Thomas

Head of Solution Engineering - North America

Mitch Thomas is the Head of Solution Engineering – North America at FinLync. After more than 12 years advising top multinationals around the globe, Mitch now lends his expertise to forward-thinking treasury teams looking to advance core treasury processes in cash management, cash forecasting and payments through FinLync’s bank API-powered suite of tools. Mitch is a frequent speaker at industry events such as Strategic Treasurer webinars, EuroFinance Americas, NeuGroup webinars, and EuroFinance International.