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The way we pay people has been changing rapidly over the last five years. We used to write checks to our babysitters and lawn care specialists, and now we just push money via PayPal or Venmo. We pay for our groceries with Apple Pay and our rent with Zelle. Digital payments, which started as a millennial phenomenon has moved into the mainstream and has been rapidly adopted among almost all age groups.
Yet despite the availability of faster and more convenient digital payment methods, U.S. businesses cling to slower payment methods such as ACH and checks for disbursements.
According to a recent Aite Group study, in 2017, 68 percent of U.S. consumers received disbursements via direct deposit, and 49 percent of consumers received disbursements via check. And in a Forrester survey of over 1000 consumers, 49 percent of customers who were not given a choice of where their funds were paid felt negatively about the experience.
While some verticals have been quicker to offer instant payments to their customers (gig economy payroll, online lending), the insurance industry has been decidedly more cautious. However, while insurance carriers tend to be risk averse and therefore not early adopters, they do tend to be “fast followers” when a valid use case can be made for innovation. We have reached a point of inflection where many, if not most, carriers have agreed that instant disbursements are a must. There are several reasons for this decision:
- Customer loyalty: As stated above, most consumers are now familiar with instant payments. It is well known that the most impactful moment in the customer journey is when the promise of insurance comes due, and the customer is looking to be made whole as quickly as possible. The ability to “pay the customer the way the customer would like to be paid” is important to customer satisfaction, especially during the all-important claim. There is still opportunity for customer acquisition through shared positive experiences, and companies who work hand-in-hand with their Digital and Marketing departments to roll out instant claims payments will see greater revenue growth. But the tipping point will soon come where carriers who don’t offer instant payments to the card or wallet of choice will lose customers to those who do, and the initiative will become more about customer retention with less first-mover advantage. In addition to claims payments, several other B2C digital disbursement use cases can be considered, such as refunds, incentives and referral bonuses that can.
- Claims costs: Insurers often think of the claims cycle as the time between FNOL and adjudication. However, repairs often don’t begin until payment is received by a customer, and that can be 7-10 days after adjudication. To improve loss ratios and reduce claims leakage, it is important to get payment in the hands of the insured as soon as possible. From reducing rental car times to mitigating mold growth in water heater claims, quicker action means lower claims costs. And the cost of digital payments tends to be considerably lower than the fully burdened cost of a check, which multiple studies have assessed can average between 5 and 7 dollars when labor, postage, and reconciliation are factored in. Furthermore, the costs of escheatment can be reduced through digital payments, as the challenges of tracking down and mitigating unclaimed property becomes more easily identified and managed.
- Reduced Fraud: As methods of payment, checks and ACH transfers have traditionally been ripe for fraud. Payments are sent without any way to ensure that the individuals receiving those payments are who they claim to be. With modern digital payment methods, identity management and account verification can be incorporated to ensure funds reach the appropriate party, and transactions can easily be tracked to prove receipt of those funds. Carriers may also want to reference the new 2020 NACHA guidelines that may soon require they authenticate accounts before sending ACH transactions. In order for carriers to confidently send instant, safe-to-spend funds, they should ensure that their digital disbursement vendors offer rigorous risk management and authentication options.
- Vendor relations: While B2C payments are an obvious first use case for digital payments, vendor payments can also be significantly improved through payment choice. By offering vendors payment options such as ACH, Zelle, virtual cards or RTP, the soon to be widely available B2B Clearinghouse standard, vendors can more effectively manage their businesses and pass their cost savings on to you. Offering choice to vendors can be a way to instill loyalty, to reward top vendors, to incentivize SLA compliance, and even reduce friction in vendor management by offering more detailed payment information.
While digital disbursements offer exciting new possibilities for revenue growth, streamlined operations and cost reduction, the process of adding new payment types can add complexity in several ways.
New payment types, if not offered through an existing gateway, may require additional integrations that must be created and maintained in perpetuity, adding cost and complexity. And reconciliation should not be overlooked when planning a digital payments initiative, as every additional payment type may require a commensurate reconciliation flow, thus adding complexity and the need for additional FTEs if not managed properly. Make sure to ask your vendors about how future payment types play into their roadmap, and understand their best practices for reconciling instant payments within your current processes.
While we don’t know what the future will hold for payments with the evolution of new digital payment protocols, wallets and cryptocurrencies, we can be certain the payments revolution is just beginning. New forms of payments will certainly evolve, driven both by consumer demand and the need to pay businesses more efficiently.