It’s Thursday and as a founder of a growing startup, you need to pay your employees tomorrow. But, you’re worried — because there are so many steps and so many different tools involved with payroll, manually entering in names and numbers often leads to mistakes. What if it all goes wrong?
According to software company Intuit, one in four workers say they have had paycheque errors. And cloud company Kronos found almost half of workers who have had two or more paycheque errors will look for a new job.
“Businesses are keying in this stuff manually, one payslip at a time,” says Tom Beckenham, chief executive and founder of bulk payment startup Comma. “There are chances of making an error, there’s a chance of missing someone, and the last thing you want as a business owner is to wake up the next day and discover team members haven’t been paid and have missed their mortgage payment or something equally important, that’s a nightmare.”
But a new kid on the fintech block could be the answer to these payroll woes — open banking.
Imperfect stepping stones
Beckenham says the main reason payroll is still so cumbersome is because a lot of companies still use spreadsheets. This could mean sending old-school data files to an accountant or payroll bureau, or even managing payroll in-house.
“The file-based method is exporting a file and importing it to your bank,” he says. “The problem in the UK in particular is that not every bank accepts the same file format, so you find that you’re having to deal with lots of different types of file formats and a lot of the time it just doesn’t work.”
A solution to this has been a virtual account — an extra bank account that uses embedded finance to make scheduled payroll payments, says Becky Danks, head of product at Comma.
However, there are still limits, as intermediary accounts just move the workload on to a different process: “The benefit is that it’s slightly more automated,” Danks says. “But you’re still required to fund that account and you’re still therefore limited based on the person who owns that account actually sending money to it.”
The problem in the UK in particular is that not every bank accepts the same file format
Rachel Quinn, marketing manager at payroll software company BrightPay, says payroll software has also struggled to automate payments.
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“While we have automated a lot of the payroll process in BrightPay in recent years, the task of actually paying employees their wages has remained quite manual,” she says. “Until the introduction of open banking.”
The missing piece of the puzzle
Open banking is an infrastructure that allows banks to connect with third party providers to provide extra services, like payroll payments.
Comma, for instance, has developed a simple integration that allows accounting systems to implement payments as an embedded journey.
“The technology that open banking has opened up, paved the way for us to be able to do what we do,” says Beckenham. “The next step was the wrapper on the top of this logic that was needed to be able to make payments simple for users to be able to execute without thinking and that’s really what we do, we remove all the thinking process, you click the button, you connect your bank and it’s done.”
Danks calls it a “fundamental next step”, while Chris Deeson, UK lead at payroll management system and partner KeyPay, says adding an open banking integration was an obvious timesaver for his company.
“It’s almost the easiest decision I’ve had to make about a partner in the last three years,” he says, because of the amount of time it will save users.
It makes startup life easier
Saving time is particularly important to startups and small businesses, says Danks: “For these small businesses that might be doing their own payroll, or they might be using a partner to do their payroll, using open banking for them could be a massive time saver and an enabler giving them the freedom to focus on other things and not worry about it.”
Beckenham adds that because startups are fast growing companies, their payrolls are often changing, continually adding new people. Quinn says this shouldn’t be a source of stress.
“Hiring your first employee should be exciting, not overwhelming,” she says. “It shouldn’t be overshadowed by figuring out how best to manage your new responsibility of paying employees.”
This can be even more stressful if your company pays its employees weekly.
Hiring your first employee should be exciting, not overwhelming
“One of the issues is just about the timeliness of that payment,” she says. “If you’re on a weekly payroll, that probably means you’re paying on Friday, which means that your BACs file [an electronic system used to make payments from one bank to another] absolutely has to be out of the door on Wednesday, otherwise people won’t get paid on time.”
With open banking, payments can be scheduled ahead of time, making deadlines more flexible and reducing the cognitive stress of payroll.
Saving time and money — while ramping up security
Because you still have to authenticate through your bank, open banking has the same level of security as you would with a bank. Open banking also only requires the information needed to pay a person — like bank details and how much they need to be paid — no extra data.
“The way we have done integration with payroll systems is that because they push information to us we only require a minimum set of information about that person, the minimum amount needed to pay,” says Beckenham.
Deeson says this is the best of all worlds, as open banking saves time, saves money and improves security.
“Every minute, every five minutes, ten minutes, that a person preparing payroll saves in having to go and send that data file to someone else in a secure way where they can download it so that they can then add it into their bank is saving money, as well as improving security,” he says.
However, he adds that big banks need to get more on board, as sometimes they are reluctant to work with smaller payroll startups.
“Open banking standards have been there for a while, but many of the big banks haven’t built their bulk payment engines and the bulk APIs are the key thing for payroll,” he says. “The big banks don’t want to talk to relatively small payroll softwares.”
Open banking doesn’t stop at payroll
According to Danks, while Comma is a UK-based offering, it has “functionality coming down the line” to enable cross-border payments. After this, she says, further European expansion will be on the cards.
“We’re in a really unique position where the open banking legislation across Europe means that we have similar capabilities,” she says. “Obviously lots of other countries have payroll solutions as well, so I think that’s quite an obvious roadmap for us in what we could start offering.”
For Will Farnell, founder and director of accountancy firm and Comma partner Farnell Clarke, using open banking for payroll is just the beginning and can extend into things like accounts payable and tax.
“Open banking technology goes way beyond payroll, I think that’s the key point here, what open banking enabled payment tools are specifically able to do to provide efficiency,” he says. “We still had to rely on our clients to have somebody to make payments, so it will be the missing piece of the jigsaw in terms of us being able to offer this full service.”
“It’s really exciting for me, I think 2022 is all about payment innovation,” he adds. “All of the exciting new technology seems to be in the payment space and that’s driven by what open banking enables tech platforms to do.”
Find out more here about the Comma integration.