Bill.com hits the banks when they're down

Banks have already failed so massively at their core business of lending money that governments have had to bail them out. Now a SaaS startup is challenging their payment processing cashcow.

If things weren't bad enough for the banks already — revealed as so inept at their bread-and-butter business of lending money that governments across the globe have had to bail them out — now their cashcow business of payment processing is under competitive threat.

This week, SaaS startup Bill.com launched a new service that allows US-based small businesses to pay their suppliers electronically for a low fee of 49c per payment — irrespective of the size of payment. The fee compares well to the $1-$3 per payment many banks charge for the same service, and is significantly less than the percentage-based fees charged by debit and credit cards or online services such as PayPal.

The service uses the US banking industry's Automatic Clearing House (ACH) system, which processes most payments in around two working days, and which currently provides fat margins to banks that charge multiples of the actual cost in fees (an ACH transfer costs your bank anything from 25c down to as little as 2.5c). Many businesses, of course, are still in the habit of sending payments by more expensive wire transfer, which generates even larger cash profits for the banks. Bill.com's ePayment service offers customers a way to sidestep those costly fees at the same time as processing their accounts payable with fewer errors and less effort.

To take advantage of ePayment, businesses have to sign up to the $25-per-month Bill.com application, which automates the accounts payable function for small businesses. Incoming invoices are emailed, scanned or faxed into the Bill.com system, which then provides email workflow to manage internal approvals. Once approved, payment can be scheduled to fit in with cashflow, and the system handles payment by check (at 99c a go) or electronically (at 49c per payment). Sophisticated fraud detection systems monitor for irregular activity to help protect against abuse.

Payments are made from Bill.com's account, which customers must keep topped up with the funds required to pay their bills. Bill.com automates this process via ACH (at its own cost, so customers need to cluster payments so they don't end up paying their own bank an ACH fee for every bill to be paid as well as Bill.com's fee). I'm sure many businesses will derive great satisfaction from paying their banks the minimum possible. The excessive charges banks have levied their customers for many years is money they've just left lying on the table. It's high time someone scooped it up to share more equitably with small businesses (only a minority of whom survive on borrowed funds — most have cash in hand).

Although Bill.com only launched its service last year, it has a strong pedigree in its CEO and founder, René Lacerte (pictured), who previously founded PayCycle, the online small business payroll provider that Intuit last month agreed to buy for $170 million. It is marketed to accountants by the AICPA's CPA2Biz subsidiary, which also promotes online financials provider Intacct. The company isn't quoting customer numbers, but VP of marketing Jeff Schultz told me this week there had been "tremendous growth" in the most recent quarter after the close of the tax year and that the daily volume of payments had "gone through the roof," with some single payments as high as $250k.

The service is especially appealing to accountants, Schultz told me, because it means they can use the same interface to manage all their clients, rather than having to negotiate the various online payment systems of a host of different bank accounts. "We're able to provide a consistent user experience," he said. "If you've got an accountant doing bookkeeping and payments for thirty different clients, it's easier for them not to have to deal with the idiosyncracies of those different banks." Even if clients are using Bill.com themselves, accountants find it much easier to deal with than going through an unloved 'shoebox' of paperwork at the end of the quarter or financial year.

The ePayments service has a directory of 4,000 bill issuers already set up, but users can easily add any new payee, including independent contractors, local suppliers or even expense reimbursements to individual employees. Schultz told me there are plans to allow any small business to register its details to the Bill.com payment network, which would allow bill issuers to set up their bank details without having to share them with others. It would also create the foundation for a possible marketplace initiative later on where suppliers could promote their products and services.

I could speculate that another future possibility is to offer a full range of small business banking services, but let's not get ahead of ourselves here. Perhaps more likely is that a financial services company might acquire Bill.com once it realizes the gaping market opportunity the banks have left exposed. "The banks are not looking at this at all," said Schultz. "The small business payment network is not something that's on their radar."

The only potential fly in the ointment is the risk of security scares. The Washington Post's Brian Krebs this week highlighted the lack of protection for businesses who fall victim to online banking fraud. It's easy to forget that the blanket refund guarantees offered to consumers don't extend to business accounts. Yet many users remain unaware of how easily their own online behavior can expose business accounts to cyber crime. Small businesses taking advantage of the Bill.com service should make sure they have rigorous security policies in place to keep login names and passwords totally secure. With those precautions safely in place, Bill.com looks like a great way to manage cashflow and save on unnecessary bank charges. I only wish it was available here in the UK, but currently it's US-only (though the service does cut checks for non-US payees in certain currencies).

PS: I've often wondered why SaaS providers don't use ACH to collect subscriptions instead of relying on credit card payments or manual invoicing. It will be interesting to see how many SaaS vendors get added to the Bill.com payee roster.

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