Due to the high payment transaction volumes payroll processors regularly handle, maintaining transparency, streamlining processes, optimizing bank payments, and leveraging merchant services are essential for efficiency and accuracy. In this article we provide an overview of the key bank payment services payroll processors use, how they can optimize costs and efficiency across bank, FX fees, and yields on deposits.

Managing High-Cost Bank Fee Services: ACH and Paper Check Challenges for Payroll Processors

High volume bank fee services, such as ACHs and checks, significantly add to overall bank fee costs. For payroll processors, frequent reliance on these services can lead to higher banking expenses.

ACH Processing

ACHs are one of the main services used by payroll processors daily to process payments ranging from wages & salaries, travel & expense reimbursement, retirement plan disbursements, garnishment payments, and tax related payments. ACHs are the lower cost option compared to traditional paper checks and are also more secure to prevent lost or stolen payments. However, ACH processing takes two to three days for clearing and is subject to monitoring by the National Automated Clearing House Association (NACHA) rules and regulations. Payroll related payments processed are also subject to national and regional regulations that require accurate beneficiary banking information and payment.

Relying on underlying customer data for payroll processing can create a liability that is unavoidable at times by the performing payroll processor. A payroll processor can implement data checks and request the underlying customer to attest the data in the payroll file is true and accurate, but sometimes the payee’s/beneficiary’s information is not accurate. These instances can create ACH returns, rejects, or repairs requests from the originating bank, and fees assessed by the originating bank to the payroll processor.

NACHA has established threshold ratios for return rates on ACHs. These thresholds are segmented into unauthorized debit entries at 0.5%, administrative return rates at 3.0%, and overall return rates at 15%. Should ratios exceed these thresholds, payroll processors could be subject to NACHA fines.

It is important to monitor any returns, rejections, or repairs  on a monthly basis and determine if these return codes are repeated with a particular underlying customer or beneficiary. Requiring underlying customer data to be verified and accurate can reduce the risk of any payment interruption and reduce these punitive charges.

Paper Checks

Paper checks follow ACH as a high-volume service utilized by payroll processors. Although it is costly compared to ACH payments, it provides a method of payment for those who do not wish to share their banking information or those who do not have a bank account. This method carries additional support costs, including positive pay item verification and management of stale-dated checks. Paper checks are also prone to being lost or stolen, increasing the risk of fraud for issuing payroll processors, as sensitive information such as bank account and routing numbers are displayed on the check. In addition, paper checks that are not cashed by the payee/beneficiary are subject to escheatment regulations, adding another layer of complexity to their management.

International check payment processing can incur additional costs as well. Payroll processors will need to convert their currencies to fund each disbursement account. These currency exchanges can be costly and could possibly have timing delays in the funds clearing the intended account(s). Planning these fundings and monitoring the exchange rates can reduce expenses incurred by payroll processors.

Optimizing Foreign Exchange Transactions: Strategies for Payroll Processors

Payroll processing is global and requires the processor to be able to fund payments in the required currency. Payroll processors should have lead time to plan for funding or fund conversion for the outgoing disbursements. Often time processors will utilize a trading platform to aid in currency conversion, such as FXAll or 360T; however, the data used for pricing is contingent on the trading activity of the processor themselves.

When FX trades are executed, an exchange rate is applied as well as a margin by the banks. An exchange rate is the market price for one currency exchanged for another currency. This rate is influenced by many factors such as inflation, interest rates, local regulations, and market exceptions.

However, an FX Margin is the bank assessed fee for executing the foreign exchange and is influenced by:

• Liquidity – The global FX market has associated risks with the pairs of currencies that are up for each transaction. The higher the liquidity for the currency pair, the lower the risk and lower margin. Currency pairs with high liquidity are defined as G10 currencies and include: United States Dollar (USD), Euro (EUR), Great British Pound (GBP), Japanese Yen (JPY), Australian Dollar (AUD), New Zealand Dollar (NZD), Canadian Dollar (CAD), Swiss Franc (CHF), Norwegian Krone (NOK), and Swedish Krona (SEK).
• Tenor Length – the shorter the tenor, the lower the risk
• Number of banks the payroll processor is using to execute the trades – by spreading the trades amongst banks, payroll processors are able to compare margin costs offered between banks.

A lack of transparency for margins assessed by banks in these trades is common with payroll processors. When submitting a trade request, the bank provides a quote inclusive of all-in costs to execute the currency conversion. Determining the bank assessed margin and exchange rate from this quote can be difficult. Although billing for these trades with the banks is commonly presented in an accumulative total, the banks should be able to provide accounting detailing the all-in costs upon request.

Maximizing Cash Yield: Evaluating Earnings Credit Allowances vs. Hard Interest

Payroll processors have a seasonality to their cash balances that coincides with the local jurisdictions’ timeline for tax payments. Most processors utilize these cash balances in an eligible yield earning account, such as Earnings Credit Allowance and/or Hard Interest.

Earnings Credit Allowances (ECA) are often utilized not only in seasonal accounts as mentioned above but also in operating accounts or other special use accounts that hold cash balances. The bank will offer an Earnings Credit Rate (ECR) and will work with processors on identifying the accounts that qualify for eligible cash balances. Eligible cash balances are balances for applicable accounts receiving the ECR less any required balance reserves or any restricted balances. The ECA is then calculated monthly and is used to offset the reporting month’s bank fees. One of the advantages of utilizing ECA is that it’s not considered revenue, which means it is non-taxable and payroll processors will not be subject to the business income tax at year end on the allowance given. The downside of an ECA is the allowance given may only be used in the month it is accrued and any excess will not carry over.

Payroll processors have utilized Hard Interest-bearing accounts to maximize revenue in the recent high-interest rate environment. This allowed interest revenue to be generated on cash balances and increased the top line revenue for payroll processors. The rates offered by the banks are factored on the type of balances (operational or non-operational), the current Fed Fund Rate, inflation, and other futures. Hard Interest revenue is subject to the processor’s business income tax rate. The interest revenue can be paid directly by the bank to the processor or netted against the assessed bank fees monthly and then the net amount is paid to the processor. This setup could be beneficial during a high-rate environment as the revenues generated far exceed the liabilities associated, making the Treasury departments a profit center versus a cost center.

Minimizing Costs and Maximizing Efficiency in Payroll Cash Management

Understanding the cost of services associated with daily activities executed with the banks allows payroll processors to minimize costs and remain as efficient as possible. Redbridge can aid payroll processors in their cash management departments and assist in efforts to educate and consult on areas of opportunity for improvement.