Payments – routes of a necessary evil
25 September 2018
This article was featured in the October 2018 issue of the magazine.
Jerome Smail, freelance journalist, discusses and explores payroll’s payment delivery methods
As we in the industry know only too well, delivering payments – whether in the UK or globally – is a complex business. Payroll professionals need to negotiate an ever-changing landscape of legislation and compliance.
Essential, of course, are the payments systems used for delivery, such as BACS, faster payments and CHAPS (clearing house automated payment system), to name but a few.
So how important is it for payroll professionals to make themselves familiar with these various interbank systems in order to serve their employer or client base?
Very important, according to Jason Davenport, vice chair of the CIPP: “Frequently, a request may be made by or on behalf of an employee for a particular type of payment to be made, such as CHAPS, without realising the options available, the time available and the cost to the business of each type of payment approach. Being aware of the different approaches allows the payroll professional to be seen as a trusted advisor, adding value to the situation faced and potentially saving the organisation time and money.”
Michael Hughes, bureau manager for Cintra HR & Payroll Services, agrees that such familiarisation is important: “As you know, the biggest mistake we can make is missing a BACS payment. Therefore, it is essential to know what back-up options you have, such as faster payments.”
...payroll still needs to remain flexible when it comes to delivering payments...
Michael’s colleague, Ian Holloway, head of legislation and compliance at Cintra, adds: “CHAPS has generally been seen as the fall-back option, especially when it comes to critical or urgent payments that have to be made in real time. Despite the fee that banks will impose, CHAPS is still regarded as the secure real-time payment method and may be the only method available where the payment is large and not accepted by faster payments.”
Simon Parsons, director of payments, benefits and compliance strategies at SD Worx, agrees that “familiarisation with CHAPS is useful for emergency payments”.
However, Hughes points out that the availability of faster payments and the introduction of internet and online banking mean there is less reliance on CHAPS, “which is, of course, also more expensive”.
Davenport notes that innovation has also led to higher expectation. He explains: “There was a time when all banking was handled face to face. The growth in ATM [automated telling machine] capability made the finance industry one of the first that was accessible 24/7. The use of telephone and internet capability supported that reach even further and this has led to an expectation that payments can be made immediately.
“Payment delivery systems have grown to meet that demand and, as the expectation for faster payments has increased, so the fees associated with doing so have decreased to meet the demands without negatively impacting organisations or individuals.”
While this may be true, Holloway points out that payroll still needs to remain flexible when it comes to delivering payments and take a distinctly old-school approach where necessary: “I think there is a general move by employers towards workers being paid electronically – probably via BACS, which remains the UK’s largest bulk payment system by far. Further, there is a general acceptance by workers that this is the way they will be paid.
“However, there are still many employers and sectors where cash remains king and we must not forget this. Cheque payments are probably on a decline to zero, yet payroll has to respect the employer and worker that wants to pay and be paid this way.”
Even with the rise of technology, there is still room for improvement, according to Hughes: “The issue with BACS is that it still takes two days to process payment. You would think with the changes in tech that this would have been shortened, giving us additional time to process the payroll.”
“Plus the fact that payments can only be made on banking days,” adds Holloway. “So, of course, there is the fact that bank holidays always have to be taken into account by the payroll department.
“While we all enjoy bank holidays, they are actually terrifically inconvenient for payroll departments, as are Saturdays and Sundays, particularly when they fall on payday. You would have thought that a 21st century banking system could operate 24/7.”
While he describes the UK payment delivery system as “excellent”, Parsons agrees the limitation of payment cycles “may be seen as restrictive”. He adds that “for larger employers, the maximum payment limits can occasionally cause some concern”.
For Davenport, though, the current issues are related to security: “Any system which deals with money, whether personal or business, is at risk of being hacked. Banks and payment delivery companies need to ensure that they have safe and secure systems in place to limit this risk.
“The recent introduction of the GDPR [General Data Protection Regulation] has gone some way to mitigate these risks as many organisations took the opportunity to map their data flows and identify where security could be improved. For payment delivery systems, this could be using secure online portals instead of email as a communication and data sharing mechanism, for example.”
So much for the UK and the likes of BACS and CHAPS. Paying employees in different parts of the world adds a new set of acronyms into the mix, such as SWIFT (Society for Worldwide Interbank Financial Telecommunications), ACH (automated clearing house) and SEPA (single euro payments area).
Andy Brown, operations director at EQ Global, provides a basic guide: “SWIFT is tried and trusted. There are two types – wires and urgent wires – where funds are sent down the SWIFT network. That takes a varying number of days depending on currency types and so on. For example, with our operation at EQ Global, we can get a US dollar urgent wire same-day payment up until mid-to-late afternoon, although that’s probably because we’re working with an American bank.
“ACH is an American system and you can use it for some 34 countries around the globe.
“SEPA is very similar to ACH but obviously under a different name.”
As Ruairi Kelleher, chief executive officer of Immedis, explains, you can’t rely on a singular method to pay globally: “We pay into over 130 countries repetitively on a monthly cycle. We break it down into low value and high value. Ultimately, low value from a payroll perspective is the most attractive.
“So the low-value rails such as ACH provide a much stronger success rate in terms of on-time delivery and you always strive to use them. But they’re not always available in the more exotic countries, so you are dependent on the SWIFT network.
“From the SWIFT side or high-value payment side, it is deemed a higher-risk method of payment than a low-value method but sometimes you have no option.”
The way to mitigate those risks, according to Kelleher, is in-depth testing: “We would always do multiple payroll cycle test payments on the SWIFT network to get an understanding at local level, all the way down to branch level, of where delays might occur along the chain.”
Not only does the delivery of global payroll payments involve different interbank systems, but it also adds layers of complexity.
“There are really two payments in the one payment,” says Brown. “It sounds confusing, but if you’ve got £500 and you want to send into the US, there’s a transaction there to get the equivalent amount in dollars. And then those dollars need to be paid to the recipient. So that’s why it’s much more complicated than the BACS payments we’re used to in the UK, both in terms of our process and our expectations.”
Then, of course, there is the complexity of complying with the different rules and regulations of each country. The differences with domestic payroll delivery are stark, says Brown: “As an extreme example, we’ve had a situation in Bangladesh where, for each payment, the beneficiary had to complete a form for the Central Bank of Bangladesh and sign it, then present themselves to their bank to be able to get the money into their account.”
Money laundering checks can also throw a spanner in the works when delivering international payments. Brown explains that certain names on the payroll could raise red flags because they might share a moniker with someone on the danger list.
“However,” he explains, “the vetting systems are such that once a name has been matched and cleared, a ‘false positive’ flag is put on it. False positive in this case is a bit counterintuitive but it means the beneficiary has been wrongly matched with the name on the list. So the system notes the name, bank and country for the payment and the false positive will let the payment go through each time those details are the same.
“The only time it gets interrupted again is if something changes on the beneficiary’s side, such as if they change bank or they move, or if certain changes are made to the register that the name is being checked against, such as another person with the same name being added.”
Keeping fully compliant with the changing rules and regulations and ensuring payment to the right person, in the right place at the right time makes careful planning and high-standard tools essential, says Bart Jonkers, director of global services for SD Worx. He explains: “Depending on the service model and the level of outsourcing detailed agreement of roles and responsibilities of what has to be delivered and when, is key.
...complexity of complying with the different rules and regulations of each country
“Additionally, all systems delivering information to the payroll engine – such as time recording, time management and global HR systems – need to be fully captured to be able to do the gross and net salaries calculation.
“Having the right tools in play that can capture and enrich all data from international HR systems, but also give you a clear view on the status of the different country payrolls in one single dashboard, is one of the most efficient ways to gain a unified view of all your territories.”
Of course, different time zones across the globe need to be taken into account when delivering international payments. As Kelleher says: “If you say someone is paid on the last day of the month, in payroll that means someone wakes up in the morning and the payment is there, regardless of the time zone from where the payment originates. So we have hard-coded integrations built into our payments platform with specific release dates depending on the country the funds are to arrive in.”
Brown points out that international payroll payments aren’t usually of an ad hoc nature, so time zones aren’t usually a problem – unless something goes wrong: “We had a problem with Singapore. I had an hour’s window every day, when they were open and we were open, to try and sort out the problem. And there are difficulties with terminology. For example, if you say to someone, ‘I’ll have an answer for you tomorrow,’ whose tomorrow are you talking about when you’re in different time zones?”
A final word must go to the all-pervading issue of Brexit. How will it affect global payroll payments? Like so many aspects surrounding the issue, no one can say for sure.
Jonkers says: “At this moment it’s simply all speculation. We can only know the exact nature when the UK government and the European Commission have made an agreement. Only then can firms predict the outcome and impact on global payments.”
However, Holloway sees a more specific Brexit-related issue on the horizon: “As part of an EU exit deal, we need to be looking at mention of continued membership of SEPA. If the UK is forced to leave SEPA, processes, technology and systems will need to ensure that interoperability with other SEPA payment systems and processors are maintained.”
So, changes could be on the way and payroll will need to adapt. Doesn’t that sound familiar?