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Will Banking Changes Really Improve Payroll Processing?

Posted by on Oct 22, 2016 in Business | Comments Off on Will Banking Changes Really Improve Payroll Processing?

Will Banking Changes Really Improve Payroll Processing?

In September (2016), the U.S. banking system underwent a systemic change designed to move money across electronic networks more quickly. In theory, the change affects payroll processing right along with just about every other financial transaction that occurs across computer networks. But will the change really improve payroll processing dramatically? Only time will tell.

The change in question relates to how often banks update their transactions across the Automated Clearing House (ACH) network. This networkand its associated platformwere first developed in the 1970s to facilitate electronic bank transactions. Some $41 trillion moves across the network every single day, according to Bloomberg, in a manner that has proven safe, reliable, and cheap.

So what does this have to do with payroll? It’s all about speed. Prior to the change, banks only synced their records with the ACH network on a daily basis. Practically speaking, that would mean a transaction that took place at 9 AM would not be synced to the network until the close of the business day. The other entity involved in the transaction would not get notice of it until the close of the following business day, effectively requiring at least two business days to post the transaction.

Since September, banks have been required to sync their transactions three times per day. The increase in the speed of posting transactions under this new model should be obvious. That same transaction that occurred at 9 AM may be synced by the originator at noon and again by the recipient at 4 PM. The transaction would be posted on the same day it was conducted.

Payroll and Small Business Benefits the Most

The change in syncing does not mean much to large corporations transferring millions of dollars with impunity. Nor does it matter a whole lot to the banks. How often their records are updated is less important than making sure the updates are accurate. No, the real beneficiaries here are small businesses and their payroll departments.

Syncing banking transactions three times a day will benefit payroll in a couple of ways. First, companies will not have to have money in their payroll accounts for three or four days prior to issuing paychecks. A shorter window for deposits will give them more opportunity to use their cash assets for other purposes. In other words, they will not be tying up cash waiting on banks to update their records. Whether doing things in-house or through a online payroll service, companies will be able to make better use of cash.

Second, companies that still issue paper checks will be able to tell their employees that their money will be available the same day checks are issued. Workers will not have to deposit their paychecks and then wait for them to clear before accessing the money.

Beyond these two benefits, the banking change does notreally affect payroll processing in any way that would necessarily make it easier. Records still have to be kept, hours still have to be calculated, withholding and tax payments still have to be handled, and everything still has to be done accurately and in a reasonable amount of time.

In the end, requiring banks to sync three times a day will improve payroll processing by moving funds more quickly from one account to the other. But in a practical sense, the average worker is unlikely to notice any significant change. Most workers are used to their routines to the extent that they will not even think about the change unless someone goes out of his/her way to tell everyone about it. Meaning payroll will simplycontinue as usual.

 

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