6 mins

Original article: The Problem with (and Solution for) Payouts

The Problem with (and Solution for) Payouts



A beautifully designed payout experience can increase customer satisfaction, translating to cost savings and/or retained revenue. Choice and speed are important, but ease/simplicity is paramount, yet more an evolving challenge. This can be even more difficult to achieve where an arm’s length relationship exists with the customer at the time of payment.

To learn more about the current payout market, including processes, customer experience, and future solutions, PaymentsJournal sat down with Mike Magennis, Product Director at EML Payments, and Don Apgar, Director of Merchant Services Advisory Practice at Mercator Advisory Group.

Payouts: imprudently archaic and low-priority

Payouts in this context are defined as payments that businesses make to their customers, as opposed to pay-ins, which are sent from customer to business. Across all industries, business payouts are significantly more outdated than pay-ins. No business operates on one-way transactions; money moves back and forth, so why would one direction work differently or more efficiently than another?

“The reason is simple,” Magennis explained. “Businesses prioritize making it easy to collect. It’s less obvious why it should be important to dispense money as easily as you bring it in.”

“A lot of companies default in many instances to the lowest common denominator [regarding payouts],” Magennis continued. “Sometimes that’s checks, sometimes that’s cash, and sometimes it’s both… I think it completely misaligns with the expectations across most demographics.”

Issues with checks include:

Back office headaches and expense
Concerns with positive pay, reissues, and escheatment
Extra service costs
Merchants dealing with payee complaints
Slow speed of delivery and processing
Unnecessary time and effort for the consumer

Dealing predominantly in cash may also cause issues with safety and security, delivery insurance, and theft for merchandise exchange, gaming and slot machines, and other types of payout kiosks.

“It’s really just not ideal, this kind of antiquated view,” said Magennis. “We’re living in a digital age, but companies continue to struggle to get there with payouts.”

Unnecessary complexity can be a thing of the past

Given the pace of current digital payment automation technology, it hardly makes sense that outmoded payment types would still be a concern, but as Apgar noted: “I think it’s a question of bandwidth. Merchants haven’t gotten around to looking at this yet, but it’s time.” Unfortunately, the combination of inertia and prioritizing more overtly profitable upgrades is a difficult mindset to overcome. “The biggest thing we’re fighting is the status quo,” Magennis clarified. “And [businesses] don’t necessarily think as much [about payouts] because it’s not as immediate in terms of gratification.”

Insurance is a perfect example of an industry that has been doing things the same way for decades and is due for a change. Although plenty of progress has been made with initial payments for claims – such as by utilizing Mastercard Send or Visa Direct payment rails – the refund process is still conducted using checks. “I don’t know why it’s still done that way,” Magennis admitted. “Business [payouts] should be as easy as it is for me to pay you with Venmo.” Once upon a time, this check use could be explained because insurance companies might have been able to earn 20% in the money market by holding onto funds on deposit for an extra week, but the prime rate is currently so low that the benefits are practically nonexistent. The older and slower payout methods seem to serve nobody.

Moreover, the pandemic demonstrated that customer experience is job one. “A lot of companies didn’t realize the impact that these types of transactions have on the overall customer experience,” Apgar pointed out. “You want to delight customers when you onboard them… but there are opportunities to continue to improve that customer experience.” Modern wisdom says that every touchpoint is an opportunity to either delight or aggravate customers, and payouts are no exception.

Why merchants should care about (and invest in) payouts

To mix metaphors for a moment, the tide is changing, and the writing is on the wall: ease and immediacy are the new expectations. “Older generations have come to expect [payouts] not to be easy,” said Magennis. “Younger generations, they’re the Venmo generation, P2P, social media – everything’s immediate. So, if they’re interacting with a business and something is not immediate, they are going to think more negatively about that business or just find another business to go to that makes it easier for them.”

Apgar expanded: “The rule of thumb is that if a customer has a good experience with a business, they may tell one person. If they have a bad experience with the business, they’ll tell at least ten people, because people like to complain.” The repercussions of a negative experience are much more far-reaching than those of a positive experience, and payouts mark as a consistent pain point for customers of all stripes.

To illustrate the point, Magennis described both a bad and a good experience he had with payouts. The bad experience involved cancelling his insurance when he moved. The insurance company insisted on mailing a check, but they had the wrong address on file, and it took a series of several phone calls to make sure that the information was up to date. “If I didn’t think about that,Magennis remarked, “then it was going to go to the wrong address because I don’t live there anymore, and that was their default.” Conversely, Magennis relayed a very pleasant experience dealing with a sudden Airbnb cancellation: “Airbnb went absolutely above and beyond to see what they could do, not only to refund me right away, but figure out what other incentives and offers they could make to make my experience even more delightful in the future.” These types of payout experiences impact whether a one-time customer will become a repeat customer.

Questions merchants should ask themselves about the future of payouts

Magennis hypothesized that most businesses likely haven’t considered the state of their payout system in quite some time, and emphasized that introspection is warranted, suggesting some questions businesses should ask themselves:

When is the last time we looked at the payout experience?
When did we think about our demographic and the perception they have?
Are we able to reach all potential customers, or could we be unknowingly excluding new ones, or losing the possibility of returning customers?
Are those customers in control and speaking highly of their experience with us?
How can I move into the digital era without completely overhauling my front end customer-facing business and my back office?

Customers are always looking for the next, best, easiest thing. “Adaptation is paramount,” summarized Magennis. Instantaneous delivery options are crucial because of something Magennis describes as “one-call resolution mentality,” namely that the closer a positive experience occurs to the source of that experience, the easier it is for the consumer to tie the positive experience to the interaction with the business. “We’re all very scattered in this day and age,” Magennis pointed out. If the problem takes more than one call to resolve, that may lead to a mental disconnect. “We forget that there’s a connection point, and we may forget that it was a delightful experience.”

In the wake of the pandemic and the Great Resignation, many people are pausing to think about what is really important in their lives. “Just like people who say, I’m not going to work at this crappy job anymore, they say, I’m not going to tolerate this substandard service,” said Apgar. If people don’t have a good experience, they will take their business elsewhere, so merchants should step up their payout game. “The time is right now,” Apgar concluded.