Payroll Payments: Past, Present, and Future

The world of payroll payments – the accurate and on-time delivery of salaries to employees and taxes to authorities across the globe – may be on the verge of another revolution.

Throughout history, payments have taken all different forms and delivery methods. In many ways, the history of salary payments is also the history of mass payments in general, covering all of the major milestones in the world of finance.

As payments grew increasingly complex due to government regulations and tax requirements, solutions emerged to simplify the process. When a new innovation arrived, it ultimately transformed payroll payments, pushing it forward in efficiency, reducing costs, and increasing speed and convenience.

With the rise of digital payment technology (paytech), the world of payroll payments appears headed for another major shift. The signs are already pointing to a massive transformation in payroll payments.

Paytech Innovation is Breaking Through

Global payroll payments at most companies are still delivered through traditional channels, which have never truly delivered high efficiency for salaries and tax payments across borders. The current landscape typically involves extensive manual delivery or the use of subprime banks.

Since payroll payments across the world need to be delivered in the local currency, many banks have to rely on correspondent banks to make the foreign exchange. As currencies get more exotic, banks have to use more correspondence banks to acquire the necessary currency, driving up costs and slowing delivery speed.

Digital technology is poised to replace the entire system of correspondence banks and manual transfers, making direct payments quicker, easier, and cheaper.

Virtual wallets such as Revolut, Paypal, and assorted mobile payment apps, have already disrupted all forms of payments – from retail to wholesale and even remittances. Estimates point to widespread adoption of easily accessible payment apps across the US, with a majority of people already using them for retain purchases.

The business world has also adopted the technology, paving the way for major changes, particularly in the area of payroll payments.

A History of Payroll Payments

As long people have performed work, there has been payment. The only things that change are the form of the payment and how it’s made.

Virtually any financial era can be explained through the advances that improved – and dramatically altered – how employers paid their workers. In many respects, the history of finance is the history of payroll payments.

Pre-Industrial Age – barter

Once upon a time, before the industrial age, payment was a type of barter. People received goods such as food, clothes, or housing in exchange for their labor. These types of payments addressed people’s immediate needs. Others received precious metals such as gold or silver.

The era also introduced an early form of credit in the form of “promissory notes” – certificates people held that promised payment at a later date.

Industrial Age – pay cycles

With the Industrial Revolution and the eventual advent of labor laws limiting the hours people worked in factories and other industrial age jobs, companies began to adopt regular pay days, informally creating the first pay cycles. The practice would only be formalized in the US in the 1940s, with the Revenue Act of 1942.

During the early days, employers would pay workers directly for the hours worked. There were no intermediaries such as paychecks and tax withholdings. The transactions were simple and direct.

Civil War Era – introduction of tax withholdings

In 1862, the government introduced the first tax withhold system in an effort to raise funds for the Civil War. Alongside requiring employers to deduct income taxes from their employee payment, the government instituted a wide range of additional taxes.

By 1872, the withholding system was abolished and many taxes were repealed, including income taxes. The system would be brought back intermittently when the government needed to raise funds.

Early-to-Mid 20th Century – tax withholdings standardized

In the 20th century, payroll payments began to take the form that people associate with salary payments today. In 1934, Social Security withholding were introduced, but employers complained bitterly about assuming the role of tax collector on behalf of a peace-time government.

But with the passage of The Revenue Act of 1942, Congress created a permanent income tax on American citizens to raise funds needed for the Second World War. The following year, the Current Tax Withholding Act was passed, bringing back the tax withholding system, which would remain a normal part of payroll payments going forward.

Mid-to-late 20th Century – Technology Breakthroughs

The evolution of international payroll payments accelerated dramatically during the second half of the 20th century, with every decade contributing an important development.

• 1950s – With the growth of bank networks following the war, the paycheck, delivered to employees in envelopes, was standardized as the primary payment method, with easy consumer access to banks across the US to cash or deposit the paycheck.
• 1960s – With banks maintaining hours of operation that often created challenges for working people to access their accounts or even cash their paychecks, banks introduced the ATM as a 24-hour option – a technology solution created in response to limits on bank operations.
• 1970s – SWIFT (Society for Worldwide Interbank Financial Telecommunication) is introduced in 1973. This messaging system revolutionized communication between banks, streamlining international transactions.
• 1980s – With ATM machines making bank accounts accessible around the clock, an increasing number of people chose to forgo the physical check, preferring to receive their compensation directly in their bank account through direct deposit.
• 1990s – Internet services and gift cards made it possible for anyone to transfer money without writing checks or going through banks.

2000s and beyond – Digital payments and virtual wallets

The first digital payment solutions began gaining acceptance on the market, used primarily by consumers to turn their physical currency into digital currency they could use for retail purchases online. The technology would eventually be adopted by the fintech industry for B2B payments, and ultimately for payroll payments.

Based on Mckinsy global payments report

How Companies Execute Payroll Payments Today

Today’s payroll payment landscape is still rooted largely in traditional payment options. Companies use three primary methods for paying their global employees – all of which stand to be replaced with the coming wave of paytech solutions.

1. International Bank Transfers – Companies with branches across the world open bank accounts in every country where they operate. In most cases, they make the payments manually through each account. An enterprise with a large global footprint may have thousands of employees across 20+ countries.
2. Payment Service Providers – Some companies outsource their payments to third parties dedicated to the task of payments. But none of current payments companies specialize in payroll payments, or even recognize that payroll payments have different characteristics from other types of payments. They use all-purpose payment rails, which means that the payments travel through different banks, each charging a fee, increasing payment leakage, and slowing the process.
3. Payroll companies with outsourced payments – Business with employees across the world often outsource the entireq payroll operation to companies offering global payroll services. Although these companies only handle payroll on their own and outsource the payments part of the process, they offer customers the illusion of end-to-end service. But customers have no visibility or control over the outsourced companies, many of which rely on subprime banks, preventing full value transfer for the employees.

Addressing the Challenges and Opportunities in Payroll Payments

Money Transfer Licenses

Companies that offer global payroll payments need licenses for holding and transferring funds across borders – also known as e-money licenses. In most cases, they need multiple licenses in different jurisdictions in order to cover payments to all necessary countries. To maintain the licenses, companies need to file thorough reports with regulators and uphold high standards for handing client funds, including the use of segregated and safeguarded accounts at high-end banks.

Unlicensed companies do not necessarily uphold the highest standards, and do have to meet the high demands of regulators. Therefore, their operations may not meet the high standard expected of licensed companies.

Challenges of Currencies Exchange

Since companies need to pay their international workforce in local currencies, large companies with many locations have to devote a great deal of effort to manage currency exchanges for all the locations.

Since most companies still use local bank accounts in each country, treasury management is a major undertaking. All payroll data is siloed from the rest and requires reconciliation at the end of each pay cycle. The challenge can be even greater more exotic currencies, which can often be highly volatile, making it difficult to predict how much funding the company will need to cover payroll in any given location.

KYC Process and Compliance

Companies that work with top tier banks will have to carry out a security process known as Know Your Customer (KYC). International trade requires that banks know the identity of the sender in any cross-border transaction.

While the process varies widely from bank to bank, and from country to country, the basic requirements usually involve providing documents proving the legitimacy of the company, its leadership, and its board of directors.

The process can be accelerated for companies that specialize in payroll payments – if they can ensure that the payments are designated as salary payments.

Same-day and Instant Payments

With advances in technology, most advanced countries have developed high-speed payment rails, which can often be used for payroll payments. Most PSPs, however, are all-purpose payment companies. They use different rails for different payments, but because they often bundle payroll payments with other types of payments for their clients.

But when a company focuses on payroll payments, they can make same-day payments in many countries. If they need to reroute payments with more exotic currencies through other banks, the payments may take longer and cost more to deliver.

Working Capital and Fees Issues

Most companies with global payroll have to fund accounts at an early stage in the process in order – sometimes as much as 2 weeks before payday – to ensure that the money is ready when the transfers take place. In addition, they have to add a significant buffer to cover any anticipated FX fluctuations, often as much as 20%.

Since payroll payments constitute the largest expense at most companies, having such an enormous sum of money tied up in payroll accounts for half of every month can be a significant strain on a company’s working capital.

Automated JE and ERP Connectors

The previous two decades have introduced a wide range of workforce management tools, many of which cover different facets of role HR and Finance play at the company. The next era will be about consolidating the data these tools collect and creating a unified office environment.

Payroll software has the potential to serve as the unifying element between all the different tools because it collects data from HR and Finance and automates journal entries to a company’s ERP system. It can serve as a single source of truth between all the departments.

Transparency in Payment Services

One of the biggest obstacles companies face in building an efficient payroll and payment operation is the lack of transparency payroll companies typically display in their payment delivery. Since virtually every payroll company that offers payments actually outsources the operation to a payment company, providing no visibility for the client.

Unifying payroll and payments into a single process not only brings complete visibility of the payments from the beginning of the process but also makes it easier to predict what the payments will be, factoring FX volatility. The flow of data through the system makes payments trackable at every stage of the process, building control and trust.

Security and Anti-Money Laundering Measures

When it comes to security for payroll payments, there is only one standard. With so much money passing through the payment rails – and so much private data – payroll payments require bank-level security. People should feel as secure about the safety of their funds and data as they are when they make bank transfers.

A big part of that high security standard is ensuring that the funds and accounts are carefully examined to ensure that payments are in compliance with strict anti-money laundering laws. The payment should always run checks on the intended recipient to ensure that funds are never sent to people under sanctions or those who appear on terrorist watch lists.

Industry-Specific Insights

Just as payroll payments vary from country to country, they also vary from industry to industry. Industries that require more complex payroll payments can be extremely challenging for companies with manual payroll processes, while only top-line companies offer payments automation that can support more complex payments.

Oil and Gas Industry

Companies in the oil and gas industry tend to hire a large number of expatriate workers, typically highly skilled individuals or people with specialized skills in oil well exploration and production. The oil and gas workers will often be assigned to short-term projects in foreign countries. As a result, they will often have payments split between the currency of their host country and their home country.

Split Payments

Many expatriate workers prefer to have their payments split so that they cover their day-to-day expenses in the local currency, with no need to change currency, and leave their savings in the home currency so that when they return, they don’t have to change large amount of money.

Companies need to consider currency exchange rates, conversion fees, and potential impacts on expatriates’ purchasing power. The solution often relies on advanced payment technology that includes treasury management capabilities. It must ensure the payments comply with the tax laws of both countries, withholding the correct amount of taxes in each country.

Maritime Industry

People who work in the maritime industry often face a different form of split payments. Over the course of a year, they may have to work in any number of jurisdictions, with most banks unable to provide continuous access to the cash they need in any particular docking point. As a result, maritime workers often find it hard to navigate their own financial needs or send money home to their families – which is a major factor in why a portion of the workers choose jobs in the industry.

Push-to-card payments

While 10-20% of the industry solves the cash flow problems by paying workers in cash in the local currency where they dock, the majority of the industry relies on more advanced solutions such as push-to-card payments. The workers are given pre-paid cards when the dock. These cards function like debit cards, allowing the workers to use their money when they need it.

Making remittance payments to their home country can be challenging because of foreign exchange volatility between the home country and the country where the workers are located at the time of payment. These fluctuations can be mitigated through split payments, limiting the amount of money that is subject to volatility.

Processing Payroll Payments

To calculate and employee’s gross pay, the payroll team needs access to as much data as possible. It starts with collecting Time and Attendance reports, multiplying them by the hours worked to arrive at a gross salary. Alternatively, the figure can be obtained by dividing the yearly salary by the number of pay periods in a year.

When the gross salary is ready, the payroll team must take out any pre-tax deductions, such retirement or insurance plans, then deduct all state and local income and social taxes, as well as any voluntary deductions, such as employee savings plans. The end result is the employee’s net pay, as reflected to the employee on their payslip and to the employer as a gross-to-net calculation.

Digital trends and predictions

Trends Transforming Payroll Payments

• The Rise of AI: The world has moved sharply in the direction of artificial intelligence, and the payroll payments industry is no exception. AI is growing in applications throughout the payment process, including checks for payroll accuracy, distribution of payslips across different languages, and even in areas such as treasury management.
• Tokenization: The process of converting bank funds into digital currency for payroll payments often requires sophisticated means of identifying the recipient of the payment. This is particularly true for advanced processes like push-to-card payments. Tokenization covers the process.
• Mobile Wallets: Digital wallets, also known as mobile wallets, have gained prominence. These apps allow users to store payment information securely on their smartphones and make seamless transactions.
• API-based Connectors: The modern office is an assortment of independent tools covering all aspects of workforce management. The problem is that they all work independently. Sometimes, companies need to enter data manually, multiple times for different systems, creating more opportunities for manual data errors. API-based connectors bring the office together, connecting the dots between systems so that data is shared efficiently.
• Contactless Payments: With the rise of NFC (near-field communication) technology, contactless payments using mobile wallets have become popular. Users can tap their phones to pay at point-of-sale terminals.
• Biometric Authentication: Some digital payroll payment solutions use biometric features (such as fingerprint or facial recognition) for secure access and transactions.

Predictions for the Near Future

• Real-time or on-demand pay: Employees will not have to wait until payday to access payments for hours already worked. They will access earned wages in real-time or on-demand, offering greater financial flexibility and control.
• Personalized benefits: Employees might have more control over choosing and customizing their benefits packages, catering to individual needs and preferences.
• Corporate Wellness Programs: Beyond financial compensation, companies are focusing on holistic well-being. Wellness programs, such as gym memberships, mental health support, and stress management initiatives, enhance employee satisfaction.
• Flexible and Collaborative Work Options: As remote work becomes more prevalent, companies are rethinking compensation structures. Offering flexible work arrangements, remote work allowances, and collaborative workspaces can be part of the compensation package.

Papaya Platform Features for Simplified Global Payroll Payments

Papaya Global built the first SaaS platform dedicated to global payroll and global payroll payments. The technology infrastructure allows clients to execute their entire payroll payment operation, including complex payments, through a single platform connected directly to their payroll data and integrated with their HCM and ERP system.

The self-service platform covers the entire process, from opening virtual wallets in numerous currencies, completing the Know Your Customer (KYC) process, forecasting costs to reduce the amount of deposit, funding the accounts, receiving approvals from clients, and delivering cross-border payments to employees, tax authorities, and benefits vendors. Contact us to learn more.