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Reward Strategy. Incoporating Payroll World.

Payroll: Caught between two worlds


Payroll software may have revolutionised how payroll managers calculate employee benefits, tax contributions and salaries on a weekly, fortnightly or monthly basis, but there are still a lot of manual processes in payroll, which are adding unnecessary costs to the business.


This was one of the key findings from an online survey of more than 90 payroll professionals from payroll bureaus and private and public sector employers conducted by B2B payments specialist, Modulr, and UK payroll publication, Reward Strategy. Whilst an overwhelming number of companies (84 percent) indicated that they used either off-the-shelf or in-house software to manage complex payroll calculations and to prepare payroll files and customised reports, 37 percent also said they still used Excel spreadsheets to manage payroll processes. Most of the companies (40 percent) that still used Excel were in the private sector, as opposed to only 20 percent of payroll bureaus.


Qualitative telephone interviews with survey respondents suggest that payroll professionals use Excel for data inputting and outputting of information from payroll systems, as well as for the uploading of payment files to bank portals and other electronic payment systems like Bacs.


“We don’t have a back-end portal, so clients submit data in Excel,” said one payroll bureau that handles more than 50,000 payslips a month for 1,500 clients. “It comes back in Excel and we import it and check it. If there was a better way to do it, we would.” These findings suggest that payroll managers are caught between two worlds: One in which some aspects of payroll processing are partially or fully automated, and other parts of the process, which are still highly manual.


Most of the survey respondents were comprised of payroll managers from private sector companies. More than 20 public sector companies and 17 payroll bureaus, managing anywhere from hundreds to tens of thousands of salary payments on a weekly, fortnightly or monthly basis, also responded to the survey. Payroll bureaus ranged from one-person operations to large-scale firms with a dedicated team member for each client.


Payroll software gets you so far


Off the shelf payroll software proved the most popular with companies surveyed (48 percent), compared to 37 percent that used in-house software. A small number of firms used external payroll bureaus or fully managed payroll solutions, as well as Enterprise Resource Planning software such as Oracle and SAP.


Whilst payroll software has minimised or removed a lot of the complexity in terms of calculating national insurance and PAYE and doing bespoke reporting for clients, our interviews with survey respondents suggest that some payroll managers still use Excel to calculate net employee contributions for parental leave and private healthcare, for example.


44 percent of respondents to the survey cited manual payments handling — authorising payments, uploading payment files to banking portals, checking bank accounts for cleared income — as the biggest cost to their business.


The second biggest cost (37 percent) was manual reconciliation, followed by inconsistency in admin team workload across the week (35 percent)*. “Double checking what was sent is still a manual process,” said one payroll bureau. “We have to go through and check the list of payments that should have been made. It’s outputted in the wrong format for us to manipulate in an automated process.”

Although 75 percent of respondents indicated that it took less than one working day per week to reconcile agency payments with contractor pay outs, five percent of payroll managers in the public and private sectors indicated that reconciliation could take four or more working days. Companies in this category tended to cite additional cost factors such as errors caused by batch payment files (11 percent) and internal error-handling processes (15 percent) for dealing with failed payments. Poor quality, incomplete or incorrect client information were cited by five percent of companies as other cost factors.


As one payroll bureau we interviewed pointed out: “Manual is time; that’s our margin.” And as payroll moves towards the real-time provision of services, that leaves even less room for error.


Given that most of the survey respondents came from the private sector, it is hardly surprising, perhaps, that the majority indicated delayed payments or errors had not cost them any customers. Of those that said they had lost clients – a mix of human resources software and services firms, umbrellas and some accountancy firms who typically manage payroll services on behalf of other companies – a number had issues or additional costs pertaining to manual payments processing, reconciliation, admin workload and batch file errors.


Payroll managers we interviewed highlighted the additional complexity added to their workload by regulation – real-time information reporting to HM Revenue & Customs, the European Union’s General Data Protection Regulation (GDPR), pension auto enrolment and making tax digital. “Non-stop regulation is a cost to payroll,” said one payroll manager. “It takes longer to run [payroll] than it did ever before because of compliance checking.”


Bacs vs. Faster Payments


For umbrella and payroll companies whose bread and butter is payments, certainty of payment is essential. Yet, 87 percent of companies surveyed relied on Bacs, which operates a three-day settlement process, to make salary payments.


The process for submitting payments to Bacs can be time consuming and potentially error prone. Payroll managers must create and export batch payment files, which then need to be authorised. That process needs to be completed by Tuesday at the latest if salaries are to reach accounts by the Friday, which leaves little room for error or time to resolve failed payments.


In addition, 32 percent* of companies indicated that they also used Faster Payments, which operates a same-day or real-time payments service depending on whether a bank is a Direct Participant in the Faster Payments scheme.


Most companies (37 percent) accessed Bacs directly using approved software or via a banking platform (33 percent), which requires the manual uploading of authorised payment files to the bank’s portal. For the Faster Payments scheme, 19 percent of companies accessed it via a bank portal and 11 percent via an alternative bank / method. Some payroll bureaus we interviewed said clients made salary payment themselves using Faster Payments.


Interviews we conducted with payroll bureaus suggest that Faster Payments tend to be used by companies that left their payroll to the last minute, or as a back-up or contingency if something went wrong with a Bacs payment. “It would be good if Faster Payments could be activated by payroll people for an emergency in case something happened and you can’t get the payroll submission done on the correct date,” one payroll bureau stated.


Some bureaus we interviewed expressed concerns about the upfront cost of becoming a Bacs accredited commercial bureau. “The charges for Bacs facilitation are prohibitive,” said one bureau. “It doesn’t make sense for us to become a registered Bacs agent.”


A revolution in payroll software

Whilst payroll managers we spoke to prided themselves on their ability to offer bespoke and highly customised reporting and payroll services to their customers, few seemed to be aware of the revolution that is taking place in payments. Regulations, such as the European Union’s Revised Payment Services Directive, or PSD2, and the UK Government’s Open Banking Initiative, along with the emergence of a well-funded fintech sector, have given rise to innovative new payment solutions.


Payment APIs (Application Programming Interfaces), like that provided by Modulr, allow more processes to be automated, can help ease reconciliation and provide richer data for reporting.


Modulr’s API can also be easily integrated with payroll software applications, allowing for an “auto payment button,” which removes the need for manual CSV exports of employee payment information and manual uploading of CSV files to bank accounts. Less manual intervention means reduced costs and less errors, as well as improved payment processing times.


Most payroll managers we spoke to said they would welcome the integration of payment functionality within off-the-shelf payroll software as it would help eliminate unnecessary steps in the process, saving time and ultimately money in what is essentially a low-margin business. “It would be great if the payroll software fed directly into Bacs,” said one payroll manager.


You can download the full report for free here.


*Some of the survey questions provided the choice to select more than one option. For example, the same company may use both Excel spreadsheets and in-house payroll software to manage their payroll processes.









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