In March 2023, thousands of people didn’t receive their paychecks on time due to a major bank collapse. HR and executives at the affected companies couldn’t do anything while their people suffered.
Why? Because their HR and payroll tech provider only banked with one financial institution.
This wasn’t just a problem for organizations in tech and financial sectors. Another disaster like this could impact a company from any industry.
Employers should invest in an HR and payroll provider backed by diversified banking — the practice of using multiple financial institutions to offset one’s possible failure. Leaders should also ask their prospective tech provider about their:
- risk management
- continuity strategy
While no provider’s perfect, vetting them effectively could help avoid the fate of the businesses and employees harmed by the bank collapse.
How do businesses ensure their HR and payroll provider will protect them?
Organizations should follow these five best practices to reduce their payroll provider exposure:
1. The more banks, the better
When the large bank failed, the payroll provider that solely used it had to quickly switch to a larger national bank. This process can take several days — and possibly weeks — to complete. Backup banks help eliminate the delay created by one institution’s failure.
2. ACH is great, but it has its limits
Over 80% of U.S. employees are paid through the Automated Clearing House (ACH) network. ACH has been around for 50 years, and it’s still one of the best tools for companies to divert transactions and mitigate the risk of delayed payroll.
3. The more processing locations, the better
While multiple banks help ensure accuracy, multiple processing locations help deliver timely payments. This is crucial for businesses that operate across multiple states.
“Since each state has its own set of laws and regulations, bank locations across state lines can affect the speed of payments and transactions,” said Jon Morgan, editor-in-chief of Venture Smarter, a financial consulting firm specializing in small business.
4. The stability and size of processing banks matter
Consistent payments rely on a bank’s size and stability. Verify the banks and payroll provider have a good track record of managing risk. A stable bank also should have:
- a strong credit rating published by S&P and Moody’s
- financial statements
- clean audits
5. The best banks (and payroll providers) avoid failure by planning for it
The ideal banks and payroll providers minimize risk by adhering to strict and robust continuity plans. The right payroll provider should work with banks that have a strong reputation in payroll processing and a proven track record of accuracy and reliability.