BANKING AND PEO: A HOME RUN RELATIONSHIP

As we approach Independence Day, most Americans find themselves gravitating toward the familiar. Few things in life are more American than freedom, mom’s apple pie, baseball, and the haunting feeling when you ask yourself: “did that payroll go out on Thursday since Friday is a holiday”?

As a baseball coach and father of young players, I find myself in many discussions over the rules of baseball; a game in which there are as many interpretations as there are rules. As the game evolves and grows, the rules change to suit the demands of its stakeholder base. This includes owners, players, staff, and fans. Throughout its rich history, the rules governing the game have increased in number and complexity to cover a variety of situations. The same can be said about the relationship a PEO has with its bank as the number of worksite employees (WSE) increases and banking regulations change with the times.

An evolving labor market has caused the risk landscape to shift for PEOs, and it has never been more difficult to manage. PEO practitioners need to be able to focus on solving their client’s needs without having to worry about the complexity of banking regulations and what seems like an endless battery of questions. Grappling with these requirements is simplified when the “why” behind all the questions becomes clear.

SO, WHY DOES YOUR BANK ASK SO MANY QUESTIONS?

When opening a bank account, most questions from your banker should be meant to ensure the needs of the PEO are being met. Others stem from the regulatory environment and an attempt to reduce financial crime. You will be asked for information about your business, its ownership structure, who will have authority over the account, where your business is registered, and verification of all this information. Additionally, your bank will want to understand the type of accounts you will need, the projected activity, financial profile, how you want the money to move, and how the confirmation of the money movement is communicated.

All banks are subject to intense regulatory scrutiny due to the ripple effects of a bank failure across the financial system. However, banks vary significantly based on asset size, business models, services offered, funding sources, and risk appetite. As a result, regulatory requirements are tailored to the specific institution. Asset size is a key driver of the regulatory framework. Certain regulatory exemptions and heightened expectations come into play as banks cross specific asset thresholds. Additionally, audit activity and enforcement actions can significantly influence a bank’s governance, compliance practices, third-party oversight, capital planning, and risk management. The cost of facing an enforcement action—or alternatively, building a compliance program strong enough to prevent one—can disproportionately impact smaller institutions. This reality shapes what your bank expects to see when evaluating your business. The governance structure they require will reflect their own risk appetite, the strength of their internal governance program, and the expectations placed on them by regulators.

As banks grow, so do the regulatory expectations placed upon them, which helps to support improved risk management, enhanced customer protection, and greater safety and soundness. Effective governance not only strengthens the individual bank but also the broader banking system—and, by extension, your business. When your bank requests incorporation documents, policies and procedures, audit reports, or other documentation, they are assessing how well your business aligns with regulatory expectations. Meeting these expectations strengthens your business and positions it as a vital contributor to the soundness of the payments ecosystem. As you grow, consider your bank’s capacity and willingness to grow with you—and anticipate how regulatory rules, expectations, and controls will evolve as you both scale.

The same trends in the PEO space which are driving risk complexity in other areas can also lead to increased fraud attempts and require enhanced banking controls. Credential based attacks (i.e., stolen/compromised credentials and business email compromise attacks) continue to be on the rise and are taking longer to identify and contain. Fraud is a leading cause of financial loss and banks need to ask questions to help prevent it and other financial crimes. Answers to questions such as who will have access to your accounts, how will you access your accounts, what fraud prevention controls are in place, and whether there is a culture of awareness at your organization will have an impact on how fraud risk is mitigated.

Traditional payment methods have various and sometimes recurring instances of attempted fraud. Partnering with your bank to understand the risks in your payments flow and implementing the latest technologies and practices will go a long way to help your PEO stay ahead of the fraudsters. Multi-Factor Authentication, separation of duties, encryption, fraud detection software, appropriate ACH limits, positive pay and many other tools will help to mitigate the risk of your PEO getting bogged down in a lengthy fraud resolution process. It is important that the PEO and the bank understand one another’s role in the effort to help prevent fraud and financial crime.

Trying to play baseball without clearly understanding the rules and the purposes they serve would lead to a lot of frustration and a game that is not very much fun at all. Banks ask questions to ensure your business needs are met, satisfy regulatory expectations, aid in fraud prevention, and facilitate information gathering. Questions lead to meaningful conversations. Hopefully, your bank understands the PEO business model, has the capability to arm your business with payment technology that enables your PEO to thrive, and helps you manage the inherent risks of high-volume payment origination. A bank that understands the industry can have the same impact that PEOs have on their clients, which is to empower the PEO to focus more on its core and less on regulations. It promotes a safe and sound PEO industry and overall payments ecosystem. In short, it allows us all to do what we love…PLAY BALL!