Paper checks are the oldest form of non-cash payments and have served us well for centuries. And, there’s nobody that believes that they are the payment method of the future (or the present, for that matter). The use of checks by consumers is dropping dramatically; consumers have a breathtaking array of choices that center on mobile and online money transfer. But with business-to-business (B2B) payments, the opposite is true – companies are actually writing more paper checks than ever before.
Why do paper checks persist in B2B payments? Do banks truly understand the payment challenges that their business customers face? What is preventing the increased use of ACH, Commercial Card, and their electronic payment methods from being used more broadly?
Let’s take a quick look at some of the issues and challenges.
The Enormous Cost of Paper Checks
The problem is bigger than most people realize.
There’s a widely quoted statistic from the Association of Finance Professionals that 50 percent of business payments are made by paper check, but that statistic is really only accurate for larger companies with a $1 billion or more in annual revenue. Many studies have shown that smaller companies make closer to 90 percent of their payments via paper check.
In fact, the most recent Federal Reserve payments survey found that 8 billion remittance payments (payments by businesses against invoices) are made by paper check annually. The cost to issue those 8 billion paper checks, along with the cost of processing the 8 billion invoices associated with them add up to nearly $100 billion in annual spend by U.S. businesses.
And that does not include the cost of check fraud ($7B in check fraud attempts in 2012 on banks alone), and US Postal Service taxpayer subsidies. Clearly, this check issuance habit is not a good one.
The Depressing Lack of Check Alternatives
Most businesses have struggled to find effective alternatives to paper checks. Banks market ACH for B2B payments typically only to larger businesses through their Treasury Management Sales Organizations; the high-average ticket size of a B2B payment (about $5,000 per payment in our customer base) makes credit card merchant fees very expensive (about $125 per average payment); and real-time wire payments are risky, expensive, and tedious.
And, less than 2 percent of all businesses use bank offered Bill Pay solutions. Bill Pay solutions are not tied into the business accounting/ERP system, do not support basic payment controls and workflows, don’t produce the kind of rich remittance that needs to go with a payment, and (except when payments are made to very largest consumer billers) generally end up issuing payments by paper check.
The Nature of Commercial Payment Solutions
Today’s commercial payment solutions are not built around the core asset that practically every business depends on: its Accounting/ERP system. Whether it is an entry-level Accounting solution like QuickBooks or an enterprise ERP system like SAP, these are the financial systems of record at practically every business.
Unfortunately, when it comes to sending payments to vendors, these systems are adept at producing paper checks, and not much else. Conversely, bank-offered payment alternatives like ACH are generally poorly connected to the business systems of record. This yawning gap between Accounting/ERP solutions and more modern electronic payment methods is what breeds an ever-increasing number of paper check based B2B payments.
The Slow Trundle Toward Faster Payments
None of this is a surprise to payments industry insiders, and least of all to the U.S. Federal Reserve System. In January 2015, the Fed released “Strategies for Improving the U.S. Payment System,” a document that highlights the need for -- among other things -- faster payment settlement times and enhanced payment security.
Faster payments are inevitable. Shorter clearing windows provide businesses with greater control over cash flow, more effective use of capital through reduced float, and smaller opportunities for fraud.
And, about a month ago, NACHA voted in Same Day ACH. This is an important industry marker – this was not an easy rule set for NACHA to pass, and it likely would not have passed without the Fed’s payments modernization push.
The message should be abundantly clear.
The biggest economy in the world needs a better payment system: a payment system that is faster, safer, and more efficient.
AP and Payment Automation Solutions
And what of the vibrant, innovative, growing businesses that make the U.S. the biggest economy in the world? Everyday B2B payments generally result from the so-called “Invoice-to-Pay” process. Every day, millions of U.S. businesses receive invoices; record them into their Accounting/ERP systems, have them approved, and pay them. Unfortunately, this essential task is generally mired in manual, ad hoc, paper-based, insecure, poorly controlled processes.
Until recently, most available solutions for automating Invoice-to-Pay have targeted a few thousand large organizations with $1billion or more in annual revenue. These expensive custom solutions are generally out-of-reach for most of the rest of the 4 million or so U.S. businesses that could really benefit from automation, efficiency, and greater security.
Most finance and accounting professionals are not aware of the existence of a new crop of affordable, cloud-based, delightfully simple solutions that work out-of-the-box with their Accounting/ERP solutions.
But, as awareness increases, expect to see a major shift in business payments that will chip away at that $100 billion annual spend in slow, insecure, paper-based, inefficient B2B processes.
MineralTree is proud to be part of that movement and can help banks join the charge.