Businesses considering the move from paper checks to electronic payments are discovering a growing array of alternatives. Here's how to evaluate your options.
For American consumers, spending electronically has become old hat. We buy all kinds of goods online and likely pay most of our bills there, too. But many businesses remain enamored of paper, with a typical company making more than half of its business-to-business (B2B) payments by check, according to the 2016 AFP Electronic Payments Survey by the Association for Financial Professionals. Another survey asked financial executives who favor checks why they hadn't considered electronic solutions. The most common response: "Our current process works."
Checks are less popular than they used to be: The number of checks written in this country fell from more than 40 billion in 2000 to roughly 17 billion last year. "But that number is still not shrinking as fast as we'd like it to," says James Hicks, Head of Treasury Services at Regions Bank, who says paying bills by check exposes a company to security threats and inefficiency.
"Can you imagine how many sets of eyes will see the account number and the bank routing number on each check?" Hicks asks. "That puts a company at risk." On top of that, "technology has made forging checks much simpler—and cheaper—than it used to be," says Jeff Taylor, Certified Treasury Professional, Senior Vice President and Group Product Manager of Treasury Management Products & Services at Regions Bank.
Moreover, there's the cost of having staff members write and process checks. A paper check also takes days to settle and clear—and it could be weeks if the recipient's accountant is on vacation. Checks can also go missing.
So why are checks still so popular? Many businesses say they prefer writing checks to suppliers because the payment can be sent in the same envelope as remittance information for the vendor's accounts receivable department, making it clear which invoice is being paid as well as conveying other information—whether your business has taken a discount, for example. "That's been a significant barrier to moving toward electronic solutions," says Hicks, who notes that some e-payment systems have attempted to link remittance data to digital transactions, without much success. Still, "the leading hindrance to adoption of newer, more secure solutions is likely operational inertia," says Greg Miles, Senior Vice President of Treasury Management Products and Services at Regions Bank." 'We've always done it this way' is a strong barrier to change, and unfortunately it often takes a jolt—a fraud loss, for example—to trigger adoption of innovative solutions."
In the meantime, Hicks says, "the U.S. payment system is on the edge of major changes." He compares the emergence of new payment technology to the rise of cloud computing. Just a few years ago, the idea of storing critical data and using software programs via the Internet would have seemed crazy to many business owners. Now it's becoming standard operating procedure. Eventually, the shift to new payment options could be just as dramatic, Hicks predicts.
Paying in Real Time
The U.S. Federal Reserve system is one of the nation's largest check processors, and it's also one of the two major members of the automated clearing house (ACH) network, which processes electronic payments such as payroll direct deposits, government and Social Security benefits, online banking payments and others (including some B2B payments). Now the Fed has established a Faster Payments Task Force to study ways to rev up debit and credit processing.
Meanwhile, the other major U.S. player in check processing and ACH—The Clearing House, in New York City—will roll out a solution called Real-Time Payments (RTP) later this year. "RTP will let small to mid-size companies make payments on their own schedule," says Steve Ledford, Senior Vice President, product and strategy, for The Clearing House. ACH payments are settled more quickly than those by check, normally taking a day or two, and same-day ACH settlement became available last fall. But RTP will transfer funds immediately, making that aspect of treasury management more nimble. "Real-Time Payments will be a game changer for the industry," Taylor confirms. "The ability to make just-in-time payments offers significant benefits to both payor and payee." Regions, a member of The Clearing House, launched Same Day ACH last year, he adds. "Taking these steps solidifies our commitment to the development of real-time and faster payment technology, and aligns us with these evolving payment channels."
Unlike wire transfers, RTP will be available around the clock every day of the year. Senders could receive receipt confirmation more quickly, and this new payment platform would let you send extensive remittance data and other information.
Betting on Blockchain
Another powerful technological force, blockchain, first became known for facilitating the rise of the digital currency bitcoin. However, blockchain-based approaches have many possible applications, and not all of them require businesses to use digital currency.
A blockchain creates an environment for peer-to-peer transactions—direct transfers of funds from one party to another, says Monica Charini Tremblay, associate professor of information systems and business analytics in the College of Business at Florida International University. It does that by establishing what's called a distributed ledger, with data about transactions (collected as "blocks") that are recorded in chronological order and digitally shared among multiple parties. Because data in a distributed ledger is decentralized and duplicated at multiple sites, it's much harder to alter.
"Think of a distributed ledger as an exchange network where you can transfer assets or ownership," says Tremblay. Businesses might create blockchains for making direct payments—say, between a manufacturer and a supplier, or among various companies within a supply chain—using some form of digital currency (also known as cryptocurrency) instead of processing payments through banks and other intermediaries. However, many banks now are exploring how blockchain can streamline their own procedures for commercial clients and others. Blockchain may be particularly well suited for simplifying the often cumbersome and costly task of making cross-border payments (see "How Blockchain Could Ease Cross-Border Payments"). Central banks could someday create their own digital currencies to facilitate financial transactions in a blockchain.
Making a Change Now, Not Later
While blockchain and real-time payment technologies are still being developed, there are plenty of intermediary steps that businesses can take now to upgrade their payment systems. To guard against fraud while reducing the cost of making B2B payments, your company could use ACH or a commercial card instead of writing checks, say Hicks. "Cards are probably the fastest-growing segment of payments in the U.S. today," he says. Like using a consumer credit card, paying with a commercial card is convenient, with next-day settlement. Moreover, banks sometimes offer rebates to users of commercial cards.
Another increasingly popular option for saving money on payments and freeing employees to tackle other tasks is to outsource B2B payments, says Hicks. Regions offers an integrated payables service that lets commercial clients consolidate payments into a single file containing instructions for which vendor needs to be paid how much and when. "Leveraging the Integrated Payables platform also enables the client and their vendor to agree upon the payment channel that best suits their needs," says Taylor. "Offering commercial card, ACH, wire and check provides a wide variety of payment options—and the next generation of payment channels will be just around the corner."
