Persistence of Paper in B2B Payment
-by Kuljit Singh and Maruvarkuzhali Subramanian
The ways of transferring money for a transaction have evolved along with the evolution of the world of payments. One would be inclined to believe that the use of paper checks, which have been the most popular non-cash payment method over centuries, are finally on the brink of extinction.
Such an understanding is partially correct because if we observe the consumer side of the entire payment ecosystem, the use of checks has declined drastically over the years due to the spectacular increase in the choices that consumers today have in the form of mobile and internet payments. However, where one's understanding of the decline of paper check goes amiss, is when one includes B2B payments into the equation.
Thus, if there has been a drastic decline in checks in P2P payments, the opposite is also true in the case of B2B payments, as businesses are writing more checks than ever before.
The statistics of a reputed association of financial professionals in the US says that 50% of B2B payments are made in the form of paper checks. Though this, in itself, is astounding but again it doesn't present the complete picture as the businesses considered in the above statistical number are big businesses with an annual revenue of more than US$1 billion. If we include the small businesses, the picture becomes grimmer, as experts claim that in such a scenario, the percentage use of paper checks would jump up to 90%.
In terms of numbers, a survey has found that 8 billion payments in the form of remittances are made by paper checks annually in the US. The overall damage of issuing and processing these 8 billion checks and 8 billion invoices cost US businesses around US$100 billion annually. And this does not consider the cost of check frauds.
So why do businesses willfully turn a blind eye to such huge losses, instead of going for more effective and cheaper options? Frankly, there aren't many options that can blend both the qualities stated above. ACH is marketed by banks for B2B payments, exclusively for larger clients. The large size of B2B payments makes the credit card fees exorbitant, and when it comes to wire transfers, though it is real-time, it is also unsafe, high-priced, and laborious.
Banks also offer bank pay solution, but only about 2% of businesses opt for this option in the US as it doesn't integrate into businesses' accounting or ERP systems. Thus, when businesses try to make payments to vendors through their ERP systems, such systems end up producing checks, as payments alternatives offered by banks, such as ACH, are poorly integrated with systems that are used by businesses. This deep divide is what is resulting in the issuing of paper checks for B2B payments.
The silver lining on this dark cloud is beginning to appear in the form of NACHA approving same-day ACH to move payments faster. This is a part of the Federal Reserve System's modernization push, which would result in a shorter clearing window, in addition to faster payments. With such efforts, the opportunities for fraud are also likely to diminish. Also, with the use of a new breed of simple and affordable solutions, the issues of integration and cost are likely to be resolved in the days to come.