Paper Checks - Still Relevant but Risky
In this blog, we explore why many firms still use traditional payment methods like paper checks, the risks involved, and how firms can transition to an electronic-first payment process.
by Steve Karp
There are three types of monetary exchanges: business to business (B2B), business to consumer (B2C), and consumer to consumer (C2C, or more commonly known, P2P). Economists and banking experts agree that it is the latter that drives payment preferences, or in the words of Eileen Dignen, “business innovation follows consumer expectations.”
Now consider the following question: if someone owed you money…how would you like them to pay? Cash, check, or digital transfer/app?
I’d bet most of you responded with digital transfer or app. Checks have long gone out of style. Digital transactions support a system of record, so it would be logical to assume that digital payments are becoming the most common form of business-to-business payments.
But in reality, this isn’t the case.
According to PYMNTS, despite an ongoing shift toward electronic transactions, more than six in ten firms (62%) use legacy methods for payments.
In this blog, we will explore why this form of payment is still so prevalent, the associated risk paper checks carry, and steps firms can take to adopting an electronic first payment process.
Why are paper checks still prevalent?
First used for transactions in 1762, the paper check has long been the go-to form of payment for businesses. Even in the face of an evolving, digital-first business and banking landscape, the check still ranks as the most widely used B2B payment. Why is that?
- Old habits die hard. Many established firms are accustomed to check payments. When you do something for so long, it can be hard to adjust your process – especially when there is a perception that changes will impact a firm’s internal efficiencies, or more importantly, its cash flow (when in reality, a change would likely improve that these key business outcomes).
- If it ain’t broke, don’t fix it. Many firms are okay with the fact that payments come in one to two months after they’ve set an invoice out.
Some organizations are set in their ways when it comes to incoming payments. But that reluctance to change can have a negative impact on the firm.
The risks of paper checks
Paper checks may be a historically common form of payment, but they carry a lot of risk and can hinder your company's cash flow. Here’s why:
- They are vulnerable to fraud. Check fraud is still a very prevalent issue in today's digital world, and according to the Wall Street Journal, is increasing year over year. Unlike electronic payments, physical checks can be lost or manipulated in transit or at any point in their journey to its recipient.
- You have less control. Although free to deposit from a fee perspective, there is a cost associated with a physical deposit. Besides getting lost, firms must pay an individual to travel to a bank in order to deposit or purchase costly RDC equipment to scan/deposit on-site. This time could be spent doing more value-added tasks, and in order to accurately predict or control your cash flow, this person must go to the bank on a routine basis. If they fail to do so, this could put your firm in a position where it is unable to meet financial obligations or capture new opportunities.
- You have no visibility. Unless the sender notifies you when the check is in the mail, or provides you with a tracking number, you have no idea when this payment will arrive or when it will be deposited.
Why electronic payments are better than checks
With the risks of paper checks in mind, it’s easy to see why electronic payments are better in almost every way.
- They are secure. Electronic payment vendors use secure portals and platforms that undergo extensive compliance/regulatory audits. Unlike paper checks, which could be lost or intercepted without notice, there is a clear audit trail.
- It can move directly from invoice to cash. With electronic payments, firms don't have to wait for a check to arrive or for it to be deposited into their account.
- You have more visibility than you do with paper checks. With electronic payments, there is no guessing game when it comes to whether an invoice has been paid or not.
- They’re easier for everyone. Not only is it advantageous for your business to accept electronic payments, but it’s also often easier for other businesses or consumers to submit payment this way. Rather than having to issue a check, they can easily send payments with a few clicks. When the payment process is easier for the payer, they’re more likely to make it in a timely manner.
A typical rebuttal you’ll hear from firms is they collect the majority of their invoices within 30 days, so they have no need to adopt a digital -first payment process. But establishing a secure payment methodology, allowing firms to accept multiple forms of payment early, enables them to grow in a more strategic and controlled manner.
It also will have an impact on a firm’s’ Days Sales Outstanding (DSO), which best-in-class firms are always looking to decrease in order to capture new opportunities and take on more business. For more on this, take a look at our blogs on decreasing DSO and the dangerous status quo of using legacy systems.
All of these factors lead to a more predictable and controlled process and should be adopted by businesses. As previously mentioned, this is easier said than done. So, your next question might be: how do we get started?
How to transition from paper to electronic payments
The first step in any transformation process is to first assess your company's infrastructure. Ask “Do we have the tools in place to do this well?” As firms look to optimize their business processes while reducing risk, a good first step is to evaluate solutions providing a centralized platform in which to do so.
Next, you’ll want to make sure your vendors and clients are aware of this shift. A good way to do this is to update your invoices and purchase orders with acceptable and preferred forms of payment. Communicate any changes clearly well before they occur. The last thing you want to do with someone who owes you money is to catch them off guard. An even more forward-thinking AR posture is to simply make the decision to no longer accept checks as a form of payment – aggressive...yes -- but likely where all businesses end up down the road in the not-too-distant future.
Finally, you’ll need to implement and execute. The key to this is partnering with a solution that makes it easy for you to facilitate electronic payments.
With the right electronic payment system in place, you’ll simplify the payment process, spending less time tracking down invoices statuses and getting paid faster.