Death by Paper Cut: The Hidden Costs of Checks

The way things have always been done could be harming firms in the long run.

That’s because in an era where technological advancements are transforming industries at an unprecedented pace, businesses that continue to rely on paper checks and other manually driven processes are inadvertently burdening themselves with hidden costs, in addition to sunk time and postage stamps.

And it is often the industries that could sorely use an update themselves that are digging in their heels, hamstringing their future growth.

Insiders have told PYMNTS that despite an ongoing shift toward electronic and digital transactions, more than six in ten firms (62%) use legacy methods to pay for commercial goods and services.

While paper checks may seem like a familiar and straightforward payment method, particularly for bigger commercial transactions, the true cost of this antiquated process goes far beyond the price of paper and postage.

Call it death by a thousand paper cuts.

Read also: Farmers Are Pretty Digital; Their Buyers Are Really Not

Modernizing Payment Systems Is a Necessity

The accounts payable (AP) and accounts receivable (AR) departments are often a first line resource in prevent fraud — and paper-based processes introduce a much higher risk of leaving a back door open for bad actors.

“Let’s be honest, [legacy processes are] candidly way more susceptible to fraud” than electronic AP solutions, Ernest Rolfson, CEO and founder of Finexio, told PYMNTS. Still, even Rolfson said that “checks are going to continue to die the slowest death.”

So why is it that business payments are taking so long to go fully electronic?

After all, the manual nature of paper checks introduces a higher risk of errors that can damage relationships with vendors, suppliers and even employees. Not only that, but their physical characteristics are an attractive attack vector for fraudsters, and they can be easily lost or stolen in transit.

Beyond that, ongoing shifts in commercial customer expectations have introduced widening opportunity costs for businesses that exclusively rely on paper checks; and the repetitive administrative processes necessary to send and receive them ties up valuable employee time that could — and should — be better spent on more strategic initiatives.

“The typical in-house AR program runs the same way it has for the last 20 or 30 years, same tools, same processes, sometimes even the same people,” Ben Lamm, chief operating officer at Capital One Trade Credit, told PYMNTS. “It’s an outdated legacy program. It’s manual and clunky, not just for the merchant, but also for their customers.”

Get the research: Can Automating Working Capital Insulate Businesses From an Economic Downturn?

Digital solutions powered by modern innovations can solve for the challenges and frictions inherent to paper checks, while boosting operational effectiveness and workflow efficiency. But in order to take the next step, businesses need to first recognize that there might be a problem.

“People are not saying, ‘Our biggest problem is paper checks’ — that is not currently in the debate… The general managers, decision makers, these folks are usually within a few years of their retirement, and they don’t want a lot of change because they want to finish out and let somebody else take on the next effort,” Jake Joraanstad, CEO at Bushel, told PYMNTS.

“Treasury operations historically have been bogged down with manual processes, but are often the last to get investment dollars for new software automation,” Krista Sharp, co-head of Treasury Services for Middle Market Banking and Specialized Industries at J.P. Morgan Chase, told PYMNTS. 

Innovate or Stagnate

PYMNTS Intelligence finds that 64% of CFOs say they “definitely need” more automation for their AR processes.

That’s because embracing technological advancements not only reduces costs but also positions businesses to thrive in an increasingly digital and competitive world.

“The amount of paper that is still passed around in the B2B space continues to stun me, and it’s somewhat by choice, but more and more, I think businesses are looking for a better way,” Shawn Cunningham, managing vice president and head of Capital One Trade Credit, told PYMNTS.

“If you’re a supplier and you’re not making it easy for a B2B customer to do business with you, then you are not meeting their needs … and you are putting relationships at risk,” Cunningham said.

And the needs, as well as the savings, go both ways. Paper checks bog down employees, while automated solutions free up their time to focus on more important objectives.

“There are two ways to monetize [digital payments], which is efficiency of the finance teams, and then actually efficiency of the payments itself,” Karandeep Anand, chief product officer at Brex, told PYMNTS. “If you can even save some eight- or 10-people’s worth of work at the end of the quarter and finish and close the books within 24 to 48 hours, that is priceless.”

It is a story PYMNTS has heard repeatedly. Let’s hope it has a happy ending for today’s businesses.