The paper check remains stubbornly entrenched in daily life, eschewed by consumers but still a mainstay of business payments. However, a carrot-and-stick approach can optimize the transition to digital payments.
In a recent On the Agenda panel, CheckAlt Chief Product Officer and Chief Innovation Officer Bobby Rahmanian, Regent Bank Chief Operating Officer Steve Baker and Synctera co-founder and CEO Peter Hazlehurst discussed the reasons why that approach is necessary with PYMNTS’ Karen Webster.
For businesses, clinging to paper-based payments — while also trying to digitize payments and wrestling with the ever-constant threat of fraud — presents a challenge to streamlining commerce.
To get a sense of the scale of the problem, consider that domestic B2B payments will exceed $54 trillion by 2023, up from $49 trillion this year. The average days sales outstanding for firms that deliver between 500 to 1,000 invoices monthly is 32 days, which shows just how constrained cash flows can get.
Those stats don’t account for the checks that never get presented for payment or cashed, as check fraud is also on the rise.
The Benefits of Automation
Automating payments speeds up that cash-flow cycle and can cut processing costs from $6.30 to $1.45 per invoice.
We’re at least headed in the right direction — PYMNTS’ data shows that of 400 chief financial officers surveyed, 40% said that they are using paper checks less often than they were before. Zelle is gaining traction but it’s not universal, and automated clearing house (ACH) payments are neither real time nor 24/7.
Baker noted that online bill pay, mobile deposit capture and remote deposit capture can provide channels through which companies can move beyond checks.
However, companies need to embrace a shift in process at the same time, which is easier said than done for companies in the insurance or healthcare industries, for example. Nonprofits also tend to still see significant check volumes coming in and out of their coffers.
Synctera’s Hazlehurst said his own firm’s enterprise clients, particularly FinTechs, are seeing their own end users demand that they be able to accept payment in the form of a check — but in real time.
Hazlehurst recounted that one client, a FinTech, has been building out the ability to scan a check with a mobile device, upload it onto a debit card and have access to instant cash. That type of payment on demand, he said, can be a boon for gig economy workers.
CheckAlt’s Rahmanian said that platform models (such as on offer from CheckAlt) can help FinTechs that work with banks move toward digital capture of checks and white label digital capabilities for banks in order to serve merchants or consumers.
“It’s important to make sure the payments still stay electronic and don’t ‘fall back’ into checks,” he told the panel.
Key to keeping that “falling back” at bay, he said, it to ensure that multiple modalities are on offer to capture that check if that’s the way the consumer or merchant decides to go. CheckAlt’s Catch! Electronic lockbox converts payments to electronic transfers.
We’re headed toward more collaboration between banks and FinTechs, enabled by those networks, which can route payments efficiently and quickly, across states and even internationally.
Rahmanian added that onboarding and the movement of funds is becoming easier and faster, with the advent of application programming interfaces (APIs). But many banks are still in batch mode and a single stretch of time, daily, for payments processing.
Consumers who walk into the branch deposit their money and the funds are available instantly. Using cards at the ATM, or debit cards at a point-of-sale (POS), makes sure that transactions happen in real time (even though in the latter case, settlement takes days).
Behavioral Barriers
If the technology is there to help speed the digital transformation, some barriers still exist in the form of entrenched behaviors. The panelists told Webster that individuals, by and large, are still resistant to putting sensitive data about themselves online.
That can seem a bit ironic when considering just how much information is contained on a printed check that is being sent for outbound payment: Name, address, routing and account numbers all are featured prominently.
Fortunately, as Hazlehurst said, “Utility will always trump fear … the reason why we still have checks as an instrument is because there’s no universal way of sending money to someone. If you don’t know who they are and you don’t have their in-payment information, the check is kind of ‘it,’ unfortunately.”
Baker noted that checks exist because so many individuals, including business owners, are comfortable with the “human factor,” and the fact that regulatory agencies such as the IRS accept cashed checks as proof of payment.
“Everybody’s got to have a piece of paper to show somebody,” Baker said. In fact, he said, checks are so firmly ingrained in corporate mindsets that they’d order them on their own if not offered by banks. Full-scale change requires that both the check writer and the recipient get more comfortable with the digital experience.
The Carrots and the Sticks
To break those behaviors, the carrots and the sticks can serve great purpose to incentivize the digitization of checks — especially in B2B payments.
Hazlehurst contended that the carrot, for the recipient, is faster access to funds — sidestepping the three-day wait until the check arrives in the mail and one visits the bank branch.
For corporates, virtual debit cards can be issued in the same amount as the check, and online bill payers are able to create their own private networks — where a check onboarded today will be a real-time payment sent the next day. Online bill payment platforms can also help avoid check fraud, Hazlehurst added. Credit and debit transactions offer cash back and other rewards as a “carrot approach” to avoiding the check.
Change will be a collective effort, said Rahmanian.
As Hazlehurst added, one giant nudge could (conceivably) come from the Federal Reserve, which is to say (to name one hypothetical experience) that beginning in 2030, checks are no longer legal tender. That leaves us with seven years to figure it all out — a variation of what the payments networks did with chip and PINs a few years ago.
Or, Hazlehurst added, authorities could make it more expensive to use a non-digital payment method — chiefly through tax policy.
The above methods, said the panelists, would be akin to the “stick” approach.
Looking ahead, Rahmanian said that banks can use data and new solutions to guide the transformation from paper to digital. Baker noted that nightly processing at the Fed could effectively make banking systems real time.
For a nearer term solution, Rahmanian said that APIs should be used more widely available across platforms, making real-time processing of payments more widely accepted within banks that are still used to batch processing.
“We as payments professionals have to work together to make that transition easier,” he said.
