Treasury teams looking to save time and money are increasingly switching from paper checks to electronic payments. While checks are still used by many businesses, some of whom that might be reluctant to adjust to new processes or lack the IT support to adopt the latest technology, most businesses are electing to utilize the speed of digital payment rails to power payments. In this article, we will review the growing trend of adopting electronic payments and the benefits derived from this shift, why paper checks continue to exist, and best practices for moving away from checks.
The rise of electronic payments and their benefits
While checks may not be a thing of the past anytime soon, statistics show that check volumes continue to decrease. According to the latest figures released by the Federal Reserve , volumes are down by 13% from 2022 compared to 2023. The same data conversely shows that in 2023 alone, Fedwire transfers increased 2.5%, growing to 193.3 million transfers worth $1.087 billion (this number doesn’t include the volume for the release of FedNow in July 2023). Near-instant payments are also experiencing tremendous growth, with Same-Day ACH volumes surpassing 3 billion payments in 2023 for a value of $6 trillion since their creation in 2016.
Growth in electronic volumes is buoyed by market practices adopted by corporates looking to improve straight-through processing, leveraging electronic payment rails to gain efficiencies and reduce costs (among other benefits). As a result, the importance of real-time or near real-time digital payments such as Same-Day ACH, FedNow, RTP, and card are fundamental to creating any payment solution.
Digital payment benefit examples
Benefits of digital payments include:
-
Increasing time and cost savings
A study by the Association for Financial Professionals found the primary reason for moving away from paper checks to electronic payments was to increase efficiency (92%) and reduce both costs (85%), and fraud (67%) . The same study also found large price discrepancies between the usage of paper checks vs ACH transactions. It reported that the median price for issuing a paper check is between $2.01-$4.00, while the median cost for receiving a paper check is around $1.01-$2.00. Compared to the median price for initiating and receiving an ACH transaction of $0.26-$0.50 (all in), the savings can be considerable. Note that the prices listed above are not inclusive of bank fees, which are often as low as $.01 or less per ACH transaction. -
Automating manual work
By employing the use of ERP platforms and treasury workstations, corporates can automate payment processes as they focus on moving away from check issuance. In general, corporates have been able to improve and make the payment process more efficient by replacing common manual payment tasks, e.g., printing of checks and the invoices, matching the invoice to the checks, and ultimately preparing and mailing the checks to the intended recipients. ERP systems have been proven useful in matching invoices while generating the electronic payments through a treasury workstation or similar platform or application. -
Streamlining financial processes
Corporates are also utilizing features offered by payment rails to improve incoming payments/receipts enhancing their collection process. Employing RFP (Request for Payment) through RTP and FedNow allows corporates to make it easier for those vendors or customers who are not able (or unwilling) to send an electronic payment as they continue to rely upon checks to pay their invoices. The recipient can readily respond and acknowledge the electronically generated payment request. This results in a win-win situation as both parties in the transaction can take advantage of a more efficient collection and payment process. -
Enhancing security measures and payment predictability
Fraud continues to be a major concern for companies. Historically, checks are more prone to fraudulent behavior as they can be intercepted and digitally altered, easily changing the payee name and often the dollar amounts on the check. Electronic payments, while still vulnerable to fraudulent practices, have a lessened risk due to firewalls and related fraud protection practices. -
Predicting liquidity and funding
Another benefit to replacing checks with electronic payments is the predictability of settlement of the payment. With checks, it’s often difficult to determine when the checks will clear. With controlled disbursement becoming an increasingly antiquated process in the scheme of check issuance, it is more challenging than ever for check users to understand when their accounts require funding and the timing of liquidity (factors that need to be timed with the unwinding of investments or drawing down the working capital line). By using these alternative payment rails, users can accurately forecast payments and the timing of when funding to support the payments.
Why paper checks are still around
Paper checks continue to be used despite the availability of electronic payment options – especially among small and midmarket companies that often don’t have the capabilities or staffing to support dramatic changes in how they make payments. Another common factor impacting change, is that these companies may have vendors that do not accept electronic payments, or the vendor may not have the technology themselves to support and reconcile an electronic payment. While many multinational global clients have the power to eliminate paper payments from their systems, these smaller size businesses generally do not and may find cost of change outweighs the benefits.
Challenges clients face moving from checks to electronic payments
Corporates that want to switch from checks to electronic payments cite common obstacles that block their ability to successfully transition, including:
-
Need to change internal processes
Changing internal processes for the payables team is not just a cost issue, but a challenge in finding time to analyze and implement a new solution while maintaining the existing process to make sure bills are paid on time. Likewise, part of the process will ultimately rely upon the AP team to help coordinate with payees/vendors to be willing to accept electronic payments and possibly negotiate new payment terms. And finally, finding knowledgeable and qualified employees within the organization to drive the project and support the change may also hinder the process. -
Limited IT support or budget to make changes or to adopt digital check processing
Businesses without the bandwidth within their IT team to support a radical change can find it difficult to move toward employing electronic payments. IT may not only have limited resources to assist in the process but may also not have the payment expertise to enable and comply with the requirements (e.g., file formats, file testing) required by the banks - let alone the systems to generate and send a payment file. -
Control requirements within the company (e.g., dual signature on a check)
A common challenge, especially for smaller companies, is overcoming the current control practices within the payment process. One example is the need for dual review (or even dual signature for certain dollar thresholds) as a means of control. Resistance to replacing this procedure can be common, but not insurmountable. By using electronic payments, controls and procedures can be incorporated to ensure a level of comfort and control similar to what the company is used to.
Three ways banks can help facilitate a seamless transition
Here are three leading strategies that can help your treasury team facilitate adoption of digital transactions:
-
Educate the client on best practices
Banking providers are generally very open to discussing with the corporate treasury teams the issues and challenges they are facing when working to improve the payment process. A good relationship with your banker built through ongoing and regular discussions generally allows all parties to understand the current practices and the steps needed to meet objectives and create the optimal payments solution. The input from banking providers can also be helpful as they can provide corporates with input on how peers are operating (from technology to processes) and even assist in a cost/benefit analysis to help treasurers make the right decisions. -
Focus on supporting system structure
Corporates should focus on the supporting systems and structures from an IT perspective across the organization. This is critical both for evaluating the steps needed to succeed in supporting the new payment process, the implementation timing and plan, and measuring and achieving the benefits obtained from eliminating the use of checks. -
Outsource to bank and employ an intelligent payment router
As an option, many banks can now accept and provide solutions that will enable clients to send and outsource all payments to be managed by the bank. Often the solution includes the bank making the decisions regarding the best method of payment, employing an intelligent payment router solution that will send your payment across ACH, FedNow, RTP, or card rail (with check as a last resort) to ensure the payment is done quickly and efficiently, while being cost-sensitive.
Note: Changing payment methods without adapting liquidity management practices limits the overall potential benefits derived from switching to electronic payments. Companies can also leverage the bank’s experience to craft the optimal solution that encompasses payments and working capital
Paper payments are going the way of the dinosaur. By harnessing the power of digital payments, more companies will continue to experience the potential for time and costs savings, driven by improved operational efficiency and protection against fraud. This can ultimately provide these businesses with a competitive advantage over those that stick to analog paper processes.
