U.S. businesses spend roughly $9 billion annually on processing paper checks and invoices. It’s a system that’s worked for over 100 years. Although a recent uptick in B2B payments innovation has accelerated corporates’ migration away from the paper check, old habits die hard, and the legacy payment tool remains a mainstay in the accounts payable (AP) department.
In fact, with many AP and even accounts receivable (AR) departments continuing to prefer paper check payments, service providers risk an unfavorable customer experience — or worse, costly operational disruption — by forcing clients to move to a different payment method. And with an estimated $12.5 trillion in paper checks going out annually — roughly 80 percent of B2B payments — firms are wise to use options suited to their operations rather than chasing trends.
According to a recent issue of PYMENTS.com’s Digitizing B2B Payments Tracker:®® Moving From Paper Checks to Digital Payments, there are numerous reasons so many businesses will continue to rely largely on paper accounts payable procedures. Like most things in the payments ecosystem, the decision to digitize or not is largely a matter of trust. As the new report states, “This trust factor is causing firms to take slower approaches to B2B payment innovations, as these new tools are still seen as unfamiliar and untested for AR and AP processes.” And for many firms, this is a tough time to properly assess new tech upgrades.
“This leads some to test out such technologies more cautiously than they would [test] consumer-facing digital tools, including payment solutions. Innovating back-end processes means taking a look at the exhaustive business ecosystem behind customer transactions, and any mistakes made are much costlier,” according to the report.
Will the coronavirus accelerate digitization?
Trust-issues aside, however, the coronavirus pandemic has undoubtedly thwarted the status quo for businesses of all kinds, and some in the ecosystem are now wondering whether the event will become the catalyst that finally accelerates digital transformation. While work-from-home mandates have forced businesses of all sizes to rethink how they send and receive payments, Michael Reed, division president of payments at Deluxe, said that even market disruption of this magnitude can’t eliminate the paper check in B2B payments all at once.
“Everyone has been saying that checks are going to go away for a very long time, so I don’t think there is a cliff edge that we’re running toward,” he said in a recent podcast with Karen Webster of PYMENTS.com. “Checks will be around for a while. They’re foundational, and there are a lot of people that still like using them.”
That understanding means service providers cannot force corporates away from paper. Rather, Reed explained, by virtualizing the paper check and preserving many of the workflows that surround it, businesses can face far less friction in their payments digitization journeys.
Alternative approaches to digitizing payments
According to Reed, Deluxe’s lockbox services process $2 trillion worth of paper check payments every year. With paper check volumes so large, it can be overwhelming to consider how to digitize all of those payments. There is no silver bullet to transitioning that volume to electronic payment methods all at once – especially today when AR and AP teams are already managing an immense sense of disruption in remote working environments.
Rather, a more effective strategy can be to support corporates’ check payment operations while digitizing key components. One tactic many companies are implementing uses a hybrid approach.
“Many companies are now looking to pair paper checks’ benefits with those of digital AR and AP documentation solutions, which can help them avoid the costs and potential fraud that can come with creating entirely new payment infrastructures,” according PYMENTS.com. These shifts require firms to examine technologies like check scanners, online check conversion tools, electronic invoicing solutions or online AP products, which represent a $950 billion B2B opportunity.”
Another approach involves virtual checks and application programming interface (API) infrastructures, which allows for seamless integration of electronic disbursement workflows within the rest of the back office. This innovative alternative ensures that payment initiation retains the “look and feel” of a paper check payment for the payer. By virtualizing the paper check and wielding API integrations in between payer and recipient, those workflows become smoother.
“Many businesses still generate paper checks from the setup of their accounting systems. The best way today’s businesses can digitize their payment processes is by transitioning to innovative platforms that work with existing systems and do not require large infrastructure investments or changes to current processes.," Reed says.
"That is definitely the secret sauce, relative to speed and ease of integration, because corporates can disburse payments digitally and reconcile them through their systems as though they sent a check. It really minimizes the disruption.”
But addressing payee needs is just as critical to easing the digital migration. Remittance data is one of the strongest factors driving suppliers’ continued preference for checks, Reed explained, so any technology that aims to digitize payments cannot afford to ignore its importance.
“For any big business to implement technology, it needs to be something that’s not disruptive to their environment . It must be understood by both the sender and receiver of the payment," he noted, adding that these technologies must also enable vendors to choose how they accept funds and data, while supporting connectivity within their own ERP and accounting platforms via API. "Again, in the same way suppliers already do with check payments,” said Reed.
Real use cases: One-off B2B payments
Reed said Deluxe is approaching this market with an initial focus on one-off B2B payments, which are a greenfield of opportunity because of their associated procedural burden. A one-time digital transaction is often accompanied by complex onboarding and system integration processes, making mailed paper checks an attractive alternative. The coronavirus pandemic has yielded an even greater need to ease one-off B2B payments friction, particularly among health care, insurance industry firms or emergency assistance funds.
- Financial institutions’ loan disbursements: This is one area that can benefit from check virtualization, particularly in the context of federal Paycheck Protection Program (PPP) relief funds. With many small business applicants opening bank accounts at new financial institutions to secure funding, connecting those customers to a virtual checkbook — rather than the traditional starter pack of physical checks — means enabling small- to medium-sized businesses (SMBs) to make quicker use of the federal funds they secure. And without the ability to enter physical bank branches, remote deposit capture has also elevated its role in the current climate, enabling businesses that receive a check to digitally send it to the bank and electronically submit reconciliation data to their systems.
- Healthcare: The medical arena is another industry that can benefit from check digitization. The industry has been transitioning from paper-based processes to electronic transactions for years. Healthcare is more complex than most other industries – a tangle of relationships between patient, healthcare provider and insurer. And amongst these relationships are payment and billing systems that really don’t work well together. Despite regulatory mandates to convert payments to electronic channels, much of the industry still largely relies on paper and telephone calls for billings and payment. According to InstaMed’s Trends in Healthcare Payments Tenth Annual Report, 72 percent of consumers get their healthcare bills in the mail. And on the flipside, 87 percent of providers report receiving paper checks and EOPs from one or more of their payers.
Deluxe recently announced a collaboration with ECHO Health to facilitate electronic, one-off medical claims payments, which may occur between a provider and an out-of-network insurance company.
“Through our partnership with ECHO Health, we solved key obstacles of migrating paper checks to digital payments,” said Reed. He continued, asking for a visualization of this scenario: "You’re playing volleyball at the beach and twist your ankle. You visit the local urgent care, which is ‘out of network’ for your insurance provider. After you are patched up, you present your insurance card, pay your copay, and you’re on your way. For the urgent care and insurance company need, the reconciliation of your visit is just beginning. Let’s fast forward - the insurance company is ready to pay the urgent care for the monies owed to settle the claim. But remember, the urgent care is out of the insurance company’s provider network - so they don’t regularly send payments to them.
"What do they do? They mail a paper check – after all, it’s the only way to make a one-time payment with the explanation of benefits the urgent care needs to reconcile. Leveraging our new capabilities, it’s as simple as sending an email. You may be asking yourself, how often does this happen? Well, forty percent of healthcare claim payments are still made with a paper check today, mainly for out-of-network payments, which presents a lot of opportunity."
Checks help digital payments
For the foreseeable future, checks will continue to play an important role in payments. The pandemic may accelerate organizations’ payments digitization, but it’s unlikely to entirely eliminate the paper check from the B2B payments ecosystem. Now in the wake of pandemic disruptions and as whole industries and verticals reorganize, many are looking to digitize B2B payments, trading the costly inefficiencies of paper for the advantages and benefits of a digital-first footing.
“By supporting checks, we maintain customer relationships and gain insights that will help us digitize processes over time. In short, checks help digital payments,” affirmed Reed.
By arming companies of all sizes with technology to digitize check payments, data and workflows, businesses can embrace the benefits of electronic payments without the costs of disruption.
“If we can use existing processes and bring technology to help companies move to digital in a frictionless way within their environment, I think that has the potential to accelerate the decline of the paper check,” said Reed.
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