B2B Payments stuck in the Middle Ages

Vast majority of payments are made by cheque


I continually receive mailed cheques to Canada (yes cheques, not checks) from my business relationships from across the border. It never ceases to amaze me how many U.S. businesses (including bank clients) still deal in the world of cheques. In the U.S., cheques continue to be the dominant business-to-business payment method. While Europe has made great strides with contactless card payment methods and chip and pin cards; the U.S. still relies on paper checks.

The Association of Finance Professionals recently surveyed its members around electronic payments and released some key findings gathered from 484 responses.

  • The typical organization makes 50 percent of its payments by paper check (compared with 74 percent in 2007 and 57 percent in 2010). See chart below for a comparison from another data source.
  • Only one in five organizations makes a majority of their payments electronically.
  • On average, organizations make 43 percent of their payments to major suppliers by check, 31 percent by ACH, and 16 percent via wire transfer.
  • More than 70 percent of organizations are finding it challenging to switch to electronic payments. Major obstacles include IT barriers and customer/supplier hesitancy to adopt.

The big finding was that these organizations wanted to change - just under half of respondents said their organizations are very likely to convert the majority of their B2B payments to major suppliers from checks to electronic payments by 2016.
But how? Paying by cheque, while costly, is easy. You don’t have to obtain bank details from your suppliers, verify them, and keep them up-to-date. If accepting ACH payments, the bank account number and routing number are required.

Supplier Networks are starting to address this. Ariba is working on this with Discover, but you need to be on Ariba system and if a supplier submits an invoice electronically they can be paid by ACH. It’s a basic starting point, but going on the right direction.

I remember my days in banking when float management was big business. The time between the moment you write a cheque and the time the bank cashes the cheque creates a time delay. Having payment terms of 30 days (based on invoice date or invoice receipt, or some other value date), and then waiting the next Friday when cheques are cut, mailed, etc. could easily add 10 or more days to your 30 day term. Now, with bank deposit rates at all time low, float has lost a bit of its luster. But from a working capital perspective, it’s still important. So perhaps that is another reason why cheques still remain so sticky in the U.S.

In September, the Fed will present its “road map” for the introduction of faster payments in the U.S. system, but banks are under limited pressure to change their ways.
There are some exciting vendors in this space that are pushing, such as TraxPay, and NVoicePay, who we talked about in prior posts.

Chart below comes from NVoicepay, which gives another data point on cheque usage in the U.S.

NVoicePay Overview 061214

Source: AFP study

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