Check Payments: Why 1% Matters

  • By Magnus Carlsson
  • Published: 12/20/2016

When I reviewed the results of the 2016 AFP Electronic Payments Survey, one key data point stuck out to me. While it may sound insignificant, business-to-business (B2B) payments by check actually increased from 50 percent to 51 percent from 2013 to 2016.

While 1 percent might not sound like a lot, you have to understand that we’ve observed check use to be declining since 2004, back when it was at 81 percent. This survey, which was underwritten by J.P. Morgan, has run every three years and in each increment, check use has decreased substantially. The biggest drop occurred between 2010 and 2013 (17 points), so you can imagine my surprise when I saw the new data.

Why the shift?

Looking a bit closer, we find that there has been an increase in check payments by larger organizations. According to the survey, check usage at organizations with annual revenue of $1 billion or more, went from 40 percent to 45 percent. This was somewhat offset by trends at smaller organizations, which have reduced check usage from 63 percent to 60 percent.

One area where we still see a declining trend in check use is in payments to major suppliers. The reason for this is fairly simple. Any change a company has to do internally is costly and therefore something one does not jump into. This is especially true in times of economic uncertainty. Any changes that you do make need to make sense. Your major suppliers are your most important ones, so you want to do anything you can to streamline that process and make it more secure. This is also where most of the payments go. So making changes for this category will have a better ROI.

On the other side of the coin, this same logic could be why we see an uptick in check usage overall. Companies are less willing to make big, expensive changes in areas where they don’t necessarily make sense. So in many cases, payments to smaller suppliers who are less integral to an organization’s business overall are not yet being converted to electronic payments.

Larger organizations relapse

This also can play into why there is a discrepancy between what smaller and larger organizations are doing. Treasury departments at SMEs likely face less resistance when they want to implement a new payment method; there are fewer cooks in the kitchen and they may be more willing to try something new, like accepting payments through other providers, such as Square.

In contrast, treasury functions at larger organizations typically need to get approvals from multiple parties. That bureaucracy could be a key reason why we’re seeing larger businesses fall back on check use; they are likely much less flexible than smaller businesses.

Furthermore, many large companies use very antiquated systems to handle large payments. “These systems are so old; they’re basically dinosaurs,” a treasurer for a major insurance provider recently told me. “They can’t make any kinds of changes to these machines because they don’t conform to anything but their own system.”

  • How can you overcome? In order for large companies to make any kind of change to their payments processes, they have to make big changes—and that means a lot of time and money. So for many of those treasury departments, it can be nearly impossible to build a business case. If you’ve invested decades in these systems, it will take serious costs savings to even justify thinking about making a change. Converting all B2B payments to electronic is a major undertaking for a large corporation; they can’t just take baby steps because they have so many payments that go through each system.

Pushback from counterparties

Lastly, it often can come down to who you’re paying. As I pointed out at the Payments Roundtable, organizations often face adversity when attempting to convince customers and suppliers to accept electronic payments. Fully two-thirds of respondents to the survey named this as a barrier to electronic payments adoption. So it’s not just what you can do in-house—your customers and suppliers have to be on board as well.

So while I don’t necessarily expect to see another uptick in check usage three years from now when we run this survey again, we still have a ways to go before electronic methods take a commanding lead in the B2B payments space. Hopefully as technology advances, check usage will begin to decline again overall, but it may take longer than we thought.

Magnus Carlsson is manager of treasury and payments for AFP.

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