By Patti Murphy
Twenty-five years ago, I gave a speech likening checks to the Energizer Bunny, the Energizer battery mascot that keeps running and running even as competitors peter out. Now it seems like the "Energizer check" is beginning to peter out.
In 1997, Americans wrote about 4 billion checks per quarter, or about 16 billion in all that year, according to the Federal Reserve. In 2021, Americans wrote just over 3.7 billion, total. Not surprisingly, the drop in check usage accelerated during the height of the COVID-19 pandemic. The automated clearing house (ACH) network picked up some of the slack.
According to Nacha, ACH payments grew by 8.7 percent in 2021 to 29.1 billion, led by a 20 percent jump in B2B payments, which totaled 5.3 billion. B2B payments across the ACH network grew by more than 20 percent from 2020 to 2021, to total 5.3 billion.
Inherent inefficiencies in the check payment system are what led to creation of the ACH system 50 years ago, and it has made progress displacing checks. But it's been 50 years. Frankly, if the ACH hasn't yet displaced checks as a preferred B2B payment method, I'm not convinced it ever will.
In its Business Payments 2022 report, Mastercard estimated the North American market for B2B payments to be $25 trillion, with more than half that money transacted by check. Just 4 percent of the total (about $1 trillion) is transacted using credit and debit cards.
In 2020, consumers and businesses, combined, spent $6.75 trillion using credit and debit cards bearing logos of the four major card brands: Visa, Mastercard, Discover and American Express.
Clearly, COVID had an impact on B2B spending. As the pandemic forced many businesses to accommodate virtual workforces, it shone a light on legacy receivables processes that require significant human interaction. With few staffers on site to originate and receive incoming mailed checks, businesses were forced to consider new, digital, payment options.
A 2020 survey of North American small businesses, conducted by Mastercard found 82 percent had changed how their businesses send and receive payments. Sixty-four percent of small businesses said they were trying to steer trading partners toward digital payments.
"The pandemic has made it painfully clear how labor-intensive current business payment processes are, especially for small and medium-sized businesses," said Ron Shultz, Mastercard executive vice president.
Real-time payments are one digital payment option ready-made for B2B. But one fact I've learned in my years following the payments space, it's that moving to new networks and processes takes time—a lot of time. We need look no further than the ACH. It took more than 40 years for ACH payment volumes to surpass check volumes.
As Jack Baldwin, chairman of BHMI explained to me earlier this year, many financial institutions and back-end processors are apt to struggle with the transition to real-time payments. It will "cost a lot of money and take a lot of time," he said.
Roger McNamara is a huge proponent of migrating B2B check payments to cards. I've interviewed him several times on the topic, including on the Merchant Sales Podcast, and he has written extensively about the B2B opportunity in The Green Sheet.
McNamara's experience includes a stint at American Express, where he led a national team selling B2B. After that he founded a B2B sales training and consulting firm. Next, he joined Visa as director of B2B acceptance, which, I believe, speaks to how the card brands view B2B payments. "B2B is the next great opportunity," he told attendees at the Northeast Acquirers Association annual meeting earlier this year.
Recently, McNamara wrote a LinkedIn post suggesting rising inflation, coupled with average days sales outstanding, strengthens the case for ISOs and their sales reps to sell B2B card acceptance.
At 45 days sales outstanding and inflation running over 9 percent on an annualized basis, a supplier loses 1.12 percent of the value of an invoice while waiting for payments to come in, McNamara estimated. With interchange optimization—where additional, Level 2 and Level 3 data gets collected and processed with the transaction—card processing costs go way down. Some estimates place the potential savings at 40 percent, or more.
McNamara believes few greenfield opportunities remain for selling card acceptance to consumer-facing merchants. "[I]f the pie is not getting any bigger in B2C, why is there so much focus on it?" he asked in a blog post on his website, Guide2Interchange.com. Answer: because it's easier to sell retail merchants. Consumers expect to be able to pay merchants using their credit and debit cards, and plenty of agents are eager to sell credit cards to businesses that sell to consumers.
The problem, of course, is that the "race to zero" continues to slash margins on these accounts. Cash discounting has offered a reprieve, but shifting the cost of acceptance to consumers could backfire. Merchants have long complained about the cost of card acceptance, with consumers now shouldering more of that cost, it is no longer just a merchant issue.
The key to selling B2B card acceptance is not to sell on price, McNamara said. The time value of money is an extremely important part of the sales pitch, as card-accepting sellers can expect to collect payments faster, he noted. Operational efficiencies should also be part of the pitch, and receivables staff dedicated to routines like opening mail and depositing checks can be reassigned to other important money-making tasks, he added.
McNamara also pointed out that card payments can be a more equitable method of payment, because with checks, wire transfers and ACH credit payments, the paying firm typically is the party in control. They can throttle payments to meet their cash-flow needs, but businesses that offer trading partners the option to pay by card can negotiate terms that are equally beneficial to both parties.
To these benefits I would add the reduced potential for fraud. The card networks and financial technology firms are continuously improving fraud controls. And by collecting Level 2 and Level 3 data on B2B card payments the potential for fraud losses is practically eliminated. The payoff for ISOs and agents, meanwhile, is that residuals on B2B payments are going to be much bigger than residuals from a typical retail account.
Patti Murphy is senior editor at The Green Sheet and self-described payments maven of the fourth estate. Follow her on Twitter @GS_PayMaven.
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