A Thing
The Green SheetGreen Sheet

The Green Sheet Online Edition

June 24, 2024 • Issue 24:06:02

Inching away from checks and toward e-payments

By Patti Murphy

U.S. businesses are rapidly adopting faster and instant digital payment services, according to the Federal Reserve Payments Insight Brief: Digital wallets emerge on businesses' radar for improved customer experience and cost efficiency.

More businesses also are using the ACH, the Fed's noted. Use of same-day ACH was up 45 percent over 2022. Use of the more traditional next-day ACH option grew by 17 percent year-over-year.

That's all good news for proponents of electronic payments. Yet according to the Association for Financial Professionals, 81 percent of businesses still use paper checks for at least some bill payments. What's more, 70 percent of U.S. companies don't plan to scrap their check writing habits, the AFP reported.

Checks clearly are on the decline—from over 40 billion in 2000 to 14.5 billion in 2018, according to the Federal Reserve. And from the looks of it the majority of them were written by businesses to each other and to customers. Recently, I almost threw into the recycling bin an envelope that included a refund from a vendor—a check for several hundred dollars. That's how unaccustomed I am to receiving checks.

The business community's reliance on checks is especially costly given that checks are the most common form of fraud businesses have to contend with.

While it may seem strange that businesses are more inclined to let customers pay electronically while relying on checks to disburse, it's not surprising. I recall many years ago being told by a cash manager that companies prefer to collect money at the speed of light, but when it comes to doling out funds they would rather use dog sleds.

Checks in the mail

Consumers have a whole different mindset. When was the last time you wrote a check? Ask a thirty-something to write you a check and they'll probably look at you like you have three eyes.

It's a generational thing, of course. An eighty-something friend, who has no understanding of online and mobile payments, sent me a check a few months ago. As of this writing, it still hasn't arrived. Was it stolen? Probably not. I'm betting it just got lost. But if that check had been from one company to another, the outcome could've been costly. Think of the float implications alone.

And then there is fraud.

One in five (20 percent) companies surveyed by the AFP reported check fraud due to interference with the U.S. Postal Service, up from 10 percent in 2022.

Low-level criminals and sophisticated crime rings alike are taking advantage of this old-time way of paying bills. Thieves have been reported to be attacking mail carriers or stealing and selling carriers' arrow keys, which unlock those big blue mailboxes. Then they get to work creating bogus checks. It's an age-old technique: criminals "wash" checks using something as basic as nail polish remover, leaving the signature untouched. Then rewrite them for large amounts.

Some fraudsters deposit checks into their own accounts; others list them for sale on the dark web. Not long ago, I read an article in the New York Times about a business owner who wrote a check for a bill that was stolen and rewritten for $7,200, which drained her bank account.

"Increasing check fraud should be reason enough for businesses still issuing paper checks to ditch them in favor of secure, reliable ACH payments," Michael Herd, executive vice president at NACHA said in a statement.

Making a case for electronic payments

But electronic payments can be prone to fraud, too. Business email compromises (BECs) are one reason why. In a typical BEC, fraudsters gain access to a business email account by impersonating the owner or a vendor and then reaching out to employees in accounting, requesting initiation of payments. Typically, these bogus payments are collected via the ACH. According to the latest internet crime report by the FBI, in 2023 a BEC cost a business an average of $137,132, up from $125,612 in 2022. Often that money is gone for good.

Despite the costs associated with fraud, many businesses are falling behind when it comes to protecting against BECs. The AFP found that only 60 percent of businesses have written policies and procedures deemed necessary to protect against BECs; just under 49 percent have completed testing of these policies and procedures.

Kicking old habits

So, why are businesses, especially small and midsize businesses, so enamored with checks? One reason is familiarity. They already know how the process works; there's nothing new to learn. Then there are existing investments in systems and processes that have long supported check issuance and collection.

Skewed cost considerations are another reason. Ostensibly, checks are free. (At least that's the perception.) Not e-payments, like credit cards, which incur interchange and other fees. Transitioning to e-payments also requires investments in hardware, software and even subscription fees. Some SMBs believe those costs are too high.

Costs like interchange can be limited by including additional transaction information beyond what is required for consumer transactions. This "Level 3" data is the highest-level card data; it includes the maximum amount of information about a transaction and triggers much lower interchange than transactions initiated using consumer cards. It's an easy fix – one that ISOs and agents should be selling businesses on.

Time for businesses to give up their check habits

Anyone who has followed me through the years knows that I've been a check maven. In the 1990s, I even had a newsletter and organized conferences on checks.

I believe checks will endure. And there will be firms that offer check services, like Cross Check, which leverage technologies like mobile deposit and check guarantee services to expedite availability of funds and protect against fraudsters. But times have changed, corporate attitudes toward checks should change too.

Forbes magazine published statistics and trends in business credit cards, gleaned from a 2023 survey by Forbes Advisors. Here are insights to bear in mind when selling businesses on paying with credit cards:

  • 29 percent of businesses in the survey sought funding via business credit cards in 2022; 4.67 percent said they used credit cards to kick-start their businesses.
  • Quick access to funds was the motivation for nearly a quarter (22.8 percent) of companies surveyed.
  • Among those that used credit cards, one in four (25.4 percent) did so because they couldn’t procure traditional financing options.
  • Those that used business credit cards typically charged between $160,000 and $250,000 (39.7 percent).
  • Most businesses (88.61 percent) had at least three credit cards.
  • Of those that started their businesses with their own credit cards; about one in three (34.3 percent) had three new cards; 45.71 percent secured a total of four cards; and 8.6 percent had five or more credit cards.
  • Better than half of businesses (54.2 percent) said they paid off their monthly balances.
  • An overwhelming majority (91.4 percent) said they would recommend that others use credit cards when embarking on new business ventures
end of article

Patti Murphy, self-described payments maven of the fourth estate, is senior editor at the Green Sheet. She also co-hosts the Merchant Sales Podcast, and is president of ProScribes Ink.

The Green Sheet Inc. is now a proud affiliate of Bankcard Life, a premier community that provides industry-leading training and resources for payment professionals. Click here for more information.

Notice to readers: These are archived articles. Contact names or information may be out of date. We regret any inconvenience.

Prev Next
A Thing