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March 10, 2009
B2B: Will checks ever really go away?
While check writing in the aggregate is on the decline, one last bastion may remain in the business-to-business (B2B) arena. While consumers are adopting electronic payments at an increasing rate, most B2B payments continue to be made by check—roughly 74 percent, according to a 2007 survey conducted by the Association of Financial Professionals (AFP). This study found that the average business surveyed makes 65 percent of its B2B payments to suppliers by check, with 18 percent by automated clearinghouse (ACH) credit and 11 percent by wire transfer. With the myriad payment choices available to suit a variety of user preferences for both consumers and businesses, why has the migration to electronic payments by businesses lagged that of consumers?
The adoption of electronic payments by consumers has exceeded analysts' projections in recent years as a result of a confluence of a number of different variables, namely convenience, security, and efficiency, which have provided the necessary incentives for adoption. The Internet has emerged as an increasingly trusted payments and product distribution channel as well, facilitating the initiation of electronic payments via both card networks and the ACH. While the same benefits of electronic commerce are desirable to the B2B payments segment, the complexity of the B2B payments landscape along with technology constraints for smaller business partners contribute to a less rapid adoption than seen in the consumer-to-business segment. What are the major B2B barriers to adoption, and how are they being addressed?
The problem with cards
Cards are an expensive proposition for payments between trusted and known business partners, particularly for large value payments. While they offer advantages such as financial management and control, they also impose a hefty interchange fee of roughly 2 percent of the transaction. If you know and trust your customer, you are probably more inclined to write a check, which has no transaction fee. This scenario is likely to be particularly true during times of economic downturn such as we are now experiencing.
ACH and wire transfers
Wire transfers are important for payments that are high dollar and require immediate settlement. Their high cost limits their use, however. Also, wire transfers tend to be used by larger versus smaller business organizations. The ACH is growing more popular for larger organizations for payments between major trading partners but is used more to receive than to make payments. It is also important to note that NACHA rules currently prohibit the conversion of business checks in the ACH. While the ACH format permits the transmission of payments and remittance data, there are a number of other alternative methods to deliver remittance information.
Obstacle: no standard remittance information
One clear obstacle to the migration from paper to electronic payments is the lack of standardization in the way remittance information is sent with the payment. Because of variations in data formats, trading partners may not be able to send or receive automated remittance information with electronic payments, inhibiting the automation of accounts receivable systems. Smaller organizations typically lack full integration between electronic payment and accounting systems, as their incentives to invest in the enabling technology are likely to differ from their large corporate counterparts.
Since electronic payments are typically faster than checks, an accounts receivable function might embrace an electronic payment in order to reduce the time to collect receivables, in direct contrast to an accounts payable function. Sophistication and size generally correlate to willingness to invest in the technology to adopt electronic payments.
Moving from checks to electronic payments can reduce fraud
In the AFP's 2008 Payments Fraud and Control Survey organizations of all sizes reported more attempted or actual payments fraud in 2007 from checks than from other payment methods. However, the report also notes that the majority of survey respondents did not actually suffer financial loss from the fraudulent activitity, suggesting that effective use of risk mitigants to control fraud once it is identified.
|Payment Methods Subject to More Payments Fraud in 2007 Compared to 2006|
(Percent of Organizations Subject to Greater Amount of Attempted or Actual Payments Fraud)
|* receive only||Source: 2008 AFP Payments Fraud|
and Control Survey
B2B future is likely electronic
While the pace of migration to B2B electronic payments may not accelerate in today's distressed financial environment, eventually the obstacles to the electronification of B2B will be resolved. For now, the bottom line is that businesses want to send payments in the most cost-effective way possible, and no one payment type may suit every payment need. Just as consumers will continue to avail themselves to the full spectrum of payment alternatives, depending upon what is cheapest, trusted, and most convenient, so too will businesses choose payment options that makes the most business sense.
Electronic payments are growing in the B2B space, but not by leaps and bounds, even in recent times when the economic outlook was favorable and financial institutions were readily investing in payments technology. While the future of B2B payments will likely be electronic versus paper-based, there is no clear evidence to show whether businesses will choose one electronic option to the exclusivity of another. For now, checks continue to represent a good value proposition to businesses, particularly when they can be imaged during the collection process to avoid transportation costs.
By Cindy Merritt, assistant director of the Retail Payments Risk Forum at the Atlanta Fed
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