5 Hidden Facts About Paper-Checks That Harm Your Business

What you’ll learn


  • Examine the challenges associated with paper check payments
  • Explore digital payment trends that provide opportunities for faster and secure payments

Introduction

Paper checks may seem an outdated way to pay for products and services, but plenty of organizations still use them as their primary mode of payment. As per the Electronic payments survey report, 42% of organizations made payments to business customers using checks. Due to this, AR teams at small and mid-sized businesses are stuck in paper-check processing, expensive bank lockbox services, and a highly manual cash reconciliation process. To overcome these problems mid-sized businesses are now moving towards digital payment services to modernize their payment cycle.

Challenges associated with checks

Digital payment methods help reduce payment fraud risk and the higher costs associated with manual paper-check processing. They also make the payment cycle faster and more efficient.

In this blog, we will discuss how paper-checks pose serious challenges to your business in the long run. We also suggest smart ways to overcome them.

5 Ways Paper-Checks Affect Receivables Payment Processing

1. Time-consuming process

Most checks take approximately two to three days to clear. The time delay between when a paper-check is written and when it is reflected in the bank database is often an issue. Several other factors also cause delays in processing checks. Some of them include:

  • Manual scanning of checks and remittances
  • Manually extracting check stub data for payment and remittance information
  • Manual matching of remittances to respective invoices and posting into ERP

The lengthy payment cycle and manual processing of checks lead to an increase in days sales outstanding(DSO) which affects the overall cash flow.

2. Increased operational costs

As per Bank Of America, the costs of processing a single business check range from $4 to $20 which adds to huge sums in the long run. Banks also charge you fees for lockbox services.

If an organization opts for a bank key-in service for capturing remittances, the organization has to pay additional fees, depending on the number of characters. Also, data captured by the bank has limited information. For a key-in fee, the bank charges 1-3 cents per character. This can add up to $50,000+ per annum for high-volume lockbox accounts. Furthermore, maintenance costs range from $400-$700 per month per lockbox.

3. Limited visibility into payment statuses with disparate paper-trails

Tracking the exact timestamp when a paper-check is processed, cashed, and updated in the database is a time and effort-intensive process. Also, lost or bounced checks result in late payments and affect the relationship with customers. Paper checks also lead to high overhead costs, errors related to payment details, potential customer risk, and limited visibility into payment statuses. Further, your AR team may not be able to focus on dispute handling due to a blurred picture of cash flows.

4. Prone to errors

The handling and extracting of the data from paper checks is a tedious process that involves matching individual check payments with their respective invoices. The bank key-in process is manual, time-intensive, and error-prone. This process becomes more complicated when you have to gather remittance information from different sources such as emails and web portals. Analysts have to then manually log in to all the web portals and email portals to download the remittance details. There is always a high possibility that the recorded details may be incorrect. Any mismatch in remittance data can lead to cash flow problems and an increase in your DSO.

Another challenge for your AR team is the identification of disputes or deductions in payments. Analysts have to manually calculate and create line items for every short payment. They need to manually send emails and messages and make calls to customers regarding disputes. This further increases the time needed to close invoices. All these factors lead to the delayed resolution of disputes, hindering the customer experience.

5. Fraud and security

Reports by the American Bankers Association suggest that 60% of frauds are check-related frauds. The leading check frauds are counterfeit checks and forged signatures. With limited authorization control on each paper-check, the risk of fraud is very high. If a customer sends a check by post, there is always a probability that it can get damaged or lost during processing and delivery.

Digital Payments- A Modern Gateway To Secure And Fast Payments

Digital payments have gained huge popularity among mid-sized businesses. As per PYMNTS.com, roughly 92% of mid-sized businesses are digitizing at least some aspects of their accounts receivable process. Digital payment methods help streamline payment processing and address AR pain points. They also offer added benefits such as real-time payment, better visibility, compliance, fraud protection, and improved cash flow.

1. Digital payments: multiple payment formats

The different digital payments formats include:

  • Credit card
  • Debit card
  • ACH(Automated Clearing House)
  • Payment portal/gateway
  • Virtual card

These modes of payment save customers a lot of time and cost. E-invoicing portals also have attractive interfaces and help eliminate the effort to go to the bank for physically depositing checks.

A self-service portal can empower customers to access and manage their invoices and account statements, raise disputes, and make payments. Providing customers an easy platform to make payments leads to reduced dependency on your team and improved customer satisfaction rates.

2. Remote deposit capture(RDC) with automation

Remote Deposit Capture (RDC) is a service that helps users scan checks and transmit the images and ACH data to the bank for posting and clearing. However, RDC still requires human intervention to operate and scan the checks and remittances separately.

An integrated RDC with cash application provides end-to-end automation. It integrates RDC directly with cash applications.

  • This system scans checks and remittances together in one go with high accuracy and creates an enriched electronic file containing payment details. This omits the need for analysts to key-in data into spreadsheets.
  • For the cash application process, it auto matches the electronic payment file with scanned remittances details and fetches the open AR invoice details from the supplier’s ERP system. The payment details are then matched with the line items in the open AR and auto-posted in the ERP system. All this happens without manual intervention.

Furthermore, integrated RDC eliminates the need for expensive lock-box services and manual reconciliation of payments and remittances, resulting in huge savings.

RDC vs Lockbox vs Traditional Processing
  • Real-time process: As compared to paper checks, digital payments are processed in real-time. This means that when a customer makes a payment via the payment portal, it gets updated simultaneously in your open AR records in the ERP or accounting system.
  • Security: Digital payment modes offer multiple encryption levels that cipher the payment details according to Payment Card Industry Data Security Standard (PCI DSS) compliance regulations. Details of payments are stored in merchant-specific databases. Both merchants and customers have access to the payment information. This avoids any confusion while tracking payments because you know where the money is at all times.
  • Better customer experience:  Digitalization provides multiple payment formats which makes it easier for customers to pay invoices on time as per their convenience.
Benefits of Digital Payments

The Way Forward

B2B businesses are increasingly adopting digital payment methods As per NACHA 2019 report, the number of payments made by checks is down to 42% as compared to 51% in 2016. Within the next few years, one can expect a major chunk of B2B payments to be made via digital methods and cryptocurrencies. Digital payment formats help mid-sized businesses process faster payments and offer superior customer experiences.

Role of Technology

Furthermore, automated RDC eliminates manual efforts and captures details more accurately, thus decreasing the chances of errors. Understanding the world of digitalization and determining the cost-benefits of the different payment formats is important before you make decisions around investing in e-invoicing and payment solutions.

Want to know more about how digital payments help mid-sized businesses in the B2B world? Check out this blog: “Redefining Accounts Receivables with Digital Payments”

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