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 status
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
accounts receivable 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.
