Paper checks aren't going extinct, but it's prudent to plan for a decline

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If you had asked me in the late 1990s if paper checks would still be used almost 20 years later for business payments, I would confidently said that that there is no way that paper checks would survive the wave of digitalization enabled by the Internet and other technology.

Fast forward to the present day and it is clear that the issue is much more complicated than our industry had originally imagined. Some reports indicate that the adoption of e-payments is actually stalling at a time when the industry has committed itself to making digital options more attractive through faster payment initiatives like Federal Reserve Real-Time Payments (RTP) and NACHA same-day ACH.

A 2016 survey by SunTrust Banks of middle market and small business executives found that SMBs still make more than 57 percent of all payments through paper-driven processes and checks. The AFP 2016 Electronic Payments Survey found that 51 percent of B2B payments are still made by check, which is actually up 1 percent in comparison to 2013 levels.

From a purely economic point of view, making the switch to e-payments seems like it would be an easy decision for any company looking to improve accounting department efficiency and reduce costs. Various industry reports estimate the costs of processing a single paper check and business invoice ranges from $4 to $8. Based on these numbers, a company processing 10,000 checks per month could easily save over $480,000 annually by switching to electronic payments.

So why are so many companies still not taking advantage of this cost savings—especially small to medium businesses (SMBs) that stand to gain so much by making this switch? Ultimately making the leap to fully automated A/R and other financial reconciliation processes isn’t realistic for most businesses until the industry puts all the puzzle pieces in place. It’s not just about speeding payment processing and enabling faster access to funds. For businesses to take advantage of these innovations, the growing, but still nascent, fintech sector must tie together fractured payment networks, build the necessary business accounting and ERP system automation solutions and find ways to help businesses overcome interoperability issues.

Less than 2 percent of all businesses use bank offered bill pay solutions—mainly because solutions are not well tied into business accounting or ERP systems, fail to support basic payment controls and workflows, and don’t produce the kind of rich remittance that needs to accompany a payment today. Ninety-four percent of finance professionals surveyed in the 2016 AFP Electronic Payments Survey say it is important that payments are smart and can carry extensive remittance data.

Most available solutions for automating invoice-to-pay target a few thousand large organizations with $1 billion or more in annual revenue. These expensive custom solutions are generally out-of-reach for most of the 5 million or so SMBs in the U.S. that could really benefit from automation, efficiency and greater security.

There are some specialized accounting software and payment network solutions that aim to help SMBs make the switch to electronic payments, however these solutions typically require enrollment in a network, which serves a limited number of payers.

This might work well for SMBs with established relationships with big, frequent payers that all belong to the same network. But for those that receive occasional payments from a larger number of businesses or consumer-based payments, these solutions don’t deliver the expected ROI because of the costs and inefficiencies involved with managing multiple disparate networks and fragmented payment processes.

Despite all these challenges, the industry is making significant progress towards delivering solutions that support smart, straight-through processing of payments that carry extensive remittance data. Creating interconnectivity among existing networks and extending innovations beyond payment networks is key to success. The faster payment wave will catch up to the large number of businesses looking to capitalize on cost savings, efficiency gains and faster access to funds, once the networks have been sufficiently expanded and automated to create economies of scale for the endpoints.

While I cannot say that paper checks will completely disappear in 2017, I am confident that adoption of e-payment methods will accelerate as a prevailing number of payment players dedicate themselves to solving the last remaining challenges. And there is certainly reason to be hopeful that the dependence on paper processes and checks may finally be nearing its end for businesses -- if not this year, then certainly in the years to come.