Reprinted with Permission of ReceivableSavvy

by Ernie Martin

I don't consider myself a big science fiction cinema fan, but I do enjoy movies such as Star Trek and Star Wars. The technology on display in these movies is outstanding. Even though we don't have the capability to transport ourselves or travel at the speed of light, the technologies we do have can help make our lives and businesses run smoother.

Given all the modernization in business these days, it is surprising that some companies still allow paper checks to be their primary form of payment receipt.

This is evident from our 2017 Perceptions Study: Analysis of Invoice-to-Cash practices and preferences of supplier organizations. In our survey 87% of respondents indicated they accepted checks from customers for payments. Another 72% stated they received payment from Automated Clearing House (ACH) and 61% accepted payment from credit or p-cards. Yet, when asked which payment method they prefer 59% respond ACH, 26% selected paper checks and just 7% indicated they would rather customers use credit or p-cards.

Based on these results, it is reasonable to question why there is a difference between what suppliers prefer and what they accept.

Why are paper checks so prevalent?

In some form or another paper checks have been around since antiquity. Throughout history, banking systems have relied upon an assortment of promissory notes that were intended to secure payment of a specified sum for a payee.
Today, suppliers accept payment from customers in many ways. However, paper checks remain the predominant method in the U.S. though other forms of payments, like ACH, credit or p-cards, wire transfers and others are used. This may be because companies do not need to learn new procedures or technologies to accept paper checks. Another advantage has been the remittance data that is usually included with every paper check, assisting suppliers in determining details of the payment for cash application purposes.

Challenges associated with paper

Despite how reliable paper checks have been in the past, payment methods have modernized. The 21st century market moves quickly and companies have been streamlining their Order-to-Cash processes. Therefore, we must ask whether, in our modern world, if paper checks are still relevant?

Here are some additional insights from the 2017 Perceptions Study:

90% of suppliers stated that getting paid faster was the most important aspect of submitting an invoice.
Participants divulged that ‘not getting paid in a timely manner’ was their biggest challenge when receiving customers’ payments.
Another major challenge for suppliers identified in the study was ‘not receiving supposedly mailed payments.’

How practical is it that suppliers continue to wait days or even weeks for a check to be cut, mailed, received and deposited when modern technologies have paved the way for all this to be done within three days or less? It would be like traveling from New York to Los Angeles for a crucial business meeting by taking the train instead of using a commercial jet and cutting travel time down to just hours.

The rise of ACH

First developed in the 1970s, ACH was used as a replacement for check payments. It became a popular form of payment as transactions could be completed quicker and with lower fees compared to credit card networks. It has also been relatively easy to set up ACH payment acceptance through financial institutions. Due to its high standards and widespread acceptance, ACH has become more common for B2B transactions.

The Electronics Payments Association, NACHA, has played a significant role in developing the rules and guidelines, such as ISO 20022 as the international standard for financial service messaging for business processes. You can read more about the work that NACHA does on their website: www.nacha.org.

Why the disconnect?

According to the Perceptions Study, most respondents prefer to be paid through ACH. However, that does not explain why they still accept paper checks. There were 5 typical responses from the 59% of participants who preferred ACH payment, which offers some insight into this discrepancy:

Clears quickly (within 3 days) and is affordable.
Easier and Faster. No need to wait for the check in the mail and then deposit it.
Funds are available more quickly.
More efficient from a cash flow perspective.
Less chance of errant or lost payments, better record of remits.

Given that virtually all respondents indicated that receiving payments from customers faster was the most important issues for their organization, moving to ACH from paper checks makes sense. In comparison, here are 5 reasons from the 25% of respondents who indicated they preferred paper checks:

It’s how we have always done it.
Old fashioned values.
Because we have a bank courier.
Easier to handle.
We are not set up to receive other ways.

Based on these responses, it is clear that companies stick with paper checks because it is the most familiar method of payment. However, that does not mean it has been the most effective in getting invoices paid quicker.

The argument for ACH

To see a practical example of the advantages of accepting ACH payments, read the case study on KHS Bicycles. It offers a look at trials the business faced before they accepted ACH payments as well as benefits the company discovered when they began accepting this method of payment. These include cost savings, more efficient payables and even happier customers.

For companies interested in quicker payments, reducing DSO, lowering fees and being able to take advantage of early payment discounts, allowing customers to make payments through ACH simply makes sense.
It appears that time will ultimately have to play a primary role in transitioning supplier organizations, who say they want faster payment and streamlined processes, to more electronic or automated methods of payments. Today, the divide appears to be as wide as ever.

Ernie Martin is Founder and Managing Director of Receivable Savvy. He brings over 25 years of experience in financial supply chain management, marketing and communications and draws upon his extensive experience to share knowledge and best practices with AR professionals. His resume also boasts time at several well-known brands and companies such as Tungsten Network, Delta Airlines, CIGNA Healthcare and Georgia Pacific as well as a number of years as an independent consultant.

Dissecting the Disconnect: Why Suppliers Want ACH for Customer Payments but Still Accept Paper Checks