Digitizing payables and receivables has never been a more critical topic. When compared to countries on the cutting edge of this area of payments technology, such as the UK, Sweden, Finland, China and South Korea, the United States tends to lag behind.
One of the main reasons is due to the sheer size and diversity of banking institutions in the United States. As of December 31, 2020, the U.S. alone had just over 4,300 commercial banks and 625 savings institutions. Though the U.S. has been a global leader for certain platforms including card payments, mobile payment technology and transitioning away from check payments has been a slower process.
So, what are the reasons U.S. businesses should get serious about the change, and why aren’t we?
When the COVID-19 pandemic hit, paper checks became trouble for payers and payees almost overnight. For an AP staffer that had to go into the office to cut checks and a controller that had to sign them, may not have been safe or even allowed. In addition, for those employees that did go into their office, they were many times operating with a skeleton staff, not as organized or secure of procedures, including dual control or additional sign off of any payments. Quickly companies realized they needed to operate without a dependence on paper checks, and many switched to electronic or digital payments for the main purpose of necessity. Still, other companies did not make the switch, of which cost was the main catalyst.
The reasons are the same for businesses post 2020 and prior to the pandemic era for why companies did or did not adopt digital payments. The companies that did overall saw three major benefits when sending electronic payments: nearly 50% benefited from straight-through processing to A/P or A/R and General Ledger, approx. 45% from cost savings and about 39% from speed of settlement. When it came to receiving, the biggest advantages were approximately 47% cost savings, 36% speed of settlement, and 27% improved cash flow.
Cost remains the largest barrier both pre- and post- the start of COVID era. This includes cost of making changes to existing internal processes; lacking a standard format for remittance; lack of integration across systems; and fear of lack of customer or vendor adoption.
That said, we see more of an adoption among major suppliers which got on board and use ACH almost equal to checks. In addition to necessity and efficiency, checks are a more expensive payment method. Though most companies cite cost as the barrier to switching to digital, in the long run, checks cost more to issue and receive. According to the 2015 AFP Payments Cost Benchmarking Survey, costs for issuing checks are at a median of $3.00 per check and $1.57 for receiving. For ACH, the estimate is closer to $0.27 (external) and $0.29 (internal).
Overall, some major benefits of migrating to electronic payments as a payer include:
Automation to no-cost ACH payments
Portals for queries, reporting, better organized information
No need to obtain, manage, authenticate vendor banking information
For vendors benefits include:
Faster collection of payments
More efficient workflow
Security around sensitive bank information
One interface to multiple players
Change can look daunting, but if steps are taken to make progress, it won’t be as hard as one thinks. Also, as unexpected events arise, and other societies become digitized, U.S. businesses of all sizes will be glad they took the steps to evolve, which may just help them save money and be more competitive in the long-run.
For more information on treasury services at PyraMax Bank, and how we can help your business transition to electronic payments, contact 414-235-5262 or TM@pyramaxbank.com.
By Melinda M. Toy, CTP