gtnews:Why has it taken so long to see a decline in cheque usage, particularly for B2B payments?
When I look at it from an industry perspective, everybody’s pretty excited about the decline of cheques and how there are so many electronic options in the market. But the reality is – and we see it all over the place, whether it’s in studies from the Association for Financial Professionals (AFP) or the Federal Reserve – by and large companies are still using paper cheques.
So why is that? At the end of the day, the reason cheques are still hanging around is because companies understand that process. It’s not just payment initiation and payment receipt, but how to handle discrepancies, how to shuffle around the information that comes along with it, etc. While electronic payment options are good, and often they’re just as good as a cheque, they have to be so much better than the cheque that it’s compelling enough to make the switch – to disrupt a well-understood process. I think that’s really the challenge in B2B payments.
Breaking it down by business size, which companies do you see hanging on to cheques? Large corporates? Small and medium-sized enterprises (SMEs)?
What I’ve observed is that large companies with leverage over how they want to pay for goods or services have done a solid job of removing cheques from their process and moving to electronic. On the other end of the spectrum, really small businesses and start-ups are able to skip over the cheque process where they can, and so they are doing a pretty good job too. But the ones who are hanging onto cheques are the organisations in the middle. They don’t have the leverage to dictate how they want to make or receive payments, or their process is just so ingrained in their culture, that it’s just going to take a while to displace that existing cheque process with something else.
When those businesses are ready to make that change, they will make that change. In the past five years, I’ve had the chance to talk to literally hundreds of companies in all types of industries about how they do things and why they do things related to payments. Inevitably in those conversations, there’s always someone – and you can tell when they walk in – who is not all that interested in doing something other than what they’ve been doing for a long, long time. It always surprises me how much influence that person can have, whether they mean to have it or not. Sometimes it’s an executive, other times it’s the day-to-day accounts payable (AP) person, but it tends to be a trusted individual with influence in the organisation, and if they’re not on board, you’re stuck.
For companies in that middle group, would you say that the majority of them want to make the shift, but outside factors – such as suppliers and customers – are holding them back? Or would you say it’s more of an old-school mindset that things are fine right now and they don’t need to make a change?
I think the population of companies who simply don’t want to make a change continues to shrink. But what I think it evolves into is, once you flip the switch and say, ‘Okay, I’m ready to change something,’ then the next step is very often education. Do you know how to make the change? Do you understand exactly what that means?
For example, I was talking with a company recently about their desire to leverage more electronic payments. It came out pretty quickly in the conversation that anything that wasn’t a cheque, this company referred to as a wire. They didn’t really understand the differences between wires, automated clearing house (ACH), card payments, etc. What they were doing was literally calling some of their important suppliers and asking if they could pay them with a wire. You can imagine how successful they were with that approach, and yet that was their experience with trying to go electronic. That’s the kind of thing that happens.
I think a lot of companies are willing. But they might not have the tools and the education to make it happen without some help.
The (US electronic business promotional organisation) Remittance Coalition is currently working on a B2B Directory, which aims to accelerate electronic payments by addressing one of the key barriers to adoption – the difficulty that companies are facing obtaining financial information. The directory intends to provide a secure way for businesses to acquire that information. Do you think that might be something that will help advance B2B payments?
Short answer, yes. I think that’s one of the big points of friction that keeps paper around in the B2B space. However, I think the devil is in the detail when you start talking about a repository like that. Let’s say we come to an agreement on where that repository should sit, how people would access it and how to interact with it. There’s still a lot of assumption on how well accounting packages, enterprise resource planning (ERP) systems, banks, etc. can connect to it and work with it.
By comparison, banks have offered a solution we call consolidated payables; it’s essentially a payment automation and remittance delivery service that spans across multiple payment options and can actually help companies move payments from paper to electronic options. But where we sometimes run into a challenge is, if a customer’s accounting package or ERP has a hard time providing a combined payment file to their bank, or a client doesn’t know how to produce something like that, that’s where I think there’s a little bit of a bump in the road. So the success of a more accessible place to trade information will depend on how easily connected it will be.
For the near term, what can banks do to get more customers on board? Additionally, what are some key points of advice you could give to companies that are looking to accelerate their electronic payments process?
I think from the bank perspective, there are three things we need to continue doing. The first is to provide education. This isn’t just banks; it’s associations and other industry experts. We have to provide the education and make sure that organisations of all sizes understand how to access and use electronic payments. The second is that we have to be a bit more transparent in the way that payments are accessed. We have to make that as easy as possible from a user experience standpoint. I think that’s what helps move things forward. Any place where we can simplify a file structure or improve how companies initiate or receive electronic payment files gets us a little bit closer by making the move to electronic payments just that much more compelling.
Lastly, I think a good portion of this is long-term assistance that service providers can put in place. It’s one thing to say, ‘Where you send cheques today, you could be sending card transactions.’ But it’s another thing to actually enable both sides of the transaction itself. I see a lot of success in outreach campaigns on behalf of both buyers and suppliers which aim to enable the other side of the transaction, so it’s valuable as a service from both perspectives.
So, the advice I would give to companies thinking about how they can increase their use of electronic payments would be that every organisation is going to move toward electronic at their own pace. While there is no single way to approach, there are resources you can tap to help you reach your goals. First, gather information from resources in the market, including your bank partners. This is really the most important step. With the help of those resources, you will gain an understanding of the range of tools and services available, and you can begin to create a solid business case and tactical plan that makes sense for you.
Also, be sure to set realistic objectives and timing goals which are based on your industry and needs – this is another area where resources like your bank can help you by sharing their experience and expertise in making the move from paper to electronic.
When Mark Cuban declared that "Data is the new gold" he highlighted why information is possibly the most valuable asset a business has. APIs are the unsung heroes that make it possible to extract that value.
How treasury stands to benefit from blockchain: Ripple’s goal to revolutionise cross-border transactions
Imagine a world where cross-border transactions can occur in real-time, at a few cents per transaction, to and from any bank, in any ... read more
Europe’s opening banking regulation is finally here. After months of preparation across the continent, the Revised Payment Services Directive comes into effect on January 13.
The revised Payment Services Directive regulation, regarded as one of the most disruptive in Europe’s financial services sector, will begin to make an impact on January 13, 2018.