The Last Flight of the Paper Check

January 19, 2016

8:00 pm

Before 2003, an average of $6 billion in paper checks was flown on airlines to their final destinations every day.  In an attempt to do away with this enormous inefficiency, the Check 21 act was signed into law, allowing banks to settle using electronic images instead of sending physical checks. Fraud went down, costs of processing dropped significantly, and physical check settlement between banks quickly fell to almost zero.

When digital payment alternatives arrived for businesses, many assumed a similar transformation would occur, hailing the new age of B2B payments. This was simply not the case. The rise of ACH, Paypal, electronic bill pay services, p-cards, and other digital payment alternatives over the past decade has given businesses more options when it comes time to pay. Yet, around 50 percent of US businesses still use paper checks as their primary method of payment.

Such a widespread lack of adoption represents a tremendous inefficiency when you consider the average cost of writing a check. Bank of America estimates each check costs business anywhere from $4 to $20 from start to finish, including labor costs and processing. The WSJ estimates that this antiquated process is costing US businesses up to $54 Billion per year. New software and technology are streamlining every other aspect of a company’s operations, yet billions are being squandered by businesses using an inefficient, insecure method of payment that has not changed significantly since its creation two millennia ago in ancient Rome.

So why are rates of adoption slowing down despite such clear benefits? After discussing this with various CFOs, controllers, and treasurers, two main issues arose: familiarity and cost, and disconnection of information.    

Most businesses that still used paper checks stated that it is how they have always done business and do not plan on changing anytime soon. Also, in some cases, costs of switching to a digital alternative would be more expensive, especially with small businesses. Options such as p-cards and payment services that offer superior convenience do so at a higher cost. Also, business owners are especially stubborn when it comes to changing their methods of payment.

Secondly, many business owners state that solutions such as ACH and bill pay services do not integrate with their existing ERP systems. The separation of information and payments requires manual input into ERP systems and can often make the process increasingly complex with each new payment method you accept.

One future solution to the gap between payments and information resides in new technological solutions provided by Bitcoin and the Blockchain. These two technologies allow secure P2P transfers of value (representing any digital asset) to and from anywhere in the world in a matter of moments with rich remittance data included. For the first time, currency is truly programmable, allowing for a transfer of detailed invoice information along with payment.

While it has yet to be fully realized in this capacity, this could be the key to eliminating the gap between payments and information, creating an interoperable global system, and streamlining finance for global supply chains. In addition, the transparency provided by blockchain solutions will encourage transparency and best practices up and down the supply chain, discouraging the use of slower methods of payment to hold on to cash for as long as possible. Overall we will see an enormous increase in efficiency across supply chains when the benefits of these systems are realized and implemented on a large scale. The last paper-based bottleneck will be smashed open, and the flow of capital will reach a similar unrestricted flow like that of information on the internet. Paper checks will no longer fly across the sky on airplanes but move at 99.37 percent of the speed of light as bits across the Internet.

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Lamar Wilson is the CEO and co-founder of Fluent, the financial operating network built on blockchain technology for companies and their global supply chains.

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