While checks are still widely used in B2B payments, their popularity has been steadily eroding. A study conducted by the Association for Financial Professionals, for example, found that among U.S. companies, check use had dropped 24% between 2007 and 2013.
The factors fueling that downward trajectory haven’t changed, according to a recent survey conducted by CFO Research, in collaboration with MasterCard. The report, titled Accounts Payable at a Crossroads: The Next Phase for Business-to-Business Payments, was based on responses from 200 senior finance executives working at U.S. companies. The businesses represented a wide range of sectors, from manufacturing to financial services to healthcare.
Among respondents, nearly 70% reported that paper checks currently were in widespread use at their companies. But most finance executives predicted that the future of payment processes would find them stepping off of the paper trail. A mere 4% of respondents saw room for increased use of paper checks at their companies over the next three years—a time-span during which about 70% of survey-takers said they expected to see their companies’ spending grow.
Moving Toward a Virtual Necessity
What’s supplanting the customary check? A variety of electronic alternatives, it turns out. More companies are moving towards using ACH (Automated Clearing House, an electronic network), bank wire transfers, and purchasing and virtual cards. Three-quarters of respondents said they expected their use of ACH to grow, while 40% anticipated an increase in their deployment of traditional corporate or purchasing cards. (See Figure 1.)
Interestingly, about 30% expected to increase their use of a relatively new technology, virtual credit cards. As nearly 45% of respondents admitted that they “don’t know as much as they need to know” to use virtual credit cards for everyday business-to-business payments, it will become increasingly important to get up to speed on how they can use these virtual capabilities to streamline transaction processing. With the development of Virtual Card Number (VCN) technology, for example, purchasing cards can deliver more granular and customized transaction data that allows tighter control over authorizations, spending limits, and purchase types, while streamlining reconciliation.
Adoption of virtual credit cards may get a push from the fact that a majority of respondents are now favorably disposed toward familiar corporate and purchasing cards. In a question pitting the benefits of cards against those of paper checks, more than 60% of survey-takers perceived cards as performing better in several dimensions, including processing speed, ease of use, cost, and need for manual intervention. One finance executive crisply summed up the appeal of such cards as “easy to use, easy to track, and easy to protect.” (See Figure 2.)
It should be apparent that paper checks have become victims of their own inherent inefficiencies, resulting in higher costs and risks. As much as automating invoices is appealing from a cost-cutting perspective, the technology also saves valuable time, compressing a company’s procure-to-pay cycle. With paperless invoicing, a 45-day payment time may be slashed to fewer than 15 days. Error rates—and the subsequent rework—as well as processing costs likewise decline.
Technology also offers the tantalizing prospect of reducing, if not erasing, costly late fees; more than half of respondents, 54%, agreed that capturing early-payment discounts was even more valuable to the company than taking advantage of credit-card float.
A Case for Cards
Still, some finance executives remain hesitant to make the move to electronic payments. The obstacles cited most frequently were the difficulty of persuading suppliers to accept electronic payments (38% of respondents) and concerns about integrating with or changing existing financial systems (36%).
One finance executive admitted, “While we have the ability to use credit cards as a form of payment…we do not yet use it with many of our vendors, due to vendors’ unwillingness to accept.” Another simply stated, “[The] technology is difficult to implement.” Others seemed stuck in the mindset that cards are only suitable for small-value transactions.
Finance executives can ill afford to continue to cling to these kinds of misperceptions, and, in fact, respondents such as these may be revealing themselves to be a bit behind the times. For example, integration issues have been rendered vastly more manageable by the availability of third parties, companies with the expertise to untangle and reconnect all the technical strands. A good place to start would be by having a conversation with the card provider—getting suppliers on board is at the core of their business proposition.
In terms of convincing suppliers, the largest slice of respondents, 41%, said that credit card payments provide benefits to both suppliers and buyers, while 12% contended that the advantage falls to the supplier even more than to the buyers. For suppliers, the prospect of quicker payments means they’ll have faster access to capital, side-stepping more expensive financing options. And the improved accuracy of electronic processing means that there will be fewer payment issues, including fewer invoices that are lost or misfiled.
Still, as with any significant change, it helps to inform suppliers as early as possible about the initiative and to support them in developing plans for the steps they’ll need to take. Some will no doubt require the application of more finesse than others, but the investment in collaborating with them is worth it for a company intent on converting to electronic payments.
A Building Breakthrough
Initially, the drive to adopt a new model for payments-processing may be fueled by such basic aims as reducing costs or stretching out the timing of payments. Over the next year, 65% of finance executives are looking to achieve additional savings in the processing costs for payables.
But finance executives are also clearly aware of their mandate to help fulfill a broader range of business-wide benefits, such as improved flexibility and scalability, along with providing for a smoother-functioning supplier network. The switch to more streamlined electronic payment methods allows for improvements in the kinds of tools that enable better management of the overall business: more control over working capital, deeper insight into spend, and tighter integration with suppliers.
As the number of transactions increases, it would only seem prudent for companies to invest in additional oversight and controls so management can better account for the company’s corporate spend. On a higher level, automated transaction-processing systems can provide the foundation for better decision making, collecting and distributing data possessing the detail and precision required for producing more accurate management reports. “The primary goal” of upgrading payment methods, as one senior finance executive put it, “would be to reduce processing costs while maintaining the same or better level of control over expenditures.”
The transition takes patience and forethought, but finance executives clearly believe that the time has come to move the modernization of the accounts payable process to the top of their agendas. The benefits of transforming the function, now more measurable than ever, will surely pay off.