The B2B payments market remains a great opportunity for digitization. New payment rails are now making the shift from paper check to digital payment possible. Checks will soon be as archaic in B2B payments as they are in B2C.
A brief history of checks
Along with roads, central heating, the calendar and flushing toilets, we can also thank the Romans for inventing checks. The first time an order was written instructing one person to pay money to another — known in Rome as a perscriptio — is thought to have happened in 352BC. Although there is evidence from around the world over the next two millennia of people realizing that it was easier to carry around a piece of paper than a sackful of coins, checks in the form we recognize didn’t emerge until the 16th century.
At the time, the Dutch guilder was the reserve currency of the world, primarily because the Netherland’s strong navy could protect trade routes. In control of a large portion of global trade, the Dutch economy thrived. People suddenly in possession of large piles of cash started depositing it, for a fee, with “cashiers’’ in Amsterdam. These cashiers soon started offering to pay their depositors’ debts out of the money in their accounts. The modern check was born.
Although the efficiency, security and usability of the checks in use today has advanced, they are still essentially the same as those issued over 250 years ago: a written, dated, and signed piece of paper that tells a bank to pay a specific sum of money to the bearer.
Consumers use checks increasingly rarely, but checks still make up an astounding 40% of B2B payments. Despite pandemic-driven digitization efforts from companies operating in multiple sectors, 81% of businesses still pay other firms using paper checks — making it the most common B2B payment method.
Why are checks still so prevalent?
There are a number of reasons why so many businesses continue to use checks, but most of them boil down to the fact that it is easiest to continue doing things in the same way they have always been done.
These reasons include:
Familiarity
Businesses have entire teams and processes set up to process checks, and would need to change all of this to modernize. Furthermore, traditional AR/AP processes are designed to accommodate all aspects of paper check payments.
Ubiquity
The majority of business partners, vendors and suppliers will accept a check.
Minimal information requirements
Writing a check does not require the inclusion of the recipient’s banking information. Companies often have a company’s or consumer’s address but not their bank account and routing number.
Control
Checks offer financial perks, as they grant an extra period of liquidity before the check is received, allowing companies to earn interest on the money until it clears. They also give companies greater control over the payment process, so they can avoid overdrafts from automatic transfers.
Lack of urgency to switch
No one is getting the ball rolling. If suppliers remain unconvinced of the benefits of electronic methods’ merits, it is difficult and unappealing for smaller firms to commit money and time to digitizing their B2B payment processes.
Regulation
Businesses are keen to avoid navigating different federal and state regulations on electronic payments.
Bookkeeping and data organization
Checks create a paper trail, which help them to stay organized and reflect transactions in their records.
There has never been a better time to modernize B2B payments
People have come to expect digital payments. Think of payments in apps such Uber, or instant financing for Pelotons via Buy-Now-Pay-Later company Affirm, as we discussed in our recent post on B2B embedded finance. At the end of the day, businesses are run by individuals, who are finding paper payments increasingly jarring.
The pandemic helped to spur the growth of innovative payment methods, such as in-person contactless card, digital wallet, and P2P payments, particularly on the consumer side.
Here’s why we think businesses are now due to start using them widely too:
Costs
In the United States, issuing a paper check costs between $1 and $26. The average cost per check is $6, when manpower, postage, ink, paper, fraud risk, and environmental impact are all taken into account. In businesses, multiple people from different teams have to sign off each check, and different people do different functions in its production and distribution: one team approves, one prints, one organizes postage, one delivers the check. These convolutions take place again when the check is received.
For context, the average U.S. consumer writes 36 checks per year. In stark contrast, 3.7 billion commercial checks were collected in 2021, valued at collective $8.8 trillion, according to the Federal Reserve’s quarterly data. This creates $22 billion of potential savings for businesses.
Speed
To give a sense of just how slow check processing can be, it takes, on average 83 days for construction businesses to be paid after invoicing. Electronic payments can decrease the time it takes for key stakeholders to receive funds to near real time. In the construction industry, this can drastically hasten vital transactions such as loans for materials and cash for subcontractor wages.
Risks
Businesses using paper checks are susceptible to malicious fraud attempts and accidental human error. Digital methods lessen these risks by incorporating security measures into payment facilities.
Reconciliation
When a check is received, both the payer and payee have to incorporate that payment into their books for it to be reflected in their accounting records. Modern payment methods integrate seamlessly into business processes, displaying the relevant data with each payment and automatically reflecting changes on both sides.
What will replace checks for B2B payments?
Although there are a number of ways this could go, we think there are approaches towards digitizing payments which are likely to succeed. Each has its merits and will be carried out by a different type of business.
They are:
Horizontal payments software
This addresses the problems of check payments head-on. It will reduce the cost of payments, protect against risk of fraud or error, and make data and bookkeeping more efficient.
Companies doing this include:
- Verituity*, whose experienced team have built a platform that connects banks, payers, and payees and places contextual verification and an adaptive policy engine at its core. It strengthens payout speed, accuracy, and visibility, and delivers pay-by-anything and anywhere payment choice, while reducing complexity, risks, and cost. AVP co-led their $10 million Series A funding alongside ForgePoint Capital in May 2021.
- Chek, which is enabling Social Sector organizations such as nonprofits, foundations, universities to easily and securely disburse funds using virtual and physical debit cards instead of checks.
- Vertical SaaS with embedded payments
These solutions address a business problem and offer embedded financial services like payments. We’re interested in existing, industry-specific software that is already solving a business need and is now embedding digital payment solutions. Many industries already use specialized software, and its owners now have the opportunity to include financial services in their products.
Companies doing this include:
- Givebutter, a free operating system for nonprofit fundraising, whose do-it-yourself platform and completely free model enabled by embedded financial services allow it to serve even the smallest of fundraisers. AVP participated in their $7 million seed round this past June.
- Mindbody, the leading cloud-based business management software for the fitness industry, that offers bookings, staff scheduling, and payments.
- Toast, an end-to-end management platform for restaurants. Initially, it was a Point of Sales system for processing transactions, but expanded into online ordering, inventory, workforce management, payroll, capital, customer review management, and marketing.
New software
We also see an opportunity for new-age software that reaches industries that haven’t yet been digitized. Sectors with high friction that can be solved with tech, those with significant fragmentation, and those with low tech adoption are ripe for disruption via software that optimizes their businesses and their transactions.
These players benefit from both of the value propositions mentioned above, and would also gain the convenience of having payment systems automatically included in their products.
B2B marketplaces that are streamlining and facilitating transactions across buyers and global suppliers are the obvious users of this software. Many insurance companies, for example, still pay their customers by check after they file a claim. The same is true for swathes of the online gaming industry, for healthcare payouts, and for rebates and tax refunds. On the buyer side of the payment, real estate and rent is still often paid for by check, for example.
Conclusion
The use of paper checks is so deeply ingrained in business payments that, for a long time, few people wondered if there was a better way. It is true that, until now, the barriers to jettisoning paper checks from business were just too high. But today, the digitalization of B2B payments has been made possible due to new payment rails, and made a priority by the digitalization of B2C payments. Here at Ardent, we firmly believe that we are only starting to see the effects of this enormous opportunity.
If you are building something that facilitates the move away from checks, we would love to hear from you.
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