Photo appears courtesy of wsssst. Guest blogging today for the Aurora EDI Alliance is Carlos Rodriguez of DadeSystems. This blog is part one in a three part series on a virtual payment processing solution we are now offering called Lockbox 360.
As an experienced banker and bank operations person, I have worked directly in the bowels of banks and the companies we served. We handled their deposits, often balancing their addition errors for them (which is why we do so much dual control), sorted and posted their payments, even creating posting files to automate the posting and to reduce errors). Hence, it is no surprise to me that the check continues as one of the most heavily used forms of payment between businesses, with their combined face values outstripping credit card and ACH totals by 5 to 1.
As a banker, let me tell you why.
The check is a marvelous instrument, despite its humble and now-obsolete form factor. Businesses like it for a long list of reasons, but the most important ones are; 1) it can be of any amount, 2) it is issued on demand, suiting the business, 3) with imaging, its cost compare to those of ACH payments, and 4) it “floats”, allowing for extra cash flow days every business needs.
The need and interest in float is universal across all businesses and the check trucks right along helping provide that. Remember, ACH, by definition, will not provide float to a business, as availability shrinks or is regulated away (see Reg CC).
Regardless of the payment type you accept, all of these methods require an internal investment in time, effort and processes that usually have nothing to do with what you do. It makes sense to adopt efficient internal mechanisms that insulate your business from unnecessary costs related to the simple act of accepting a payment. For example, I work with a lockbox vendor that produces perfect posting files for our merchants or their customers extracted from and automatically compared to the incoming payments (the term “lockbox” in banking refers to internal or external business payment processing services provided inhouse or outsourced to a business account holder).
But, in banking and as experts in processing payments (which IS our real business), we specialize in automating one of the most labor-intensive aspects of accepting a payment. By providing these services, the bank’s business customer obtains real value from their bank relationship; a huge savings in key-entry time and a change from an error-prone to an error-free posting. No more hunting down out-of-balance conditions with your general ledger and no unmatched items in your receivables. The business now can count on its posted totals, increasing liquidity while reducing payment risk.
So, I strongly urge you to look at how your business accepts payments and do not look at the check as a bad payer. Remember, it lets you float a payment in the mail, it lets you write it for any amount on demand, it is accepted across all businesses as legal tender (something PayPal or even Square cannot claim).
Finally, in a cruel twist of irony, recent changes to the laws revolving around payments have created a very unusual situation. As CFO and accountants well know, due to increased fraud in electronic payments in general, recent changes to consumer finance legislation have extended the payment return date on credit card and ACH payments from 45 to 90 days. Anytime within that 90 day period, a customer can unilaterally return a payment claiming fraud or other protected claim under the reg. Checks, on the other hand, remain at 45 days, meaning the risk of return of payment is half that of credit card or ACH payments.
So, a very large commercial account told me that they now consider electronic payments twice as risky, for liquidity purposes, as the exact same payment made by check. This merchant now asks all its thousands of customers to pay them by check. They reduced their exposure to returns by going down this route, while cementing their liquidity calculations around the “safer” 45 day period afforded by checks.
Talk about your unintended consequences.
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