It takes plenty of patience to deal with paper-based accounts payable processes, especially when paying vendors with paper checks, and there are many other accounts payable problems that finance departments tend to downplay. The costs and risks associated with paper far exceed the reward businesses think they’re getting by using paper. In reality, paper payments bring about more troubles than triumph.
The Phenomenon of Paper Payments
It’s widely held that paper checks originated at least a thousand years ago. Surprisingly, despite digital advancements, checks have stood the test of time, especially in business. For decades, companies have relied on signing, sealing, and mailing paper checks to their vendors.
Even with accounts payable (AP) automation and other FinTech advancements, both buyers and suppliers still rely on paper payments. According to a recent PayStream Advisors report, 49 percent of companies still pay with paper checks. There are a few reasons why checks are still the popular payment method. For most, it’s because checks work. They’re tried and true and have kept the wheels of commerce turning for years.
The #1 Accounts Payable Problem: Paying with Paper Payments
Many organizations operate by the notion “if it’s not broken, don’t fix it” and think paper payments are just fine, but there are many accounts payable problems that accompany paying with paper checks, including:
- High payment processing costs. Believe it or not, manual tasks come with high-dollar expenses. Additionally, the time spent managing paper payments makes it hard to take advantage of early payment discounts. When cutting out paper payments and invoices, companies can cut payment processing costs in half.
- Lack of control and visibility. No one knows the exact date and time a mailed check will be delivered to your office. To further complicate the process, who knows if the check will be delivered to the right department on time? Lost and bounced checks are only a few of the accounts payable problems that come from the lack of visibility and control of the check process.
- The risk of late payments. Consider the time it takes to manually go through all the steps of paying with a paper check. Often, paper-based AP processes slow down the payment process and waiting for checks to be sent via snail mail often leads to late payments.
Stop Sending Paper Payments via Mail
Despite increased fraud risk, the number of paper checks used increased from 2013 to 2016. If your company chooses to stick with paper checks, there’s one critical point to bear in mind: Stop sending paper payments via mail.
According to the same article, putting checks in the mail leads to a number of accounts payable problems for the finance department, but the top concern is fraud.
Vulnerability to fraud increases with the number of times a payment is touched. A mailed check can be touched by as many as eight people during its lifecycle.
With paper checks, the finance department is left in limbo for days—sometimes almost a week. While the check is in transit from the buyer to the supplier, both parties lack control of the funds. There’s also the risk of the check getting lost in transit or proprietary information being stolen.
To protect the check in transit, many companies try a few tricks. Some wrap the check in several pieces of paper to hide it. Others track the check in transit. The problem is these safety measures aren’t all that effective.
A Future Filled with Fraud?
If your organization continues to count on paper checks as the primary vendor payment method, accounts payable fraud is likely in your foreseeable future. Paper payments and invoices are the leading causes of fraud for the finance department.
The catch is paper checks can easily be replicated. Recent reports show that payment fraud is at an all-time high. Seventy-eight percent of organizations were targeted in 2017, up four percent from 2016. The report also shows that checks are still fraudsters’ top target, with 74% of businesses reporting that check payments were targeted for fraud. To fight fraud, organizations are relying on two weapons—Positive Pay and internal processes.
As fraudsters become more hip to a finance department’s payment processes, they’ll find new ways to attack. The only way to truly reduce fraud risks is to eliminate paper checks and manual processes. And to that end, most companies turn to AP automation.
With automated bill payment software, all paperless vendor, payment, and invoice information is stored via a cloud-based SaaS. With Positive Pay and AP automation, a report is created for every paper check to double-check for duplicate invoices and fraud attempts. The other anti-fraud tactic—internal processes—is also effective, but not guaranteed.
Adding Up the Cost of Checks
There are many hidden costs and fees with paper checks that organizations often minimize or ignore. According to a recent Entrepreneur article, it costs anywhere between $4-$20 to process one paper check. When you add up the cost, remember the postage. Whether using USPS or other delivery services, companies must account for hard costs including envelopes, stamps, and paper. Consider other internal resources that may be needed just to process one check from your business to a vendor.
The most expensive hidden cost that companies don’t factor in is manual labor. Determining the exact dollar amount of this expense is something many companies struggle with. On top of that, another aspect of the actual cost of using paper is decreased productivity. Think about the time staff spends filling in the blanks and stuffing envelopes. Instead, employees could be focused on analyzing reports and data to build a case for more efficient processes and resources.
Businesses that adopt AP automation can reduce accounts payable and payment costs by up to 60 percent. In fact, according to PayStream Advisors, 82% of organizations reported a noticeable improvement after AP automation implementation. That includes cutting costs from manual tasks, heavy lifting of paper payments, and recovery from expensive errors. With AvidXchange solutions, if your vendor prefers a paper check, our AvidPay Network will send a check on your behalf the next business day. Our team will work with your vendors to determine the preferred electronic payment method for you. Your finance department still has full control and visibility into each payment without adding up the high costs for each paper-based process and check.
The Future of e-Checks and e-Payments
Organizations that recognize paper check risks are implementing e-Payment systems to safely and quickly send and manage vendor payments. Technology is making it easier for finance departments to process and manage payments without the heavy lifting.
To eliminate the risks associated with paper checks, enterprises are exploring a new twist on the old payment method. E-checks (electronic checks) are processed through the Automated Clearing House (ACH) to pay directly from your bank account without paper.
Compared to paper payments, e-checks are faster, but businesses must keep in mind there’s no lag-time when creating an e-Check. Balance’s Electronic Check Guide points out the difference.
You need to make sure you have enough money available in your account whenever you write a check, and you can no longer rely on ‘float’ time, or the two or three-day delay that used to exist between submitting a check to a vendor and having the funds taken out of your account by your bank.
Other companies that aren’t sold on e-checks, but still trust e-Payments, lean on ACH bank transfer payments. In fact, according to a recent AFP survey, 38% of businesses rely on ACH to pay vendors. With ACH payments, businesses can send funds directly from their bank account to their vendor’s verified bank account. There’s no paper or manual labor involved because the financial institution or bank safely sends the funds electronically on your company’s behalf.
Tips and Tricks for Paying Smarter
In the meantime, if your business is sending any volume of paper payments and not quite ready to go paperless, here are some tips to protect your payments and reduce risks.
- Keep paper safe and secure. To reduce the risk of fraud, keep all blank checks locked away.
- Require two or more signatures for each printed check. Yes, this may be time-consuming, but requiring multiple signatures reduces the risk of an unapproved payment being sent.
- Set up a payment process. In a recent article, Brent Myers pointed out that most AP departments handle multiple payment types. Having a day designated for each payment type reduces confusion. “Maybe Friday is a check-run day, and the team spends the day printing checks and stuffing and stamping envelopes. Tuesdays and Thursdays, they send ACH or credit card batches to the bank and remittance advice to the vendors.” Setting aside different days will simplify managing multiple payment types and create a clear payment process.