Businesses are capable of evolving with the times. The widespread adoption of QR codes, other barcodes, and mobile apps confirms this. Yet the financial check is still widely used. Despite rapid payment transfer facilities, many businesses prefer to write or print a company check and to use the US Postal Service to send it out to consumers and other businesses.
Even while consumers have moved confidently to electronic payments to pay for purchases, the business community has largely held fast to this old standard. Why do businesses still write checks? Here are a few of the answers we discovered when we dug into the matter.
Don’t Fix What Isn’t Broken
“If it ain’t broke, don’t fix it” is an adage that many businesspeople like to stick to. While new approaches might be embraced, either in part or in full, they’re often slow to adopt them. When they’ve never had a serious problem with paying or receiving checks into the business but have read many horror stories of incorrect bank transfers being paid in error, and the money not being returned, it gives them pause.
A case in point was with Citibank in New York which lost approximately $500 million due to a series of financial mistakes. After sending out $900 million in incorrect money transfers where only $400 million was ever returned, the bank lost half a billion dollars. A business owner can point to this situation as justification for their ongoing distrust of using other payment methods.
Procedures That Haven’t Changed with Time
When it comes to sending a check, the older the company is, the least likely it is to have updated its procedures. That’s especially true if the founder is still the CEO, has reached middle-age, and dislikes the modern way of conducting business. Preferring ‘old school’ methods, paper checks are still considered fine by them. However, should the founder step aside, a new CEO with fresh ideas may come onboard. They could embrace some modernization with paper checks even if they don’t do away with them completely.
For instance, a service like the one offered by Lob allows businesses to include some automation to paper check production. They can review and even cancel past checks that might have gotten lost in the mail. Their delivery network can verify all mailing addresses before a check goes out to ensure they arrive at the correct homeowner’s or business’s addresses. Their system uses a programmatic solution to allow automation and efficient check production. See Lob’s article to learn the specifics about how they do it.
A Feeling of Greater Control Over Cash Flow
With paper checks, many companies set up approval for several senior managers who can sign checks up to a maximum authorized limit. With paper checks, many companies set up approval for several senior managers who can sign checks up to a maximum authorized limit.
Also, the bank may flag it up because of how unusual or out of character the multitude of checks would be. When this system works well, the founder and the shareholders can have confidence that it would be very difficult to complete a large value fraud. Also, it would easily be detected too.
Notable Step Away from Using Automated Payments
Automated payments certainly have their place, whether for regular monthly business subscriptions, to pay the office rent, or for other purposes. However, for owners who like to micro-manage the finances, it creates some notable discomfort.
Checks don’t get automatically issued. There are actual checks and balances involved in the planning, preparation, approval, signing, and mailing of each check. This ensures funds don’t leave the business checking account without its purpose being known and procedures having properly followed.
The Inability of Small or Micro Businesses to Accept Other Payment Methods
Smaller companies are aware that micro-businesses don’t always accept credit or debit card payments. Approximately 13 million small businesses are believed to not accept credit cards as a form of payment at this time. Sometimes, this is because they wish to avoid the processing fees involved that can reach up to 5% (even Amazon is in a battle with VISA presently over these merchant fees).
A considerable number of businesses in America are one-person operations. As such, these solopreneurs are keen to reduce the accounting and bookkeeping headache. Sticking to checks and avoiding electronic payments achieves this goal.
Retain Business Checking Account Balances for Longer
Smaller businesses often have low levels of profitability and tight finances. Cash flow can be extremely restrictive at times, especially during seasonally low trading periods. When paying vendors, it’s often necessary to delay payments for as long as possible.
Then, issuing a check rather than making an instant electronic payment adds a few more days to draft the check, send it in the mail, and then the recipient presents it at their bank. This can cover the days between not having the funds to cover the check’s value and being able to do so. Also, for companies that like to sit on the funds for longer, they can earn a little interest in money market accounts too. It might not be much, but it’s free money.
It Still Feels Safer Than Online Transactions
The latest paper checks come with additional security measures to prevent fraud. Some of the measures taken prevent people from being successful when attempting to print bogus checks, forge a signature, and send it off.
Also, paying cash for goods doesn’t provide any of these types of protections either. For company owners, paper checks still offer peace of mind that other payment forms don’t offer.
Accountability with Check Payments is Higher
The paper trail from checks is perceived as higher than with other forms of payment.
Should a consumer or another business claim that they haven’t received the check, the business can ask the bank to verify its status. The financial institution can confirm whether the check has cleared or not. If it has not, they can be instructed to cancel the check. Once this is confirmed, a new check can be sent out. At this point, it’s usually a good idea to re-verify the personal or business details including the mailing address just in case it was incorrect.
With online bank transactions, the bank has the majority of the information. Most companies cannot see many details for their transactions, and so feel a sense of powerlessness.
Other Businesses Expect the Check
While cryptocurrencies and moving money via apps are all the talk, B2B financial transactions are still paid via check in 40 percent of cases. Therefore, while alternative payment options are gaining ground, the business check is not going away.
Companies that primarily only deal with other businesses may prefer checks. As such, companies that might have switched away from them may feel the need to still offer them because it’s what’s expected.
Regulations Are Different
There is a long-standing regulatory framework around check payments in the banking world. This has matured because business checks have been in existence for over a century.
Regulations vary depending on where the business is located, and the banking institutions involved. While electronic transactions can quickly become a complex issue when something goes awry, banks have clarity on how to handle problems with a check. They’ve seen it all before, used them for decades, and have well-established procedures to manage every eventuality.
Business checks have reduced in usage, but that doesn’t mean they’re going to disappear. There are still millions of businesses that either need to be paid by check or prefer to issue them over electronic alternatives.