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Are the days of check payments numbered?

Jun 14, 2022

When it comes to paying invoices, the check has been a pillar in acceptable payment methods for decades. But times are changing, and the industry is definitely moving away from checks as the most popular form of payment.

Let’s look at not only the costs associated with checks but also what other methods are on the rise.

According to the U.S. Federal Reserve Board in 2020, there were 3,767 million checks processed compared to 16,549 million ACH transactions. Comparatively, in 2017 the number of checks processed was 5,153 million processed compared to 13,749 million ACH transactions.

The rapid decline of checks and increase of other payment methods has been exponential as individuals search for ways to pay vendors digitally versus by check.

The pros and cons of checks

The check payment method may be thought to be one of the cheapest methods of doing business. Checks are sometimes included for free by the financial institution, if you’re maintaining a certain balance, and there is a low monthly fee for processing.

With that said, the method is very time consuming, and if you started to count the touches of individuals that the paper check transfers from point A to point B, you would probably start to wonder why you continue to pay by check. Once you drop the payment in the mail or at the vendor office, the paper check is now out of your control and placed into someone else’s control to bring to the bank to make the final transfer of funds.

The pros and cons of ACH payments

ACH stands for Automated Clearing House and is the main system of electronic fund transfers in the United States since 1970. The network is run by a nonprofit called the National Automated Clearing House Association, which is part of the federal reserve system.

Simply, the two federal institutions can initiate a transfer of funds with no paper check by using the federal reserve as a clearinghouse. The ACH can take a few hours to a few days to clear, so while it does not happen in real time, it does involve fewer human touches than paper checks and can incur lower fees than credit cards.

Electronic funds transfers (EFTs) and eChecks are very similar processes as ACH payments and commonly use that pathway to process the payment.

An ACH transfer can be set up initially at a federal institution and may cost only a few pennies per transaction, if any. There are also platforms that assist with the vendor process and can have vendors send invoices directly to an email, have approvers sign off and initiate payments electronically. If a vendor does not set up an ACH, the platform sends a check that does not have the business or organization banking information.

Do you have proper controls around payments?

When you’re reviewing the overall payment method of vendors, it may be the time to review the controls around bill payment, too.

The authorized person who pays a check or transfers funds should be different from the person handling the accounting or reconciling the bank statements. Check fraud continues to be the most common type of fraud. The check can be intercepted and the payor and/or amount can be altered before it is submitted to the bank for transfer. Checks also contain personal information such as business address, account number and routing number. There are instances where a fraudulent check was created with the account number and routing number but was not issued by the business and was caught when reviewing bank images of processed checks.

To protect your organization, consider where check stocks, bank statements, bank logins and canceled checks are kept and consider locking or securing that information. If you are receiving check payments, consider sending them to a post office box if you are not able to check your mail regularly so bank statements or checks do not become a target.

Also, when reviewing your overall payment process, it’s a great time to review the insurance policies to see what coverage your business has over fraud and at what dollar threshold.

How to go from checks to ACH

You can kick off the process of turning checks into more electronic payments with a small group. This will allow your organization time to get used to the process and get comfortable with how to initiate it. Your business may develop an internal form to have vendors use to get the information needed to set up an ACH or to verify that the vendor accepts the form of payment.

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Amanda Flohr, CPA
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