Payments paper jam: Why banks and corporates should break the B2B check habit

A version of this article first appeared in the July BAI Executive Report: Modernizing payment methods. Find more insight within the issue on topics including consumer payment preferences, FedNow and RTP, check fraud and more.

It’s clear that many financial institutions have enthusiastically jumped on the digital transformation train, as have businesses. These banks and corporates are riding the rails to rapid adoption of technology such as APIs and robotic process automation (RPA) at increasing rates, as machine learning and artificial intelligence (AI) adoption—generative AI, in particular—gains momentum by the day.

If banks and corporates can implement some form of AI in 2024, then it’s time to drop the archaic and fraud-riddled paper check fixation that still hovers near 40% of U.S. B2B payments.

According to a 2024 report by Alkami and Cornerstone Advisors, 42% of financial institutions have already deployed some type of machine learning, and over half expect to have rolled out generative AI by the end of next year. According to the Federal Reserve’s annual commercial check data, the push towards more sophisticated digital solutions has resulted in check usage slowly falling over time, yet maintaining an inexplicable foothold in business payments.

Data from the Fed says the use of paper checks for B2B payments peaked at roughly 19 million in 1992, falling to 3.3 million B2B checks collected in 2023. Moving to reduce this number even further, banks are now pushing electronic payment methods for the speed, efficiency and security improvements they offer, which paper does not.

Even so, for reasons ranging from force of habit to supplier preference to a lingering distrust of digital, most organizations still rely on paper check payments to some extent. A full 38% of payments are still made by check, according to a 2023 Ardent Partners survey.

A missed opportunity for banks

Despite being overlooked when plans and budgets are focused on future-proofing innovations, the persistent use of paper checks is a significant opportunity for banks. That’s especially true as fintechs like Venmo and Square attract consumers who typically had used traditional bank channels and payment instruments, namely paper checks.

According to Ardent Partners, 53% of accounts payable (AP) teams prioritized improved AP reporting and data analytics in 2023. For smaller businesses, particularly those whose owners grew up in the predigital age, there is often the misguided assumption that they’re not large or established enough to qualify for an electronic payment system that offers digital upgrades.

For this and other reasons, it’s imperative for banks to keep educating customers on the ease and benefits of modernizing their AP operations. Failure to do so means lost revenue opportunities for banks and negative impacts on customer acquisition.

Manual processes and DIY payment solutions are still hindering the operations of many businesses at a time of ongoing economic uncertainty penned in by sticky inflation. More SMBs and mid-sized firms are getting on board with AP automation that not only eliminates repetitive tasks, errors and delays linked to paper checks, but also helps business owners and CFOs reach their financial goals more quickly.

When banks act as strategic partners, providing the tools to empower their business customers to track and manage key performance indicators more effectively, they are strengthening key relationships, driving franchise value to the bank.

What’s more, though checks are seen by some business veterans as the “safest” payment method, check fraud is more rampant than ever, rising by as much as 165% nationwide since 2020, according to the Financial Crimes Enforcement Network, or FinCen, even as usage is on the decline. The problem today is that check fraudsters are becoming more sophisticated, bypassing existing fail-safes by opening legitimate business accounts they have registered with the state at various banks. Once the paper starts flowing, fraudsters have their own tool kit for altering checks to defraud banks and account holders. This process takes very little time and energy for fraudsters, unfortunately.

Equipped with their own paper checks to manipulate using the tools of their illicit trade, bad actors deposit bad checks with the bank or upload them virtually. As they now have an account that matches the check, they can make deposits into the payee’s account, where it may be convincing enough to get past fraud detection countermeasures. This puts a significant strain on both the business and the bank.

The only surefire way to stop this form of fraud is to move all businesses away from paper check payments as quickly and completely as possible, switching to digital payment methods entirely. This returns control to banks and businesses that can detect cybertheft more easily in the digital domain, and at a lower cost. That’s the message merchants and financial institutions are getting, though not as fast as might be expected given some five years of digital transformation.

Monetizing payments: Taking it a step further

The opportunity for banks afforded by the widespread adoption of digital payments is clear, but it’s not the end of the line. As banks seek new and innovative ways to grow non-interest fee income, monetizing low-value payments becomes crucial. Beyond the business, operational and anti-fraud benefits of automated AP, banks can drive new revenue streams by monetizing low-value payments.

Simply put, paper checks don’t belong in the post-pandemic payments mix. Banks and the verticals they serve need to embrace the pandemic-era shift to a digital B2B payments ecosystem that reduces friction and fraud to further the transition from checks to electronic payments.

While financial institutions continue improving these technologies, helping business customers continue to transition to electronic payments is critical for staying competitive and securing ownership of the primary customer relationship.

As opportunities go, this is one that should be difficult for banks to pass up.

Jessica Cheney is Vice President and Head of Product Management, Banking Solutions at Bottomline.