Digital payment tools and technologies have seen steady increases in adoption over the past several years, but legacy methods are still holding on in certain industries. These include the investment world, where paper checks are often used to pay out quarterly dividends or other such disbursements.
Paper checks’ drawbacks for such payments have been evident for some time as they represent both a time-consuming and costly way to send out disbursements. Investment firms are thus exploring alternative ways to support clients’ disbursements, especially as the COVID-19 pandemic exacerbates the existing frustrations attached to paper-based transactions. Seamless payments are essential as these companies aim to promote wealth and create long-term financial stability for clients, explained Brian M. Bond, founder of investment firm Leverage Financial Advisory. He said Leverage taps automated clearing house (ACH) transfers for the bulk of its clients’ disbursements, for example.
“We set up a link between [clients’] checking accounts … [and their] investment accounts,” Bond said. “[Clients] can transfer money in that way through an ACH transfer, and then all of [their] investments — let us say [they] get dividends — they go right to [their] investment accounts automatically through our broker.”
PYMNTS talked with both Bond and Kai Stinchcombe, co-founder and CEO at financial services provider True Link Financial, about the rising role of ACH and other such digital solutions for contributions and disbursements as well as how the pandemic may finally be loosening paper checks’ hold on the investment industry.
Why Paper Checks Are Ill-suited To Many Investors’ Payment Needs
Paper checks are no longer as dominant as they were in the investment industry. Receiving dividends and other disbursements via physical checks is still an option for Leverage’s clients, Bond said, but none are currently using the method. This could be because millennials represent the firm’s target demographic, he noted, and these consumers’ perceptions of investing and payments differ from those of previous generations. Many millennials are wary of investing in the first place.
“Millennials have grown up with the rise of the digital economy,” Bond said. “They are comfortable and trusting of electronic payment processors such as Venmo and PayPal and expect their investment experience to be 100 percent electronic from start to finish. The minute any actual paperwork or physical signing of documents enters into the equation, the client experience loses the seamlessness [to which] millennials have become accustomed.”
Those younger consumers who do invest are unlikely to seek dividends or other disbursements via paper checks, he said. Many also choose to reroute these dividends back into their investments to continue growing their wealth.
“[For] dividends, let us say we have [clients] invested in a stock and they receive a quarterly dividend,” Bond said. “Typically, the two options [for clients] are, ‘Do you want to reinvest that dividend automatically and buy more stock with it, or do you want that money to go as cash into your account?’ Then if it were to go in as cash, we can reinvest it in a different area, or [clients] can transfer that out via ACH or set up recurring ACH transfers that automate the disbursements of [those funds].”
He also noted that younger investors are much likelier to be farther away from retirement, and many older clients and retirees have relied on checks or cash for their daily transactions. These older investors could thus be disproportionately affected by the pandemic’s impacts on manual payment methods, especially as the health crisis keeps brick-and-mortar locations and interactions on pause for months.
COVID-19 And The Disappearance Of The Check
True Link Financial still offers paper check disbursements to investors, Stinchcombe said, but this method’s use has shifted even among older generations as the pandemic continues. The company’s target demographic includes retirees and others in the “spend-down” phase of their lives, meaning they mainly use investment accounts or pension funds rather than actively earning income to pay their bills. Approximately 20 percent of the firm’s disbursements are still made via checks, he added, with the remaining 80 percent sent electronically. The check disbursements’ dollar volume, or value, is approximately twice as large as those sent electronically.
“I would say that we prefer electronic [methods] where we can, just because it is not going to get lost in the mail [and] it is not going to take until the next day,” he explained. “But I think often there are places where [checks are still required]. It is very straightforward to pay your phone bill automatically [and] electronically in a way that your landlord may not accept rent.”
This is because check disbursements tend to be directly applied to larger-volume expenses like medical bills or housing costs, Stinchcombe said. These areas have witnessed slow adoption of electronic payments, which means many True Link clients must still use legacy methods for their transactions. Older consumers’ historic reliance on such payment methods may have shifted some due to the pandemic’s impact on
in-person transactions and the handling of physical payments.
“A lot of our customers still [make purchases] with cash, where that is a historical preference,” Stinchcombe said. “I think if you are, for safety reasons, switching to delivery, learning to order food online, order groceries online … now has been a great time to adopt a new [payment] behavior, basically.”
Reducing the use of checks and other legacy methods for payments — and in how consumers spend their dividends and investment funds when they receive them — could go a long way toward speeding disbursements within the industry. Checks maintain their hold on the investment world, but this is likely to change as younger, digitally native consumers enter the space and as existing investors alter their behaviors during the pandemic.