Paper checks have become the ugly (yet popular) duckling of the B2B payments industry. They are slow and cumbersome, require manual data entry and are often blamed for delayed vendor payments.
But there is one benefit of paper checks that cards and even ACH aren't able to provide sellers: a mitigated risk of chargebacks.
For most merchants, the risk of chargebacks is one they're willing to take for the sake of higher sales volume. But for some businesses, this risk can prevent them from obtaining the banking services they need to operate, according to Thomas Skala, chief executive officer and president of telecommunications and payments company Genie Gateway.
The company provides checking and debit services that bypass card and ACH rails in order to limit merchants' exposure to chargeback risk. Genie Gateway focuses its services on unbanked and underbanked high-risk merchants, for which the exposure to chargebacks means they are often shunned by traditional financial service providers, Skala explained.
"There are about 150 industrial categories for high-risk merchants, and they're high-risk for more than one reason," he said. "The bank will feel they're a risky business, and for that reason won't give them an account."
One example would be the technical support industry, in which customers could chargeback a transaction if they are unhappy with a product repair, or the travel industry, in which buyers can chargeback travel plans if they are suddenly unable to pay for their trip.
Banks will place a monetary value on that chargeback risk based on sales volumes. If that company qualifies for a business line of credit of that same value, then an institution may provide account services; if not, then companies can be denied, said Skala.
Other high-risk businesses include, of course, the medical marijuana field, as well as the payday loan industry, which struggles with fluctuating regulations across state lines.
Genie Gateway offers push payment services that enable customers – both businesses and consumers – of these high-risk merchants to make payments via Visa debit card or check. Its Check22 solution sends a digital copy of a check to the seller, which they can print out and deposit into their merchant accounts.
According to Skala, checks can be "very beneficial," largely due to their lack of chargeback risk.
"This does not ride the Visa or Mastercard rails, so the usual chargeback rules don't apply," he said. "There is a dispute period, but in reality, checks don't have the problems associated with credit card or ACH."
Fraud and chargebacks were identified as the top concerns of high-risk merchants surveyed by merchant services account provider Instabill, which also services high-risk merchants. The firm published a survey last month that found card-not-present fraud and chargeback management were cited by 61 percent of respondents.
Skala said that by providing account services to both buyers and sellers, Genie Gateway is able to ensure that sufficient funds are available, thus mitigating risk of check fraud. But the friction linked to checks remains in other ways, namely the burden of having to print, scan and deposit digital checks.
Genie Gateway's latest solution, GenieCard Platinum, enables buyers to initiate push payments to sellers with funds linked to prepaid debit cards instead of checks. The solution aims to provide high-risk merchants with the security associated with checks and the speed associated with debit processing, Skala explained.
The high-risk merchant services industry is a growing one, particularly as alternative financial service providers turn to digital solutions to address risks that larger FIs are unwilling to take on. While approaching the notorious challenges of paper checks (the check is in the mail) with digital tools like email and remote deposit capture can help, industry experts largely agree that paper checks are fading out.
The Association for Financial Professionals found in a 2016 survey that, while the use of paper checks has risen by 1 percent since the 2013 levels of B2B payments, the percentage of companies that said they receive payments via check declined by 6 percent during that same period. The trend signals the need for financial service providers of high-risk merchants to seek other ways to mitigate risk if and when checks eventually die out.
Prepaid debit cards and push payments are key to ensuring that buyers have the money they are spending with these merchants, Skala noted, and at faster speeds than other payment tools. This security, he added, is largely behind the development of Genie Gateway's Check22 Platinum solution.
"This is a safer transaction for everyone," he said. "We know the account is in your name, we know the account is in good standing because we issue the card and we know there is enough money in the account. If I'm a merchant, I don't have to print the check or go to the bank."