Paper checks are gradually shrinking their market share in the B2B payments landscape, yet the outdated payment tool remains in-use for up to 80 percent of businesses in the U.S., noted PYMNTS in a previous Faster Payments Tracker.
Today, there are two key methods for how a company can address the pain point of checks. They can adopt technology to automate various aspects of checks, from printing to generation to submission and, on the accounts receivable side, processing and reconciliation. The other strategy is to migrate to another payment rail, likely Automated Clearing House (ACH), which is quickly climbing the B2B payment ranks.
Yet both of these strategies require a third-party service provider to facilitate payment processing, whether funds are coming in via check or ACH.
Profituity operates as a third-party service provider in both scenarios, offering business customers check verification services as well as ACH processing capabilities as a third-party payment processor. But George McKee III, president and CEO of Profituity, said while both services are important to mitigating B2B payments friction, the firm’s additional service — helping business clients integrate ACH gateways to become payment processors — is the direction in which the market is headed.
McKee spoke with PYMNTS in a recent interview about the process of migrating B2B payments away from checks — a process often made more difficult thanks to deeply-embedded friction points within ACH payments.
The Check-To-ACH Migration
Checks are clunky. They expose businesses on both the sending and receiving end to security and fraud risks, they’re difficult to reconcile and they do not make transaction data readily available for reconciliation and analytics purposes. However, they persist.
According to McKee, while it’s imperative that FinTech service providers support their business customers’ check needs, and deploy technology to ease the friction of accepting checks, it’s just as important for these players to help their business customers begin the process of moving away from checks.
“It’s interesting,” he said, “a check gets written, and then what happens to that piece of paper? It gets taken somewhere and converted into an electronic transaction — typically ACH — and then moves through the network that way. Why should it ever have to start as paper?”
The fact of the matter is, however, checks’ longstanding presence in B2B payments, and corporates’ resistance to change, aren’t easy hurdles to overcome — especially when the alternative, ACH, comes with its own challenges.
“If we can solve problems with technology, then checks will go away,” said McKee. “They’ll go away when people say to themselves, ‘It’s just so much easier for me to do it this other way.’ ”
ACH’s Embedded Frictions
Unfortunately, as McKee explained, switching to ACH processing is not necessarily easier for businesses, particularly smaller ones, without the resources to develop and adopt proprietary ACH processing capabilities.
Again, third-party service providers play an important role in alleviating ACH friction for companies. After all, as McKee said, businesses aren’t always experts in payments, with compliance and security requirements a major hurdle to firms being able to process ACH transactions themselves.
Yet third-party payment processing comes with its headaches, too. Among the largest, said McKee, is cost.
“Any time there’s a third party, there’s going to be an element of cost that’s baked in — and sometimes that cost is reasonable, and sometimes it’s excessive,” he said. In ACH processing, third-party players have to standardize their cost structures based on proprietary risk mitigation strategies, meaning these players will not only charge to cover the cost of that risk, they’re also going to slow down payments to ensure transactions go through, leading to the knock-on consequence of a capital float that delays funds landing in a company account.
While becoming one’s own ACH payment processor can significantly lower the costs of processing via a third party, as well as accelerate cash flow, McKee noted that ACH payment processing comes with its own host of challenges pertaining to compliance and client on-boarding.
ACH’s B2B Future
If FinTech service providers can address the biggest hurdles to companies becoming their own payment processors, McKee said, the benefits of doing so far outweigh the burdens.
“If I become an ACH originator, and I don’t use a third party, I control the application, the underwriting; I can on-board people faster. I own that relationship,” he said.
While ACH has been around for decades, the payment rail is amid a facelift as the U.S. payments ecosystem embraces speed and transparency. Enabling businesses — particularly smaller ones — to take advantage of ACH’s newest benefits is an important part of the digitization and modernization process, particularly, as more businesses demand transaction speed for enhanced liquidity management, he noted.
While FinTech plays an important role in easing friction for check payments, or processing ACH payments for companies, according to McKee, the biggest opportunity in driving ACH adoption in B2B payments will be for companies to be their own payment processors. Easing friction in that process means opening doors for businesses to access benefits like faster payments and payment data integrations into other back-office systems without the added costs or capital float times of relying on third-party processors.
“This is where there is an enormous opportunity to make the system easier, faster and less expensive — and you’ll get the long tail of the market to adopt ACH more,” he said. “Taking advantage of ACH is clearly doable, especially with today’s technology.”