The Hidden Costs and Risks of Paper Checks​

Paper checks have long played a major role in B2B (business to business) transactions. Businesses first started using paper checks in 1865 to replace cash in large-value transactions, making them the first non-cash payment instrument in the United States. And until credit cards became widespread in the 1950s, paper checks remained the overall most common non-cash payment instrument but what is the impact of paper checks cost?

Developments in technology since 1865 have greatly expanded the options for payment systems. Today, all B2B transactions could take place digitally, eliminating the need for antiquated paper checks. Still, paper checks remain the most popular payment method for American B2B transactions. According to the Association for Finance Professionals’ 2019 Electronic Payments Survey, 42 percent of B2B transactions still take place using paper checks. A combination of ACH, credit cards, and ePayables account for the rest of today’s B2B transactions.

42 percent of B2B transactions is an all-time low for paper checks, down from 74 percent in 2007. However, this rate of decline has slowed in recent years. Why are so many businesses stubbornly holding onto paper checks in the face of less expensive, more efficient, and safer options?

Businesses that have not yet switched to electronic payment are likely so accustomed to the hassles of paper checks that they do not realize the hidden costs of paper check transactions. In order to make a B2B transaction with a paper check, a business must first spend money on printers, ink cartridges, envelopes, and postage. Given the volume of checks that some businesses process, these costs can together have a very real effect on a business’ bottom line.

Additionally, the inefficiency of paper checks presents more major hidden costs. In order to process paper checks, a business’ employees must take the time to open envelopes, deposit them at the bank, and then follow up on unpaid invoices or bounced checks. Paper checks can have long clearing periods, too, which deprives businesses of capital that they would have easier and faster access to through digital payments.

All told, Bank of America estimates that every paper check a business processes comes with an aggregate cost of somewhere between $4 and $20. MineralTree Inc. estimates that paper checks together cost American businesses between $26 billion and $54 billion in 2010.

In their responses to the Association for Finance Professionals’ 2015 Payments Cost Benchmarking Survey, over two-thirds of finance professionals said that they would transition from paper checks to electronic payments if doing so came with a cost-benefit. Given that there is a clear cost-benefit to moving away from paper checks, it seems that these finance professionals do not realize how much paper checks are actually costing them. Paper checks are so deeply ingrained in many business’ payment systems that these businesses are oblivious to their hidden costs.

And then there are safety issues: paper checks are still a top target for fraudsters. In 2017, almost three-quarters of businesses were affected by check fraud.

Every check that a business writes shows its name, account number, and routing number. With just this information, fraudsters can gain access to a business’ checking account and use their funds as they please. And given how many different people handle a check on its way from business to business – from the payer’s administration to postal workers to the payee’s employees to the bank’s employees – it is all too easy for a paper check to wind up in the wrong hands.

Furthermore, the safety features that are meant to safeguard paper checks against fraud were created for a different time. Now, a fraudster just needs a company’s banking information in order to duplicate their checks. Paper check security remains virtually as it was in 1865 while digital security technology is constantly advancing. This makes electronic payments a much safer option for all B2B transactions.

American businesses are notably lagging behind their global competitors in the transition from paper checks to electronic payments. A total of 21 billion checks were written in America in 2012 (by businesses and consumers together). That is quadruple the number of checks written in the European Union’s 28 member countries in the same year. Even some developing countries, like Brazil, have embraced electronic payments faster than the United States has.

All statistics agree that electronic payments are less expensive, more efficient, and safer than outdated paper checks. Likewise, global trends indicate that electronic payments are the future for all B2B transactions. American businesses need to wake up to the hidden costs and risks of continuing to use paper checks. Paper checks may be comfortable and familiar, but they are not a match for our modern world. All businesses will benefit by taking their B2B transactions digital.