Pulp friction: Addressing paper checks’ challenges

How a digital lockbox network can revolutionize check delivery.

No matter how aggressively banks and businesses push for electronic alternatives, checks remain entrenched in B2C and B2B purchasing. Industry experts estimate 40% of all B2B payments are still made using a paper check.

The simplicity of checks contributes to their resilience. Checks are established, they’re understood and they require very little data to issue. While they may not be ideal, they work.

But businesses recognize that there are challenges this “pulp friction” can create in the cash conversion cycle. Even with lockbox services, significant effort is required to retrieve, process and deposit checks. There are mail delays to contend with, as well as a higher potential for fraud compared with electronic methods.

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Even though almost all B2B checks begin and end as data, there remains a “messy middle” involving the conversions from electronic to paper and back to electronic. This unnecessary routing adds up—on average, check mailing and delivery takes seven to 10 days, and processing fees can be up to $1.50 per check.

One of the biggest obstacles to solving this problem is resistance to change. Even tech-savvy companies that value electronic workflows hesitate when faced with the cost, resources and time required to bring those ideas to life. Adopting electronic payments takes work, from instituting new processes with suppliers and adapting legacy systems for new data to securing account numbers and credentials.

Innovating the lockbox network

There’s an alternative to trying to eliminate checks by persuading businesses to use other methods. What if the check itself changed from paper to an electronic transaction?

A network-based payment platform is a win-win for B2B payers and payees. Both sides maintain their established check processes while enjoying new electronic advantages. The platform works by transmitting check and remittance data directly from payer to payee through the established lockbox network. This approach bypasses the most labor-intensive steps in the check process: printing, envelope stuffing, mailing, opening, sorting and scanning.

A digital lockbox network can deliver value by transforming check delivery without requiring extensive changes for B2B payers or check recipients. Payers using this network can also accelerate payments from seven to 10 days to just one to two days.

The process is simple: Payers upload a digital file of checks from their ERP system, just as they do today. The digital lockbox platform handles disbursement, allowing in-network payees to receive digital payment in their current lockbox while exceptions receive a physical check.

The service provides digital images of coupons, statements and correspondence. To comply with federal requirements that a check exist (even temporarily) as a physical item, a copy is printed and then securely destroyed.

Network directories and intelligent routing

Two important technologies make this solution possible. The first is the nationwide directory of lockbox payees and banks—in essence, a shared digital address book that the system can use for routing and delivery.

Facilitating this network through banks and lockbox providers removes many of the hurdles that slow electronic payment adoption. Businesses don’t need to conduct enrollment campaigns or store sensitive bank account information.

Intelligent routing capabilities are the second critical technology—the “brains” of the solution. For every check payment, the intelligent router makes mission-critical decisions:

  • Is payment information complete, such as amount, payee name and physical address?
  • Is the payee a participant in the network?
  • Can the payment and remittance route digitally?
  • Does the payee have a preference for electronic payment method?

This scrutiny identifies electronic payees and simultaneously reduces exceptions. The router can fix common errors, such as misspellings, and apply fuzzy logic to recognize that while P.O. Box 17, PO Box #17 and Box 17 are not identical, they still “match” when comparing the address on a check with the directory of payees.

With nearly half of medium and large U.S. businesses already relying on lockboxes, these platforms have potential to streamline check payments and help companies large and small.

Chris Clausen is executive director of digital payment solutions for Deluxe Corporation.

Pick up valuable intel on emerging methods, technologies and competition in the payments world in the BAI Executive Report, “Payments: Increasing competition in the fast lane.”