By Adrian Stafford-Jones,
As the economy teeters on the edge of a double dip recession, government pledges to reduce red tape and make business easier for the UK’s SMEs seem increasingly critical. But given the emphasis on streamlining processes, the question has to be asked why so many organisations are still reliant on making payments via time consuming and highly inefficient cheques. The decision to retain cheques as a payment mechanism for consumers makes sense. But cheque usage is falling by around 10 per cent year-on-year for a reason: electronic payment mechanisms are not only more secure but, critically, significantly reduce administrative overheads and provide far more financial control. As Adrian Stafford-Jones, managing director, Albany Software explains, every business is searching for the most efficient, low cost payment route and, in 2011, that is provided by electronic payment methods, not cheques.
The Payments Council has been applauded for its decision to scrap the 2018 deadline for the withdrawal of the cheque service. In the light of strong opposition from consumers who still rely on cheques as a secure method of payment, forcing the adoption of alternative payment methods would cause significant hardship.
However, the decision could be perceived as bad news for UK businesses amid growing fears of another financial crisis. Without a clear deadline, companies may be tempted to postpone plans to migrate from cheques to electronic payments, despite the clear financial, productivity and security benefits on offer.
For many companies, cheques still provide a perception of greater financial control. Financial directors believe that the ability to control when cheques are paid to suppliers is key to managing cash flow, with ‘the cheque is in the post’ buying organisations an additional week in postal and bank processing time. In reality, this perception is not valid. Postal delays and supplier processing time mean organisations cannot accurately predict when the payment will actually be taken from the account; while postal unreliability can risk significant misunderstanding with key business partners.
In contrast, scheduling a payment via electronic methods such as Bacs or Faster Payments provides both the company and the supplier with a trusted mechanism: both organisations know exactly when the payment will leave and arrive in the bank account – there is no risk of delay or reliance upon administrative processes.
Control and confidence are key to the payment process. But it is also important to consider financial security. Recent studies have revealed that the improvements in electronic payment processes have led to fraudsters returning to old fashioned cheque fraud and phone scams. Indeed, despite the significant decline in cheque usage, the fall in overall cheque fraud losses has been only three per cent.
In contrast, electronic payment processes are becoming ever more secure. Payment volumes continue to escalate, driven in part by the arrival of Faster Payments, which enables companies to make electronic payments quickly and efficiently; yet the adoption of more secure payment mechanisms and fraud screening detection tools have driven a significant reduction in the economic impact of ecommerce fraud.
Bacs payments and Faster Payments are inherently secure as a result of the use of Public Key Infrastructure (PKI) technology: these payment mechanisms simply cannot be interrupted mid flow and abused by fraudsters. The banks have responded to the demand for greater electronic security by introducing token based devices that generate PINs on the fly. The result is online banking fraud is down by nearly a third in the first six months of 2011, according to newly published figures from banking industry group Financial Fraud Action UK (1).
The availability of quick, secure electronic payment mechanisms is great news: the opportunity to use Faster Payments provides companies with a quick, compelling and secure alternative to cheques. The only issue is that the process can be cumbersome due to the additional token based security devices. For smaller organisations processing lower volumes, as long as the service includes an automated data upload so there is no need to rekey data, Internet banking is an excellent and efficient alternative to cheques.
However, once an organisation exceeds 200 payment transactions a month, embarks upon more than one payment run or has more than one person involved in the payment process, Internet banking can become time consuming. Furthermore, when a company is large enough that employees outside the managing director and finance director are making payments, the use of Internet banking raises corporate sensitivity issues. To make payments these individuals need access to the bank account and, therefore, have unprecedented visibility of the company’s financial position. In contrast, taking the Bacs route enables secure, efficient payment without sharing sensitive corporate information with employees.
As a result, while many in the industry believed the introduction of Faster Payments would reduce reliance upon 3-day Bacs processing, in fact, Bacs transaction levels have continued to rise as have Faster Payments. Indeed, businesses organisations that have made the move to electronic payments are benefiting not only from the enhanced security offered by PKI, but also gaining better control over cash flow and are reducing administrative costs by combining the electronic payment with electronic remittance advice. When calculating the costs incurred for bank charges on cheques, stationery, printing and postage, the annual saving for 1,000 monthly payments by electronic payments rather than cheque is £18,360 – some 88 per cent – which is a compelling figure for any UK business.
There is little doubt that, in the long term, the writing is on the wall for cheques. With the UK’s SMEs now reconsidering growth strategies and looking again at costs, efficiency and scaling down non-profit making roles, cheques and other less secure and efficient payment methods need to be reassessed.
Of course, enabling charities and other institutions to continue to accept cheque payments makes sense. But failure to provide an incentive for UK businesses to move beyond this outdated, inefficient and costly payment medium is a concern. The government has pledged to minimise red tape and support economical, competitive SME operations – but organisations need also to maximise any opportunity to improve efficiency and financial security. Electronic payments should be an integral part of that process.
(1) Financial Fraud Action UK statistics October 2011