According to the Association for Financial Professionals, one-third of B2B payments
in the United States and Canada were paid by check in 2021. That's down from two-thirds in 2010—but still, a not-insignificant amount. What's keeping the share of business payments by paper checks so high?
Many commentators say it's the Tower of Babel problem. As business accounting and enterprise resource planning (ERP) systems proliferate, the lack of a shared interoperable standard for exchanging remittance information stands in the way of the continuing evolution toward electronic payments. It's just easier to combine the paper check and the paper remittance information in a paper envelope, stick on a stamp, and send it off.
Let's look at the fragmentation of B2B payments systems from the perspectives of buyers and vendors:
- For buyers, the Tower of Babel means that invoices may arrive via phone, snail mail, email, pdf, and more. Even with e-invoices, the data structure can vary from one biller to the next, leading to manual exception processing and delays. Smoothing out this path would enable the buyer to process an invoice automatically, saving time in order to qualify for trade discounts and perhaps to facilitate payment at the last possible moment without incurring extra fees.
- For vendors, the recording and accounting for the payment can be more challenging than the receipt of funds. When the payment comes in electronically, it must be matched to an invoice and then associated with a receivable. Before the payment is matched, it cannot be booked as received on time or accrued into the accounting systems. With current systems, some organizations can more quickly match a paper check to the associated remittance information and then apply the payment correctly into accounting systems.
How can it be that the old-school way to pay is in some cases the easiest and least error-prone? Incompatibilities in accounts receivable and payable systems (think specialized coding and data structures) create what the Minneapolis Fed's Guy Berg calls a "black hole of setup and maintenance support costs." Getting these systems to talk to each other is a goal of the Business Payments Coalition, which has set out a framework for exchanging e-invoices in a structured way.
There are roughly 7,000 languages in the world. There are not quite so many accounting and ERP systems perhaps, but there are enough to make translations difficult. Seems like B2B payments are ready for their Esperanto moment.
Part 2 coming soon: ISO 20022 and the opportunity for B2B payments
By Claire Greene, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed