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The High Cost of Issuing Small Checks

How writing paper checks can tie up a company’s cash flow

Sending a check be 10 times more expensive than other electronic methods like an ACH payment.
Sending a check be 10 times more expensive than other electronic methods like an ACH payment.

How does your business process invoices? Each month companies make countless payments to clients, vendors, suppliers and more groups all around the globe. Despite advancements in banking, including the use of ACH and wires, issuing paper checks is still a widespread practice. For some bills, the value of each payment is low, but the frequency is high. This means companies must produce a large volume of checks, some of which are valued at very small sums.

This practice persists across a number of industries, including music royalties, intellectual property law and more. Often these types of businesses must produce checks for global recipients who require payment at frequent intervals. Recently, artists took to social media to share their small checks from royalty companies. Most were under $10 USD while one was only $0.02. Additionally, a number were from projects completed several decades earlier, meaning their issuer will likely have to repeat this practice on an ongoing basis. The trouble is that checks can be expensive and tiny amounts can actually be worth less than the fees associated with issuing the checks. Sending one can be 10 times more expensive than other electronic methods like an ACH payment.

Why are checks so expensive? There’s significantly more manual and administrative effort involved in issuing and processing checks. For example, a common challenge involves obtaining accurate physical addresses of payees. Inaccurate physical/mailing addresses may result in returned mail, resulting in further investigation and re-issuance of the check. Additionally, if the check is not cashed within six months of its issuance date, it may be returned and need to be re-issued.

Because there is a time delay in these situations as well as in sending mail in general, the practice also affects cash flow. The recipient may need to manually deposit their check, meaning the issuer must have sufficient funds in their balance to cover these expenses. While this is indeed always true regardless of the deposit method, it is harder to estimate the date when a check will be cashed. In fact, check payments can make up one quarter of a company’s outgoing payments, leaving them vulnerable to overdraft and causing issues with budgeting.

Still, there are a few reasons why businesses continue the use of checks. A company’s list of payees can be massive, and decades worth of payments may be managed through their current system. Overhauling a legacy method can be time-consuming and daunting. Plus, some may have concerns about changing the delivery for long-time clients, some of whom may prefer to receive checks.

Yet as payment volumes continue to rise, finding a more efficient and cost-effective solution is becoming increasingly necessary. Financial decision makers in all industries may want to consider our digital solution, Mass Payments, where users can manage large batches of payouts to recipients in different currencies. The platform supports a fully automated transaction lifecycle via an API based channel for a batch integration model.

For more information, contact one of our specialists.