Electronic Payment Growing, But Consumers Slow to Catch On

Though the use of paper checks continues to decline, the use of electronic or expedited payments for many types of business, including debt collection, has yet to gain much traction, according to firms interviewed by insideARM.

In a recent press release, officials from ePayments Corp. discussed the advantages of electronic payments, including the faster collection of re-presented payments compared to paper checks. And electronic checking and other forms of electronic payment are catching on, as evidenced by NACHA, the Electronic Payments Association’s, report that more than 3.7 billion transactions worth more than $7.5 trillion were conducted during the quarter, representing growth rates of 8.3 percent and 6.6 percent, respectively, over the same quarter of 2007.

The Federal Reserve reports that paper checks are declining at about 2 percent per year, yet paper-based payments will still represent the vast majority of payments for some time to come, despite other parts of the world quickly adopting electronic payments.

In South Korea, for example, all a person has to do is wave a mobile phone at the point of sale to make a payment. Such a system is only in the very early discussion stages in the United States.

There are several reasons for slow adoption of electronic payments:

• The paper check infrastructure in the U.S. is too good. While it may sound funny, processing in other countries takes several times what it does here.
• Though the infrastructure here is good compared to other countries, it is also complex and entrenched, meaning it is difficult to replace. In Canada, for example, moving to electronic payments meant changing payments infrastructures at only 10 banks, not nearly 8,000, as would be the case in the U.S.
• Some consumers and some businesses are entrenched in their ways of making payments and will only change if forced to. And since many people will pay a premium for an expedited payment, it’s unlikely that they will change their ways any time soon. The younger generation – those under 30 – however, use paper payments in a much smaller percentage than do their older counterparts.

“Expedited payments show promise as an ongoing source of revenue for billers, financial institutions, and third-party service providers,” says Bruce Cundiff, director, payments research and consulting for Javelin Research. “Each of these players must gain an acute understanding of the competitive landscape, pricing considerations, and consumer motivation for using the service prior to reaching the full potential for its product, however.”

Cundiff adds that the biggest bang for the buck comes on the corporate side – business-to- business payments – not on the consumer side. While a utility company may send out thousands of bills a month, there’s little incentive from the customer side to make the payment via electronic means. In the business-to-business arena, however, the payer can accurately time the payments and, if properly structured, save on costs by tying together payments and other accounting systems.

“In 2008, 30 percent of the consumer population reported making an expedited payment over the past 12 months, compared to 29 percent of consumers as of 2007, the last time Javelin collected data on expedited-payments activity,” Cundiff said.

While he agrees that there is certainly more motivation for businesses to adopt electronic payment methods, some 65 percent still use paper processes, says Chip Martin, vice president, enterprise payments group for Bottomline Technologies, Portsmouth, NH, a company that provides collaborative payment, invoice and document automation solutions to corporations, financial institutions and banks.

Some firms are entrenched in their ways of doing business, so they won’t change despite some of the efficiencies that can be gained, Martin adds. Companies with high payment volumes tend to be the ones that change to electronic payments first because they’re the ones who tend to gain the most efficiency in the bookkeeping and accounting areas. On the receivables side, companies are much more eager to adopt electronic methods because they can increase their cash flow, meaning they don’t need to rely as much on factoring to fund operations.

Martin added that firms that want to nudge their business customers to adopt electronic payments should offer an incentive such as a discount or a longer time to pay to boost adoption.

Such incentives are unlikely to work on the consumer end, according to CEO of ePayments Corp. Lufkin oversees the ePayments Group Of Companies providing electronic check recovery (RCK) services and electronic payments processing nationwide. He points out that many people will opt to pay an additional fee to pay a bill with a credit card when it’s too late to send a check. Others will write a bad check, accepting that they will then need to pay an NSF fee.

“For most people who bounce checks, it’s just bad bookkeeping,” Lufkin adds.

While they expect continued growth in electronic payments, Lufkin, Martin and Cundiff expect it to be at least a couple of years before there is any more significant movement to electronic forms of payments and away from checks.