Why is the U.S. still using paper checks and what to do about it – Part 1 of 3

If your company is not based in the United States (or even if they are!) there are business mysteries behind banking and taxation that don’t exist in many other places and sometimes don’t seem to make a lot of sense. A lot of those requirements originate from state and federal level regulations. This blog series will uncover what those mysteries are and how to understand them as systems that can be easily managed with Dynamics NAV and Dynamics 365 Business Central.

Why is the US still using paper checks?

We are often asked the question of why companies in the United States are still using paper checks instead of electronic payments, especially when almost all other countries only pay electronically.

State-level regulation instead of Federal regulation creates different banking standards for different states which creates complexity with data exchange standards for electronic payments. The US banking industry is regulated by the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of Currency. There are over 6,000 banks in the US, and many restrict their activities to their region or states because of the large number of regulations present. The only regulatory action the US Federal Reserve has taken is to introduce Check 21, an act that abolished the requirement for a bank to have a physical check present in order to process it. This act took place in 2003, two years after the Federal Aviation Administration grounded all air traffic following the September 11 act of terrorism, stopping the flow of over $6 billion of paper checks, and raising national daily check float to $47 billion, about eight times its normal level.

Credit card fees are also a factor. On average, a company will pay approximately 3-5% on transactions paid with credit cards, and therefore choose the paper check to avoid these charges. Traditionally, US-based banks have also made it less expensive for companies to process paper-based checks instead of electronic payments. This has changed in most cases, but in many instances, the technology and information on how to transact electronic payments has lagged woefully behind. This has made adoption of electronic payment processes slow as businesses run into many obstacles to change from an already established system. It is not uncommon for companies to reach out to their banks for help in doing things electronically and to not receive the help they need. The burden of the business process lies on the company, and the bank is not under an obligation to assist.

The paper check process addresses three primary needs related to business to business payments in that they allow for transfer of money to occur between one entity and another, they allow information to be transmitted along with the transfer of money, and they work well with the business process workflow to allow those other two things to happen. Even though they address these business needs, the cost to do so is high and full of inefficiencies and inaccuracies. To date, digital options have not yet replaced the three primary functions of transfer, information, and workflow, and until all three are adequately addressed, many companies will not move despite the costs.

If you’d like some help with de-mystifying business processes and correct system setup related to US-based accounting practices, please get in contact with us to discuss how New View Strategies can help. We have specialists with deep accounting expertise in using Dynamics NAV and Dynamics 365 Business Central who can move quickly through the requirements for your company and establish clear and accurate processes to manage these complex business needs. 

Looking for more topics related to US-based accounting? Check out the rest of our related blogs at the links below.

Why is the U.S. still using paper checks and what to do about it (Part 1 of 3)

Why is the U.S. still using paper checks and what to do about it (Part 2 of 3)

Why is the U.S. still using paper checks and what to do about it (Part 3 of 3)

The good, the bad, and the ugly side of US bank reconciliations

Pay me now or pay me later: managing 1099s throughout the year

What’s wrong with U.S. sales tax and how to make it right with your ERP system

What is South Dakota vs. Wayfair and why should companies who sell online care?

O Canada! GST, HST, GIFI and other three- and four-letter words related to Canadian taxes