The "last mile" of a business-to-business payment, as funds reach a destination bank account, needs common standards and transparency as more companies eliminate paper checks and move to digital transactions.
Such a transformation will be a key driver for "new economy companies" seeking a way to make high-volume, low-value payments to suppliers without writing paper checks, said Mike Laven, CEO of Currency Cloud, a global B2B payments provider.
London-based Currency Cloud recently expanded services into the U.S. through the opening of a New York office, hoping to drive more businesses and banks to automate international payments.
But the U.S. significantly lags the U.K. and other European countries in B2B payment automation, mostly because the paper check still thrives in the U.S., Currency Cloud states in its latest report.
"The U.S. is shocking in its over-reliance on checks, which have all but disappeared in Europe," Laven said. "The big difference on the business payments side in Europe is that direct debit is totally dominant."
Citing McKinsey research, Currency Cloud's report indicates 70% of U.K. businesses rely on electronic processing of international payments, while nearly half of U.S. businesses still depend on paper checks.
European companies make all of their money transfers through direct debit accounts, but those in the U.S. never do, Laven said.
The Single Euro Payments Area has made credit transfers and direct debits in the European Union cost effective and efficient. In addition, European culture is "very open about sharing bank account numbers, as individuals and companies don't perceive that information as proprietary and confidential," said Nancy Atkinson, wholesale banking expert and senior analyst with Aite Group.
That's not the case in the U.S., where there is a reluctance to share banking information.
"Large U.S. corporations have been moving away from paper payments towards electronic for decades, but can’t always achieve complete conversion because receiving companies won’t provide their bank transit routing number and account number," Atkinson said.
Paying companies may choose to use paper checks because they are familiar with them, don’t need software to create them, and may want to delay receipt of the payment, she said.
However, the check-acceptance process has been modernized in the U.S. with automation for opening envelopes and extracting checks, and scanning equipment for character recognition, Atkinson added.
But B2B cross-border transactions with checks tend to create delays and uncertainty for companies because they don't know how long the money transfer will take or how much it will cost, Laven said.
If a company from the U.K. sends funds to the U.S., the "last mile" starts when the funds are ready to move into the recipient's bank account.
"The check comes in with no set standards, so there is a difference in transfer times, the bank's fees and the transfer to the bank through Automated Clearing House," Laven said. "That is where you need the transparency."
The challenge for B2B payments remains the data management and reporting that is included in a transaction. To address this concern, countries pushing faster payments systems are calling for the ISO 20022 standard, which enables companies to include invoicing and other data with transactions in a common format that would be used on a global scale.
Currency Cloud and other companies pushing cloud-based payments see the need for more standards similar to ISO 20022, only in areas of processing times and fees. Essentially, there is no issue with getting funds from one business to another internationally in terms of regulations or currency value.
"We are an open technology, so we look at this as a technology problem, not a problem of foreign exchange," Laven said.
"Most businesses don't know what it costs to send money until they see their monthly bank statement," he added. "Any type of standardization is good because the world is sending money in massive amounts, and that last mile is totally not standardized globally."
An international payment made through a bank has to move through the bank's corresponding and sometimes complex networks, Aite's Atkinson said.
"The timing and costs depend on the number of intermediary banks, how quickly they process, and whether they take their fees from the payment," Atkinson said.
The problem for Currency Cloud and other clearing and settlement solutions is "they still aren't completely ubiquitous and are even less understood," Atkinson added.
Indeed, Currency Cloud's report notes that 50% of U.S. respondents said they were not aware of B2B payment methods that are cheaper or more efficient, with many mid-size businesses citing that "finding a new method and getting it approved isn't worth the hassle."
Still, more than half of U.K. businesses and a third of U.S. businesses cited frustration with slow transaction times.