Our economy is long past the days when most payments were made in cash or even checks. One of the earliest responsibilities of the Federal Reserve System, enacted in 1913, was to create a national system for clearing checks as prerequisite to ensuring a nationwide economy.
Today in the U.S., we write about 40 percent of the number of checks we wrote in 2000. In 2000, roughly one-third of those checks were written by businesses, compared with about 45 percent today. This statistic suggests that consumers are moving to electronic payments faster than businesses are. Of course, businesses are on the receiving end of most of those consumer electronic payments, so your business may want to make separate decisions when selecting incoming and outgoing payment options.
Herewith is a tour of those options.
Wire transfers are fast and, once initiated by the sending bank, irreversible. Generally, it’s not efficient to use wire transfers to pay bills because few businesses are set up to send or receive these in an automated way and banks often charge high per-transaction fees. However, if you are selling something valuable — like a building, a large block of stock or bonds, or the entire company — ask for a wire transfer. Once your bank confirms the money has arrived it cannot be taken back. You’ll want to confirm receipt before you hand over that substantial asset.
Automated Clearing House
ACH transactions are also commonly known as “direct deposit,” “direct debit” and “e-checks.” They are widely used for automated payments from consumers. ACH transactions can flow both directions — to make a payment to someone else’s account (a credit or direct deposit) or to request funds from another account (a debit, e-check, or automated withdrawal). The ACH system was intended to carry a large number of transactions at low cost. Transfers are typically overnight, although new options now permit same-day credit transfers. In general, a business should think carefully before permitting another entity to use an ACH debit against its accounts. Banks can readily block this, so ask. For close business relationships, however, these can be quite efficient. For example, a car dealer may be required to permit the manufacturer to debit its account for the value of cars delivered. Note that money your business collects by issuing an ACH debit can be reversed within a couple of days, so confirm the timing with the bank before you spend the money.
Visa and MasterCard credit cards are issued by banks and operate under rules established by those two “network” companies. American Express and Discover issue their own cards and set their own rules, although many topics — such as the technology behind chip and magnetic stripes — are set cooperatively, so that the same card reader can accept all transactions. Business credit cards are useful for managing transactions, such as for travel and authorized purchases. The credit card networks also offer “cardless” services to enable business-to-business payments. Several federal laws protect consumer credit card transactions, but not cards issued to businesses, so evaluate decisions to accept card payments vs. making card payments separately.
Popular with many consumers, a bank-issued debit card transaction withdraws the money directly from the account to which it is connected. If you know any business that pays its bills with a corporate debit card, please let me know so I can learn why.
SWIFT and Correspondent Bank Accounts
The SWIFT network enables banks to exchange payment instructions internationally. If your business makes or receives payments across borders, the banks involved probably maintain accounts with each other (called correspondent bank accounts) and transfer information via SWIFT. Cross-border funds transfers can be expensive and slow. Sometimes that timing can be justifiable — depending on the country and local rules — but some banks and nonbanks are challenging this model. If your business sends or receives money internationally with any frequency, it’s worth the effort to interview several banks and push back to try to reduce fees and improve timing of receiving those funds.
Paper checks are still widely used for business-to-business transactions, possibly because companies’ computer systems were built when checks were the dominant method for noncash payments. Improvements in processing and the “Check 21” law mean that you should not count on a “float” delay between when you send a check and it clears your bank account. Money received by check is not final, that is, it can be recalled for a period of time. Therefore, consider carefully if funds have finally cleared before releasing any substantial asset. This uncertainty is one reason retail locations now use scanning services at the cash register.
Coin and currency transactions are easily understood. Safe and secure handling does carry cost, but once you receive that cash payment, it is complete. Unlike debit and credit card payments, checks or ACH debits, there is no recall mechanism built into the payment transaction. A customer who wants his/her money back has to ask nicely or consider legal action, as well as have a legitimate case.
For our purposes, think of PayPal as an intermediary enabling consumer card and ACH payments. PayPal-provided computer code (APIs) make online payments fairly available to small businesses and nonprofits.
Cyber Currency, Cryptocurrency, Bitcoin
These new, algorithm-based currencies have so reached the public consciousness that the Feb. 25, 2018, New York Times for Kids includes a graphic on “What is Bitcoin?” The graphic ends with one of its most important features: “Bitcoin transactions can’t be reversed… and if you want your money back, too bad!”
Unless this is your business, you should stay away from this “currency” while markets, regulators, banks, and lawmakers figure it out.
Michele Braun directs the Institute for Managing Risk at Manhattanville School of Business and is managing executive of The Crossway Group LLC, a consulting and professional training firm. She can be reached at firstname.lastname@example.org or at email@example.com.
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