Checks were once king: 33 billion checks were written in the US in 1979; comprising 86% of non-cash transactions. According to Federal Reserve data, check use has been declining since the 1990s, losing market share to debit and credit cards and ACH (Automated Clearing House) transfers, which are cheaper than most money transfer methods. Halfway through that decade, it felt safe to assume that, by now, paper checks would have been a distant memory.
Not so. Although check use has continued its decline, in 2019 checks still accounted for 42% of all B2B transactions. When used in the traditional way - licking stamps and stuffing envelopes - checks are inefficient and expensive, each one costing $4-$20, yet they remain prevalent among small business owners.
Why? Partly down to the confidence that they offer: checks are tried and tested, and provide a clear paper trail. Also, in the past, small businesses have found themselves on the wrong side of a power balance where the other side requests a check.
Another possible explanation is that like all busy people, small business owners are creatures of habit. Many small business owners have told us that while they know paying with checks is not the most efficient way to go about handling the bills, they tend to stick with the devil they know, rather than take the time to learn a new method.
At Melio, we have been keeping track of how the events of last year affected the way that small businesses make and receive payments. We are no enemy of checks: if a small business owner wishes to make a payment by ACH but the vendor wants to receive a check, we make both things happen, and everyone is happy.
We have however observed significant behavioral changes: among users that have used Melio for at least 12 months, we have seen a reduction in payments delivered by check from 22% to 12%. That’s just under a 50% drop.
According to data from The Federal Reserve, between 2015 and 2018, check payments declined 7.2% per year by number and 4% percent per year by value. These numbers are roughly in line with declines between 2003 and 2012. Meaning, for the years between 2003 and 2018 check use by American businesses has declined at about the 4%-8% range per year, while in 2020 it plunged by 50% year-over-year for Melio users.
Moshe Schulman, a managing partner at New York wine bar and restaurant group Ruffian Kindred told us Melio was crucial to his business during Covid-19. “It helped us track any outstanding invoices and safely process payments to our vendors while we were quarantined," Moshe said. “We were early adopters of Melio because we were manually filling out checks for our vendors and it was taking up a lot of time. It seemed like a no-brainer to switch to Melio and streamline the process, and it has been a game-changer for us. It has saved us a lot of time and provides a clear and transparent timeline of expenses.”
Another interesting finding had to do with Melio’s unilateral feature, where, at the payor’s request, the payee chooses their preferred method of payment. Here too we saw a distinct inclination towards ACH transfers as opposed to checks. 21% of all payments for which the payor chooses the delivery method are still made with checks. However, when the vendor chooses the delivery method for themselves, we see a significant drop to just 12% checks. In other words, given a choice, in 88% of payments, vendors opt to receive funds directly into their bank accounts, rather than receive a check in the mail. This trend correlates with the general decline in the status of checks.
2020 was also the most difficult year on record for small US businesses and the steep drop in the use of paper checks reflects how they have changed their behaviors in the face of extreme adversity due to COVID-19 lockdowns. The upside is that we have seen a major uptick in digitization, and pivoting to new products and services, exemplifying just how resilient and adaptive small businesses can be.
Small business owners and vendors are far from a homogenous group, and will each have moved away from check use for varying reasons. It’s likely however that each side took the time in 2020 to work out how to ensure maximum efficiency in everything that they do and a shift from checks to ACH was one of the methods they came up with.