Why it’s time for a cheque replacement strategy

The cheque book recently celebrated its 360th birthday. For many insurers they’re still a key part of the Business to Business (B2B) payments process, especially for one-off or infrequent suppliers. Yet the truth is that this venerable payment mechanism is past its sell-by date. Cheques can introduce unnecessary extra friction, cost, fraud risk and human error. That’s bad news for supplier relations and could even impact the policyholder experience.

So maybe it’s time for a digital replacement. By investing in innovative new platforms, insurance finance bosses can cut costs, improve supply chain relationships and reduce risk. 

The hidden costs

It’s easy to see why cheques are still very common in the insurance sector. Finance teams may have to manage thousands of suppliers to settle claims. Many of these may be garage mechanics, vets, dentists and others with whom the insurer deals so infrequently that it’s deemed easier to send a cheque than to save that supplier’s bank details for future BACS payments.

However, while there are some benefits to the buyer from paying by cheque, there are also major downsides, especially to the supplier, that stem from legacy, manual processes.

Here are just a few:

Time delays: Once an invoice has been approved for payment, the cheque needs to be printed, inserted into an envelope and franked, which could take a day. It will take another 3-5 days in the post and must then be cashed – again this could take time, with the number of UK high street bank branches continuing to dwindle. Once banked, it will take six days to clear. In total, this could amount to as much as a fortnight from invoice due date to receipt of funds.

Administrative overheads: Once the cheque has been received, the supplier must pay someone to match each cheque to the right invoice – not easy given the fact that there may be multiple invoices for the same insurer. They may also have to follow-up with the buyer if there are postal delays, if the cheque has been sent to the wrong recipient, or mistakes have been made with remittance information.

Excessive costs: There are bank charges to consider, as well as the cost of posting cheques to the bank and the admin overheads referred to above. Suppliers could also be hit by the ‘cost’ of being forced to use an overdraft to fund the time between invoice being sent and a cheque clearing. We worked out the total costs for the supplier per cheque could be as much as £20 per cheque received.

Fraud: with cheques, there’s a greater potential for payment fraud, affecting both supplier and buyer.

A new way

With challenges like these, it’s not surprising that more and more suppliers are refusing to accept cheques. While most of the cost and administrative burden is borne by the supplier, these problems can also impact the insurer. Suppliers may eventually side-line or delay work for customers of insurers with whom they have encountered problems getting paid. Dispute resolution can be a drain on resources. In some scenarios, such as emergency motor repairs, suppliers may refuse to begin work, or release a repaired vehicle back to the customer, until payment has cleared. All of which can seriously impact the claims experience and could lead to greater customer attrition for the insurer.

Fortunately, there are alternatives to cheques which can slot neatly into insurers’ existing B2B payment processes.

Virtual Account Numbers (VANs) are single-use, 16-digit card numbers that can be used to pay suppliers quickly, easily and securely. Reconciliation is automatic and immediate, reducing overheads and eliminating manual errors, and payment is made directly into the supplier’s bank account. Each VAN can also be enriched with additional data to improve auditability and reduce fraud and security risk. Finally, VANs generate financial rewards for every transaction processed.

To find out more, read our eBook, The Need for Payment Alternatives is Now.

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About Optal Ltd

Optal is re-inventing how payment processes work across complex industries. By stripping payment processes of their customary inefficiency, Optal helps companies boost profitability across a growing number of sectors around the world.

Optal issues Mastercard branded payment products, driving its focus on developing and bringing to market, game-changing payment solutions. Optal’s working capital solution, Invapay, turns underutilised credit lines into a dynamic resource to manage cashflow.

“Invapay” and “Invapay solution” means Invapay Payment Solutions Limited, a private limited company in England and Wales, authorised and regulated as an Authorised Payment Institution by the Financial Conduct Authority under the Payment Services Regulations 2017 which is a wholly-owned subsidiary of Optal Limited.

Talk to us to discover how Optal can add value to your organisation.

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Invapay Technical Support: +44 (0)1992 500 589

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