How much is it costing UAE businesses to accept paper cheques?

How much is it costing UAE businesses to accept paper cheques?

Old-fashioned and costly, cheques are a remnant of a labour-intensive payment and banking era gone bye. Cheques cost more than you think. Processing costs, bounced cheques, payment fraud, time delays, delayed funding, and high cheque-cashing costs can turn a businesses’ financial situation into a nightmare.

Overall Cost to the Economy

The UAE and other MENA+ countries are still heavily cash and cheque-based economies. It is a legacy payment system that is slow, inefficient, and costly for businesses, customers, and the overall economy. Most businesses today still require cheques for rents, utility bills, insurances, school fees and auto leasing to name a few. In the UAE alone in 2021, approximately 21M+ cheques were presented and cleared with a total value of over $272B. ?According to market research, it costs on average a staggering $5 USD (including hard costs and soft costs) to process each cheque and in some cases its higher. The math is mind-blowing! There is an additional cost to cheque payments - opportunity cost. What could a businesses’ staff do with their time if they weren’t processing paper cheques? How could they use those lost hours to improve the operational efficiency of the business? Once you assess the value of that lost labour, then you can truly see what collecting and processing paper cheques costs your business. You start to get a picture of the true cost of cheque payments.

The process of collecting, processing, and storing post-dated cheques is very expensive for businesses, not to mention the 1.1M+ cheques that bounce annually. The entire end-to-end process is inefficient and time-consuming, expensive, prone to human error, slow, and susceptible to bounced cheques and irregular signatures. Longer processing periods mean longer time windows required to recognise missing payments and the need to chase payments.

Real Cost of a Bounced Cheque

Today in the UAE, bouncing a cheque for insufficient funds is not a criminal offence. What does this mean? In short, no longer can the criminal justice system be used to enforce payment of a bounced cheque, making cheques one of the “dodgiest” and most expensive payment methods today in the UAE. Now businesses must shift their over-dependence on cheques as a payment method to other methods of payment given that the much-desired coercive power of the criminal courts no longer exists for bounced cheques. The illusion of cheques being secure as a payment method has just evaporated.

Under the new amendments to the UAE’s Commercial Transactions Law which came into effect in January 2022, any cheque presented for payment and returned due to insufficient funds, the Bearer (individual or entity) of the cheque can go directly to the Issuing Bank and request the Bank to partially pay the value of the cheque subject however to, (i) funds in the account must exceed 5% of the value of the cheque, and (ii) Bearer agrees, before the Issuing Bank will make partial payment.

Now, its just not that simple! ?(a) Not all branches of the Issuing Bank will process a request for partial payment; (b) you will have to find out which branch processes these requests; (c) then travel to the designated branch; and (d) wait in a queue to present a Request for Partial Payment. If there are not sufficient funds in the account, you will have to repeat (a) through (d) again until such time as you receive the full value of the cheque, or you just simply give up out of frustration and write the cheque off as a bad debit.

Many UAE landlords, for instance, are already forced to make some changes in the way they sign new tenancy agreements. In the past, the threat of criminal prosecution for bouncing a cheque allowed some landlords to request and accept 12 post-dated cheques from their tenants. Now, landlords don’t want to deal with 12 cheques that can potentially bounce without any criminal consequences for the tenant. With the lack of criminal consequences around cheques, cheques offer little value to landlords and create a situation for increased number of potential disputes. Twelve cheques simply mean 12 potential disputes with each cheque eligible for partial payment that could require multiple?physical trips to a bank branch that can process partial payments.

Hidden Costs

Many businesses think getting paid by cheque is free, but cheque payments come with labour costs and processing fees. By a conservative estimate, paper cheques are at least 5 times more costly to businesses than digital payments. This is because there’s more than processing fees to take into consideration — such as back-office manpower and incidental costs — which are not included when processing payments via digital alternatives. And that doesn’t even take into account the time the finance team spends collecting and reconciling cheques. If some of those cheques bounce, things can turn ugly very fast - a returned cheque fee along with the headache of chasing and collecting the money the business is owed as a result of the bounced cheque. In today’s digital age, the act of collecting, processing, storing, going to the bank to deposit a cheque, and waiting for it to clear, then reconciling the payment is immense. If time is money, the cost of cheques is astronomical.

In the post-pandemic era, many businesses have been hit hard and are trying to cut costs and improve their bottom line wherever they can. Using a cloud-based, business-initiated-direct-debit payment and reconciliation solution instead of paper cheques is an ideal way to reduce costs both efficiently and painlessly. This payment method is not only more cost-efficient but is faster to process and more secure than cheques. For businesses, this represents an opportunity to increase internal efficiencies, spend less time and money collecting and managing payments, lower administrative costs, and improve cash flow, all of which combine to increase a business’ bottom line.

Opportunity

Our own research has shown that there is a serious appetite for paying with direct debit, many businesses are missing an opportunity by simply not offering it as a payment method. We found that over 70% of individuals we surveyed were likely to choose a monthly-biller-initiated-direct-debit to pay their recurring bills. There is an opportunity in the marketplace for businesses to offer their customers a “business-initiated-direct-debit” payment option. This gives businesses control over the billing cycle with visibility and predictability over their cash flow.

Cheque fraud remains a pervasive issue

Cheque fraud has been on the rise over the last number of years in the UAE. Banks and businesses continue to cite cheques as a major fraud risk. Fraud operators are evolving their tactics and leveraging cheques as a low-cost, low-technology vehicle for fraud.

From a business perspective, processing cheque payments involves a multi-stage process which is expensive, adds additional costs at every stage and invites the risk of error, loss or fraud. More importantly, it hinders effective cash management. In contrast, a biller-initiated-direct-debit can be carried out at the click of a button, enabling faster payment and reconciliation, and is significantly cheaper. The statistics clearly show that cheques are no longer economically viable as a means of payment – and now is the time to consider alternatives.