A Federal Mandate Means the Electronic Payments Trend is Reaching Critical Mass

By Ken Garen, CPA

Published by www.AccountingSoftware411.com

The efficiency with which we handle paper checks has resulted in the U.S. lagging far behind Europe in the transition away from paper towards electronic payment as a mandatory practice.  However, we may not lag behind for long, as the trend involving the use of electronic means rather than paper and ink to move information around is gaining momentum. 

The U.S. payment system is the envy of the world for the low-cost per check that we process our paper check payments. This has held back the development and implementation of electronic payments. The U.S. payment system now find themselves catching up with the Europeans with electronic payments as their standard of paying employees, and to a great extent, vendors.

The electronic payment trend has reached critical mass at the Federal level, and is reaching critical mass at the State level.  The Federal government has recently mandated that all benefits, entitlements, and tax refunds be paid electronically whenever possible. Some state governments have passed legislation to allow employers to require that employee receive their net pay electronically.

The initial impetus for the electronic payment mandate was the September 11, 2001 terrorist attacks which resulted in all air traffic being grounded for three days.  During that time all check processing was halted, leaving the U.S. in financial limbo,  where banks had no idea what funds were good or not, because no clearing was occurring.

This chain of events led to the Check 21 initiative, an act spearheaded by NACHA (National Automated Clearing House Association), a leading proponent of electronic payments in the United States.  The impact of Check 21 can be felt when a consumer uses a paper check to pay for goods or services at a retailer, and the check gets converted into an electronic form, allowing the retailer to immediately give the consumer their check back as a form of receipt. 

When Check 21 was being developed, the government originally promised to always allow paper checks to be used when Check 21 was being initiated, excluding business checks, from allowing them to be converted, but they have recently been changes that will allow for the conversion of business checks as well as consumer checks. This leads to some interesting legal issues when fraud has occurred because there is no original physical document that can be submitted as evidence of the fraud.  As further evidence of this trend, when NAFTA came into being, there was a requirement to create electronic payment of Federal taxes in all three countries, and businesses were going to be allowed to continue to pay the way they were currently paying (which was in paper check and an 8109 coupon to the bank). Effective January 1, 2011, the Federal government mandated that checks can no longer be in the paper form, rather, they must be paid and delivered electronically. 

Making payments electronically offers great benefits for businesses including low cost and efficiency.  For those employees that the industry calls the “unbanked” (those having no checking account), a Debit card account can be created where the payee cannot overspend the amount of money that is in their account. This can greatly be seen as a benefit to the employees because they do not need to go to a currency exchange or bank to get their check “cashed”, and if they have relatives in another country, they can deliver funds via the home country’s ATM network.  Additionally, the employee no longer is a target for thieves as they leave the bank or currency exchange because they no longer have cash on their person. This electronic method coincides with the way Federal and State government has been delivering food stamps and other benefits.  There is a very high adoption rate because employees are familiar with how a debit card works.


Ken Garen, CPA, is the Co-founder and President of Universal Business Computing Company, (www.ubcc.com), a software development firm of high-volume, high-productivity accounting and payroll technology. To stay current on technology issues and breaking technology news, subscribe to Ken’s Blog http://ubcckengaren.blogspot.com/ and follow Ken’s Tweets http://twitter.com/ubcckengaren. Contact Ken at ubcc@ubcc.com or call Ken at 800-762-8222.


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