Check Processing

What Is an Electronic Check? The Ultimate Guide to eCheck Payment Processing

Read Time: 13 min

While “electronic check” may sound like an ‘80s rock band, it is actually a form of payment processing. Chances are you’re familiar with traditional check processing, a staple dating back hundreds of years in which banks manually process paper checks and deposit funds into the appropriate accounts. Thanks to technological advancements, checks may now be processed completely electronically, which speeds up the process and eliminates the need for paper checks.

Beyond reducing paper waste and saving time, eCheck payment processing offers many appealing advantages to both the payer and the payee. Below, we detail how eCheck processing works, as well as its benefits and its best applications. Let’s begin exploring this payment method with the most obvious question: What is an electronic check?

What Is an Electronic Check?

An electronic check, or eCheck, is an electronic payment made from your checking account. Think of an electronic check as a virtual version of your paper check. When a customer uses an eCheck as their form of payment, the funds go to the merchant’s bank account through the Automated Clearing House (ACH) network.

Merchants must have eCheck processing to enable these types of transactions.

How Does eCheck Processing Work?

Signed into law on October 28, 2003, the Check Clearing for the 21st Century Act (known more commonly as “Check 21”) is a federal law that widely enabled the practice of electronic check processing by removing legal barriers that prevented many banks from practicing check truncation.

man holding tablet showing a form for an electronic check

The traditional check payment process requires a bank to verify a physical check and send it to the other bank associated with the transaction, at which point that bank verifies the physical check, too. The phrase “check truncation” refers to the process of banks verifying fund transfers electronically with digital checks. Check truncation allows both banks to verify a digital check, eliminating the step of transporting the physical check from one bank to another.

While eCheck processing is faster than traditional check processing, the information necessary for payment processing doesn’t differ. To initiate an electronic check, your customer must provide their bank’s routing number, their bank account number, and their authorization, all of which would be provided on a paper check, too. However, merchants must have eCheck payment processing enabled to accept this form of payment, whereas there are no restrictions preventing merchants from accepting physical checks.

Below outlines the main steps of electronic check processing in detail.

The transaction is authorized

When your customer initiates an eCheck payment, they authorize a transfer of funds from their bank to your business bank account. Obtaining your customer’s authorization is the first step in electronic check processing. You can obtain your customer’s authorization through many methods, including:

  • A signed contract, authorization form, or order form
  • The acceptance of your business website’s terms and conditions
  • A recorded phone conversation in which they give verbal authorization

After you’ve obtained your customer’s consent, the electronic check information goes to your eCheck payment processor.

The payment goes through

After receiving authorization from your customer, you may now enter the necessary information, including your customer’s bank account number and routing number. If your customer authorized a one-time or recurring payment, include any information necessary to the recurring payment schedule.

After you’ve entered all essential information, your processor verifies the credentials. Upon verification, the funds transfer through the Automated Clearing House (ACH) Network. It’s important to note that while eChecks are processed through the ACH Network, eCheck payments and ACH payments are not one and the same, as the associated fees and processing channels differentiate the two.

It’s also worth noting that many point-of-sale systems can be integrated to automatically transfer the information your customer enters online or in-app to your eCheck virtual terminal, eliminating the step of you re-entering this information. With such integrations, your electronic check payment processor can instantly verify the credentials and begin processing immediately after customer authorization.

Funds appear

Through the ACH Network, your customer’s funds are transferred to your business bank account. With the funds having been debited from the payer’s bank account and credited to the payee’s bank account, this marks the end of the electronic check process.

How Long Does It Take for an eCheck to Clear the Bank?

On average, it takes 3-5 business days for an electronic check to clear the bank. This means that once the eCheck transaction is initiated and verified, it takes roughly 3-5 days to process through the ACH Network. However, the settlement timeline may differ from the speed with which you receive an eCheck payment.

You may receive the funds in your business account as soon as the next business day. In this case, it’s likely your eCheck processor or financial institution has fronted their own funds to your bank account and will be reimbursed when the electronic check clears.

eCheck Estimated Completion

Generally speaking, an electronic check’s processing time is approximate due to the number of institutions involved—the payer’s bank, payment processor, ACH Network, and the payee’s bank. This transaction goes through multiple channels before clearing, with the time it takes to clear dependent on said channels. That said, these factors should be considered when estimating an electronic check’s settlement timeline:

with receipts in the background, two people look at mobile banking app on smartphone and ask what is an eCheck
  • Your payment processor
  • The associated banking institutions
  • Weekends and/or banking holidays
  • The time of day the transaction was initiated

Keeping these factors in mind, verification can take 24-48 hours, meaning it can take an additional 3-5 business days for an eCheck to clear. But, as stated above, you may see the funds in your business bank account as early as the next business day depending on your processor and/or banking institution.

Electronic Check Verification

eCheck processors utilize API software to instantly confirm that the identification information and bank account match, the bank account is open and in good standing, and that the bank account has a positive balance to cover the transaction. For merchants, electronic check verification greatly reduces the risks of check fraud and check returns—two of the most costly pitfalls merchants experience when accepting traditional checks.

How to Cash an eCheck

Because eChecks are essentially virtual versions of a traditional paper check, it’s easy to deposit them. Typically your eCheck provider will set you up with access to a virtual terminal where you can key in the check details to initiate the transaction. Simply proceed as you would with any digital payment! The only difference from other online payments is that the funds will be paid directly to your business bank account instead of your merchant account.

If your point-of-sale system is integrated with your eCheck payment processor, your customer’s eChecks may be cashed automatically with little to no effort on your part.

eCheck deposits

Because an eCheck deposit may sound counterintuitive, this phrase deserves an explanation. An eCheck may be processed and deposited into your business bank account seamlessly through the process explained above. However, you may also deposit an eCheck through the following process:

  • Retrieve your eCheck: Once notified that you’ve received an eCheck, you may retrieve your eCheck by following the accompanying instructions.
  • Print out your eCheck: Once you’ve retrieved your eCheck, print it out. Much like how digitized flight, concert, or other event tickets may be printed, an eCheck may be printed into a physicalized copy as well.
  • Deposit your eCheck: With the physicalized version of your eCheck, you may proceed as you would with a traditional check. Endorse the check and deposit it at your bank.

In addition to depositing eChecks through traditional check-depositing mechanisms, you may deposit traditional checks through eCheck mechanisms, too. For example, if you’re issued a physical check, many banks have online or in-app services that allow you to submit a photograph of that physical check, after which the photograph serves as a digitalized check that processes through check truncation.

How to Send an Electronic Check

As a business owner, you may be wondering how to send an eCheck to your vendors, suppliers, or other partnering businesses. Depending on who you’re interested in paying via electronic check, you will most likely receive an invoice for the goods or services for which you’re paying. On this eCheck invoice, input your banking information. The most commonly required information includes:

  • Your name or your business’s name
  • The bank account from which funds will be drawn
  • Applicable routing numbers
  • The name of the issuing bank

Once this information is delivered to the corresponding party, the eCheck is authorized. Then begins verification, processing, and, finally, settlement.

In addition to eChecks being a faster, easier way to receive payments from your customers, it’s a faster, easier way to pay your vendors.

What Types of Payments Can You Make with eChecks?

With an eCheck payment processor in place, you can accept an eCheck for any goods or services your business sells. That is, if your customer opts for paying with an eCheck. Credit cards are the most commonly used payment method in the United States, so you may find your customer base prefers paying with a credit or debit card.

It should be worth mentioning that many merchants use check processing when the ticket sizes are substantially larger than normal. For instance, if a wholesale supplier wants to take a $25,000 transaction, their credit card processor may not allow that ticket size, so they would simply choose eCheck instead.

Accepting electronic checks diversifies the payment methods you offer your customers. And even if only a portion of your customers utilize eChecks as a payment method, it will still be a portion of transactions for which you may reap the benefits.

eCommerce

It’s common for eCommerce businesses to accept eChecks as a form of payment. Additionally, more customers may opt to pay for an online transaction with an eCheck, as inputting their banking information isn’t much different from inputting their credit card information.

Subscription-based and recurring billing businesses

If your business operations rely heavily on a subscription-based or recurring billing model, eChecks are an ideal form of payment. With automated initiation, eCheck payment processing delivers your customer’s recurring payment to your business bank account with little to no effort or time from you. Businesses that commonly accept electronic checks for recurring payments include, but are not limited to, the following:

  • Gym memberships
  • Mortgage payments
  • Credit card payments
  • Auto loan payments

Additionally, it’s not uncommon for property managers to request tenants fill out a recurring eCheck payment form. This enables them to deduct rent automatically from their tenant’s checking account.

The Benefits of eCheck Payment Processing

Electronic checks typically incur lower processing fees than credit or debit cards. Another benefit of eChecks is the delivery time of the funds, as they often appear in your business bank account the next business day.

a man logging onto his mobile banking app and asking what is an electronic check

Speaking of business bank accounts, yet another advantage of electronic checks is that the funds are deposited directly into your business bank account, not your merchant account. Funds from credit or debit card transactions are delivered to your merchant account, where the money is held until settlement, at which point it transfers to your business bank account. This can create a snag in your business’s cash flow, as these funds aren’t immediately accessible. However, funds from eChecks are delivered straight to your business bank account for immediate use.

Electronic check processing circumvents the need for a merchant account. This can be especially appealing for businesses encountering difficulty obtaining a merchant account. In particular, traditional, tier-one banking institutions often reject merchant account applications from high-risk businesses to avoid financial exposure. While many factors are considered when assessing a business’s risk level, businesses that have been documented on Mastercard’s MATCH list or the Terminated Merchant File are almost always considered high risk and may especially benefit from electronic check processing.

Finally, we would be remiss if we didn’t mention that there’s no limit to the monetary value of an eCheck. While credit and debit cards may impose transaction or daily spending limits, an eCheck is only limited by the available funds in your customer’s checking account. Businesses selling expensive goods or services may especially benefit from offering an electronic check payment method.

The benefits of eCheck payments over ACH payments

While quite similar in many ways, one of the differences between eCheck payments and ACH payments is that ACH payments require you to be approved for an ACH merchant account. Again creating a snag in your cash flow, funds sit untouched in your ACH merchant account until settlement. Additionally, approval for an ACH merchant account requires thorough business analysis, during which many businesses are rejected.

Businesses that do not qualify for an ACH merchant account can still partner with an electronic check payment processor to accept eCheck funds straight into their business bank account—no merchant account necessary.

How Much Does eCheck Processing Cost?

If your eCheck payment processor charges a flat rate, it’ll typically be around 1 percent. If you’re charged a flat fee, it’ll usually be between $0.25 to $1.50 per check. Overall, electronic check processing tends to be more cost-effective than many other payment methods. Please note, that for high-risk businesses the pricing is often higher.

Businesses with high ticket sizes may especially benefit from flat-fee electronic check processing. For example, a jeweler who sells an engagement ring for $15,000 may only pay a processing fee of $1.50 if they opted for flat-fee eCheck pricing, as opposed to $150 if they opted for flat-rate eCheck pricing or much, much higher if the transaction was paid for with a credit or debit card.

Are Electronic Checks Secure?

One key benefit of electronic checks is that they are a secure payment method. In fact, electronic checks provide more security than using a physical check. Because electronic check processing immediately verifies credentials, the risk of falling prey to bank fraud or returned checks is greatly reduced for merchants. And because eChecks eliminate the physical document, the risk of lost or stolen information being used to commit identity theft is greatly reduced for customers. The additional layers of authentication through the payment process add layers of security that protect both parties.

Below are a few electronic check security features that ensure your business’s and your customer’s information stay secure during the electronic check verification process:

  • Advanced Encryption Standard
  • Transport Layer Security
  • Multi-factor authentication
  • Cloud infrastructure technologies
  • Continuous security monitoring

How to Cancel an eCheck

An eCheck may be canceled up until the point of transaction settlement. Typically, transaction settlement is marked by the arrival of funds into your account. But as mentioned above, you may receive the funds for an electronic check as soon as the next business day because your payment processor or banking institution fronted you the money before settlement. Thus, you may be able to cancel an eCheck even after the funds have been delivered into your business bank account. However, after it has cleared, you cannot cancel the eCheck and must issue a refund.

Can You Dispute an eCheck?

The Check 21 Act allows a window of 40 days following an eCheck transaction during which a consumer may file a dispute. Meanwhile, credit card transactions typically allow consumers 180 days to file a dispute. This smaller time frame during which consumers may file an eCheck dispute provides consumer protection and protects merchants against excessive chargebacks.

To dispute an eCheck, your customer must contact their bank with the necessary documentation within 40 days of the transaction.[1]Gov Info. “Public Law 108–100—Oct. 28, 2003”. Accessed May 6, 2022. Your customer’s bank then has 10 days to investigate the transaction. This detailed dispute process requires a great deal of paperwork and occasionally even affidavits. Because it’s a time-consuming process, fewer customers file eCheck disputes, especially for smaller transactions.

Do Electronic Checks Process on the Weekend?

Because the multiple channels through which electronic checks are processed tend to only conduct business on business days, electronic checks do not typically process on the weekend.

Can an eCheck Bounce?

When an electronic check is initiated, there’s usually an authorization hold placed on the payer’s checking account in the amount of the eCheck. This ensures the funds necessary to cover the transaction remain in the checking account until settlement.

Of course, there are odd situations in which an eCheck may bounce, but there are guardrails put in place to ensure they do not, which is a major improvement from traditional check processing.

Do ACH and EFT Fall Under Electronic Check Processing?

An electronic funds transfer (EFT) is the process of electronically moving funds from one bank to another. The transfer can happen entirely online without the need for paper money. EFT is a broad term. Under this umbrella are many different types of electronic funds transfers, including ACH payments and eCheck payments.

So, no, ACH and EFT do not fall under electronic check processing. It’s more accurate to say that ACH payments and eCheck payments fall under the category of electronic funds transfers.

eCheck vs Credit Card Payments: What’s the Difference?

As mentioned above, eCheck processing rates are often much more cost-effective than credit card processing rates. Credit card transactions are processed through card networks, whereas eChecks are processed through the ACH Network. Credit card networks charge an assortment of assessment fees for the use of their networks that the ACH Network does not charge.

How are eChecks and Paper Checks Different?

Well, paper checks are paper and electronic checks are digital. That’s the most obvious difference between the two, as they both contain the same information in a different format.

Electronic checks offer substantial benefits that paper checks do not. The instant verification of eCheck credentials circumvents much of the bank fraud and returned checks to which paper checks more easily fall prey. Not only the more secure option, electronic checks also process faster than paper checks. The advanced security and speed of electronic check processing make electronic checks a substantially better option for business owners.

How to Get an eCheck Payment Processing Account Instantly

Electronic checks may not be an ‘80s rock band but, to paraphrase Kanye West, they’re better, faster, and stronger than paper checks, and most other available payment methods for that matter.

Accessible, secure, fast, and cost-effective, electronic check processing is a fantastic payment method to offer your customers. In order to process electronic check payments, you don’t need a merchant account. Simply partner with an electronic check payment processor to begin accepting eCheck payments today.

Article Sources

  1. Gov Info. “Public Law 108–100—Oct. 28, 2003”. Accessed May 6, 2022.


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