Electronic Checks for Businesses: Definition, Benefits, and Implementation

The 2021 Q2 volume of eCheck payments reached a 7.3 billion count with a value of $18.4 trillion. That’s an increase of about 25% compared to last year. Such rapid growth makes more and more company owners consider offering this payment method to their clients. But what exactly is an eCheck, and how does it work? Read ahead to find out how such payments function and whether your business can benefit from them.

What Is an eCheck?

An eCheck, also known as an electronic check, ACH transfer, or direct debit, is a digital version of a paper check.

eCheck payments are equivalent to traditional paper checks in the majority of ways but are transmitted electronically, which makes them an easier, faster, and safer payment method.

What Is the Difference Between ACH, EFT, and eChecks?

EFT is the abbreviation for “Electronic Funds Transfer”. The EFT term covers many types of transactions, such as:

• Wire transfers
• Direct deposits
• ACH disbursements

ACH means “Automated Clearing House” and is the digital system utilized by banks and financial institutions in the US to provide infrastructure for entities that process payments.

Essentially, eChecks are an EFT type that implements the ACH network to process financial transactions.

How Did the ACH Payment System Begin Dealing with Checks?

The ACH payment network was introduced in the late 1960s as a response to the increasing use of paper checks. At that time, payment industry players were overwhelmed with concerns about the capacity of the existing technology. Their main question was: “How to efficiently manage the growing volume of financial operations involving paper checks?”

The ACH enabled merchants to accept paper checks by utilizing the routing and account numbers linked to the payer’s bank account alongside the authorization from the client. Due to this, merchants gained the ability to withdraw money directly from the payers’ bank accounts immediately upon receiving their paper checks.

In the 1990s, the ACH network was further adapted to handle not only paper checks but also eChecks by integrating with evolving digital payment technologies.

How to Use an eCheck

Electronic check payments utilize ACH to perform a direct debit from a payer’s checking account to a business’s bank with the help of a payments processor.

Before we start explaining how to initiate a digital check payment, it is worth mentioning that such a transaction requires customer authorization, which can be done in more than one way, namely:

• Signing a contract
• Accepting a website’s Terms and Conditions
• Giving verbal consent via a recorded call

A business, on the other hand, needs to have a merchant account to be able to accept such digital payments for their goods and services.

How to Make an eCheck Payment: Data Required

To conduct an electronic check payment, the consumer has to provide the same data as they would on a paper check, namely:

• Full name
• Payment amount
• Checking account data
• Bank routing number

As a merchant, you will need to include the following details about your business to accept eChecks:

• Company name, address, and years in business
• Bank account details
• Federal Tax ID
• Transaction processing volumes

Parties Involved in the eCheck Payment Process

There are four main parties involved in the payment processing of eChecks:

• Originator. It is the business that initiates the direct deposit process.
• Originator’s bank. The payee’s bank, also known as the Originating Depository Financial Institution (ODFI). It aggregates payments and sends them in batches to an ACH operator.
• ACH operator. This party processes the fund requests and settles the funds into the originator’s bank.
• Client’s bank. The customer’s bank or the Receiving Depository Financial Institution (RDFI) receives the request, verifies the availability of funds, debits the client’s bank account, and credits the payee’s account.

eCheck Processing Steps

Electronic check processing consists of the following steps:

1. Authorization request. First, you will need to receive authorization from your customer.
2. Payment set-up. When the authorization is complete, you should fill up the required details in the online payment processing software. In the case of recurring money transfers, you also have to input the payments schedule.
3. Transfer confirmation. For an automatic withdrawal of funds from the client’s account, all you have to do is submit the details to the ACH network. But how long do eChecks take to process? The money is likely to reach the payee’s account in about three to five days from the moment the transmission of funds is confirmed.

If the money fails to reach the account within the expected timeline, it is advisable to contact the payment processor or financial institution to inquire about the payment status and investigate any potential issues.

Main Security Components of Electronic Check Payments

Electronic checks are significantly more secure than paper ones. Here are the core security steps a digital check payment goes through:

1. Authentication - the payments provider verifies the client’s input of the account data, so that wrong or fraudulent information doesn’t get sent to the originator.
2. Encryption - the digital payment network encodes sensitive information to prevent unauthorized use. Public key cryptography is one of the techniques utilized to cipher the data and protect it in transit. Digital signatures with time stamps also help ensure that electronic check fund transfers are not duplicated. Besides, the SSL Certificate safeguards the information, encrypts transactions, and enables secure communication.
3. Duplicate detection - this fraud detection strategy monitors and identifies repeated identical electronic check payments and flags them as suspicious activity.

Which Companies Can Benefit from eChecks?

Now that we have thoroughly answered the question “What’s a digital check?” you may be uncertain whether your company will benefit from this payment method. eCheck payments are advantageous for a variety of business types, such as:

• Online merchants. eCommerce businesses offering their clients an opportunity to use eChecks have a chance of increasing their profits and upgrading customer experiences, as it is a payment method that many clients prefer.
• Organizations processing large payments. Transfers using online checks eliminate middlemen, such as those involved in credit card payment processing. For businesses that have a large turnover, this means no interchange fees involved.
• Subscription-based businesses. If you offer goods or services that require recurring billing, a paper check alternative might be even more effective than credit cards. Digital checks make auto-pay and auto-renewal functions easy to implement. Besides, checking accounts rarely change, so the payment flow is likely to be uninterrupted in the long term.

If your company belongs to at least one of these categories, it is worth looking into the possibility of integrating eCheck payments.

The Future of Electronic Check Technology

Checks have gone a long way, evolving from paper to digital format, but there is still considerable potential for their further innovation. Here are some current trends and developments that are set to shape the future of electronic checks:

• Artificial Intelligence (AI) and Machine Learning (ML) technologies are being actively integrated into electronic check payment systems to help identify and prevent online fraud.
• Biometric authentication is a highly secure and user-friendly method that can be implemented for authorizing electronic check operations. Nowadays, many digital check platforms use fingerprint or facial recognition to protect sensitive consumer information and their funds.
• Blockchain and Distributed Ledger Technology (DLT) are expected to enhance electronic check payments, ensuring safer and faster transaction recording in real time. The immutability of blockchain can also be helpful in upgrading payment tracking and auditing.
• Mobile wallet integrations with eChecks enable individuals to transfer funds more effortlessly than ever before. They also eliminate the need for paper checks, boosting the convenience and speed of the payment process.
• The Internet of Things (IoT) can potentially revolutionize the digital check payment process. In the foreseeable future, it is forecast to empower smart devices like wearable gadgets and connected vehicles to seamlessly engage with digital check payment networks.

As you can see, the rapid technological progress paired with the benefits of eChecks is driving a significant transformation in the digital payment world. This tendency makes eChecks an increasingly important financial instrument that should not be disregarded by merchants striving to attract customers and up their sales.