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What Are E-checks? How E-checks Work

Graphic of a computer and a check with title "What are echecks"

In 2003, money went digital in a major way, thanks to the Check Clearing for the 21st Century Act, also known as “Check 21.” This federal law laid the regulatory foundation for electronic check processing, making it not only legal, but quick, secure, and convenient for all parties involved in a transaction. Since then, financial technology innovators have effectively dematerialized the paper check and taken it to the internet.

What is an e-check? 

An e-check, also known as electronic check, are electronic payments made from your checking account. An e-check works quite a bit like a regular check, but instead of tearing a piece of paper out of your checkbook, you provide payment information (like your bank account, routing number, and payment authorization) through an e-check authorization form. This prepares your payment to be processed electronically.

How are e-checks processed?

Electronic checks are processed via the ACH (Automated Clearing House) network, which is a central piece of digital payment infrastructure for US financial institutions. You might imagine ACH as a figurative highway for moving money electronically, and e-checks are just one type of car traveling on that highway.

E-checks reach their destinations more quickly than traditional paper checks do, as paper checks require additional logistical overhead in order to successfully complete a payment. The recipient’s bank must first verify the check, then send it to the originating bank involved for the same verification. This can take some time in order to execute.

E-check processing happens much more quickly, but it still relies upon the same information in order to work. The person initiating an electronic check payment needs to provide their bank routing number, account number, email address, and their authorization.

Here’s an example of how a merchant can collect payment via e-check.

1. The customer authorizes a transaction

When a customer initiates an e-check to pay for goods or services, they are authorizing an electronic money transfer between their bank account and the merchant’s bank account. Merchants can get this authorization in a few different ways. They can include a signed contract, an authorization form, or an order form, among other mechanisms. The bottom line is that the merchant receives some confirmation indicating that the customer is expecting to part with their money.

2. The merchant captures the necessary payment details

With this authorization in hand, the merchant then needs all the requisite information to execute the payment. This includes the customer’s bank account number and routing number. If it’s a recurring payment, the merchant will collect all the details pertaining to the payment schedule.

3. The payment processor verifies credentials

The transaction has to pass validation with the merchant’s payment processor. Does the name of the customer match the name of the account they’re paying from, for example? Is there enough money in the account to cover this payment? The payment processor runs some basic checks to make sure the transaction looks legitimate, then the transaction can be executed.

Merchants that use a point-of-sale system may be able to automatically capture whatever information a customer enters online or in an app, then send it to the merchant’s virtual e-check terminal. This saves the trouble and headache of having to enter those details twice. If you have this kind of integration, it means your electronic check payment processor can instantly verify the credentials and begin processing immediately after customer authorization.

4. The funds appear in the merchant’s account

E-check funds move through the ACH network, from the customer’s account to the business’s account. While all e-checks are processed on the ACH network, it’s important to note that not all ACH payments are e-checks—there are different fees and processing channels depending on how you use the ACH.

The ACH network processes payments in batches, so this is not an instantaneous process. It generally takes two to three business days for funds to appear in the destination account.

What’s the difference between e-checks and credit cards?

At the surface level, there is no functional difference between these payment methods. They are all valid mechanisms that people use to pay for goods and services. The real difference here is in the way these payments are processed.

Credit card companies maintain their own payment infrastructure. These are private networks for capturing transactions made by all users of a given credit card. Because of this exclusivity, there are often higher fees associated with using them.

On the other hand, e-checks rely on the much more widely used ACH network, so the processing fees there are generally lower. E-checks don’t ever incur credit card interchange fees, and the cost for using them can be as low as 10¢ per transaction. For businesses that do hundreds of thousands of transactions a year, that can translate into major savings.

The advantages of using e-checks

To give an analogy, e-checks are to paper checks as email is to postal mail. E-checks distill all the data necessary for a conventional check transaction into digital information that can move around the world electronically.

There are three main reasons business owners take advantage of e-checks: they’re faster, they’re impossible to lose, and they’re highly secure. 

    1. E-checks are fast

Paper checks can take a week or more to clear before the money successfully moves from one account to another. Banks have to confirm a paper check deposit by getting in touch with the bank the check originated from and confirming all the requisite details pertaining to that payment. That can be a time-consuming process. While those wheels of financial bureaucracy spin, merchants are simply waiting to collect their income.

But e-checks represent a kind of digital “upgrade” for old-fashioned paper checks. While they may still take two or three business days to finalize, they take no longer than that (and they can sometimes even execute much faster). This means processing time and administrative costs are reduced, and businesses get to receive their money sooner.

    1. You can’t lose or misplace an e-check

How many times have you misplaced your keys, your wallet, and so on? It’s not hard to imagine losing a paper check. If it happens, your only recourse is to get a fresh new check from whoever wrote the first one. You furthermore stand the chance of a malicious third party finding the original check, setting the stage for fraud if that check goes uncancelled.

E-checks are intangible, so you can’t really ever lose them. In fact, you have lots of help from the computer networks that excel at keeping track of them.

Remember the analogy: e-checks are like email for checks!

    1. E-checks are highly secure

E-checks are inherently more secure than paper checks and come with extra consumer protections to guard against fraud. There are five main points of security that go into making e-checks the robust and reliable payment technology they are:

  • Authentication: This is the first step in the e-check payment process, and it’s about making sure the customer “consents” to parting with their money. This authentication is achieved by verifying the account information of the person submitting the payment. Authentication is about ensuring no fraudulent payment information is submitted or processed.
  • Digital signature: A timestamped digital signature helps guard against fraud.
  • Duplicate detection: This is about preventing fraud, specifically looking for duplicate e-check transactions or other suspicious activity.
  • Encryption: This is the established cybersecurity practice of concealing sensitive data so it can move safely through a digital network. If a malicious third party should intercept this data, it would be useless to them because they don’t hold the private keys that decrypt the information. Every single transaction on the ACH network is encrypted, including e-checks.
  • Certificate authorities: A certificate authority is an entity that stores, signs, and issues digital certificates, like the widely used SSL certificate, to certify the ownership of the public key that goes into encrypting data.

E-checks bring the paper check into the 21st century. Where paper check deposits call for a lengthy back-and-forth process of verification and authentication, the e-check paradigm greatly streamlines this for all parties involved. Customers can pay more easily, businesses receive their money more quickly, and much of the bank authentication is automated.

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