What Are E-Checks and How Do They Work?

Dimitri Raziev14 Nov 202212 mins
What Are E-Checks and How Do They Work?

Key Points

An e-check is a type of online payment that practically serves the same function as a paper-based check.

As the business world becomes increasingly digitalised, the widespread adoption of e-checks was observed as fewer customers were writing checks for their daily purchases in favour of e-checks, which can be processed within a shorter amount of time and is a much more cost-efficient approach.

Not to mention, e-checks are deemed to be safer than paper-based checks because they employ features such as encryption and authentication.

E-checks utilised the automated clearing house (ACH) network during their payment processing step to direct debit from the payer’s bank account into the intended recipient’s bank account.

E-checks differ from credit cards in terms of their processing method, whereby e-check processing utilises the ACH network, whilst credit card processing employs the card networks. Thus, the processing fee for e-checks tends to be cheaper in comparison to credit cards.

Even though e-check payments are generally compatible with any business, this method of payment is typically very appropriate for companies employing a subscription-based revenue model, online businesses, as well as firms that frequently manage large payment volumes.

Thanks to the Check Clearing for the 21st Century Act in 2003, more popularly known as “Check 21”, the massive digitalisation of payments took the business world by storm. In essence, this new federal law legalised electronic check processing and laid the regulatory foundation to transform the entire transaction process into a much faster, more convenient, and more secure practice for all affected parties.

Since this new regulation’s passing, paper-based checks drastically declined as financial technology innovators began to invent internet-based processes to dematerialise the entire payment process.

With that, Kolleno is a smart credit control platform at the forefront of the financial technology revolution as it offers several sophisticated collections and payment software solutions for a wide range of industry partners, such as construction, health care, law, and many more!

What Is An E-Check?

Put, an e-check, also known as an electronic check, is a variant of electronic fund transfer (EFT) that processes payments made by customers to be deposited into their intended payee’s bank account via the automated clearing house (ACH) network, an electronic network that links the financial institutions in the United States together. As a result, the e-check technology, as a whole, was created to effectively replace all forms of traditional paper-based checks that were previously utilised during the payment processing and settlement procedure.

In other words, one could essentially describe e-checks to be the digital version of a paper-based check, whereby e-checks distil all the information that is required for a regular check transaction into a digital format. This, in turn, enables the data to be transferred across the globe electronically through the facilitation of the ACH network.

Meanwhile, the payment process is kept secured by the necessity of the payer to authenticate the transaction either by accepting the terms and conditions to execute the transaction over the internet or a recorded voice message or through signing a contract in person.

How Do E-Checks Relate to ACH And EFT?

Electronic funds transfer (EFT) is a broad term encompassing a wide range of payment processing methods such as direct deposits, wire transfers, ACH disbursements, and electronic benefits payments.

The main connection between e-checks, the ACH network, and EFT can fundamentally be explained by e-checks being a type of EFT that utilises the ACH network during their payment processing step. To elaborate, when a customer makes a payment via an e-check, the funds will be electronically withdrawn from their bank account and transferred to the recipient’s financial institution through the ACH network, followed by the electronic deposition into the company’s checking account.

The Difference Between E-Checks and Credit Card Payments

The functional variations between e-checks and credit card-based payments are practically negligible if one were to investigate them from a high-level point-of-view, as they are both payment methods that individuals and firms use to pay for the products and/or services that they have purchased. However, a noteworthy difference between these two approaches will begin to surface as we dive deeper into the specific mechanisms utilised by e-checks and credit cards to process the payment.

As mentioned previously, e-checks are much more reliant on the ACH network for the payment processing step, which is a network that is significantly more widespread compared to the credit card network. Therefore, the cost incurred for processing e-checks could be as low as ten cents per transaction. Consequently, this phenomenon suggests that corporations processing a high volume of payments every year would greatly benefit from the cost savings of e-check payments.

On the contrary, credit card payments maintain their unique payment processing infrastructure as there is a separate and exclusive network amongst credit card companies to capture transactions initiated by their user base. As a result, heavy credit card users tend to incur a substantially higher transaction fee as opposed to those who are more active users of e-checks.

How Do E-Checks Work?

If one attempts to summarise the entire process into a few steps, the process usually begins with the company needing to gather the customer’s information. This includes their checking account numbers and bank routing details in order to accept their e-check payment. Firms should usually be able to obtain these records by either contacting the client online, collecting the information in person using a paper-based survey or by making a phone call to them directly. Though, in the majority of cases today, businesses would usually submit an electronic form to the customers, who can then securely provide their data. Moving forward, the company’s bank will use this piece of information to interact directly with the client’s bank for verification purposes before initiating the direct debiting of the customer’s checking account.

Once that is completed, an online programme will deliver a receipt to the client to confirm the successful payment. In most situations, this entire process will take three to five business days once the ACH transfer has been initiated.

Typical Duration Required to Process An E-Check

The overall time taken to process an e-check is largely dependent and can be approximated by the number of financial institutions that are involved in the transaction procedure. Such entities would include the paying customer’s bank, the ACH network, the payment processor involved, along with the recipient company’s bank. As a result, the transaction will have to go through several payment channels before it can be cleared, and the time taken to clear each channel will impact the total duration of the payment processing.

Nevertheless, the average timespan for an e-check to clear the bank would range between three and five business days. In other words, this means that the e-check transaction will take around three to five working days to be transferred via the ACH network once it has been kickstarted and authorised by the payer. Regardless, the timeline for the payment settlement might vary slightly from the speed at which the recipient firm will obtain the e-check payment.

In the best-case scenario, the company could receive the money deposited to their bank account by the next business day. This thereby means that there is a high probability that the banking institution or e-check processor has fronted their own capital to your checking account, and they would be reimbursed upon the clearance of the e-check payment.

Common Types of Businesses That Utilise E-Check Payments

In a nutshell, payments via e-checks allow a company to maintain regular payments as long as the client’s bank account details do not change for an extended period of time. This, thereby, drastically lowers the chances of encountering a payment failure compared to credit card payments, whose account numbers may vary much more often.

Having mentioned that, some types of business models that benefit the most from e-check payments would include: 

Businesses With a Subscription-Based Revenue Model

Given the recurring nature of subscription-based monetisation models, e-checks would consequently simplify the entire payment process as it allows for the automatic payment directly from the payer’s bank account upon the customer’s renewal of the business’s subscription service. As a result, e-checks can remove a lot of headaches associated with ensuring punctual payment among customers.

Businesses That Manage High Volumes of Payments

Considering that the ACH network is responsible for the transfer of capital, they, in turn, would eliminate the need for an intermediary to manage the credit card processing step. Consequently, the high interchange fees associated with credit card payments will be circumvented by companies that operate using e-check payment methods, saving them a large sum of money in the long run. This is often beneficial for firms that either make or receive large sums of payments, such as those involving mortgages, rent payments, or insurance premiums.

E-Commerce Businesses

As payments are increasingly becoming a digitalised procedure, e-checks would be considered one of the most efficient and affordable methods of payment out there for merchants specialising in online commerce business models.

Having mentioned that, Kolleno is a smart credit control platform offering an accounting software solution that is applicable to a wide range of industry verticals, ranging from health care to architecture. Thus, if you are a company owner hoping to simplify your internal payment management process, contact Kolleno today to arrange for a detailed product demonstration.

The Benefits of Using E-Checks

Besides the companies being able to incur a much more budget-friendly payment-related processing fee and enjoy a faster processing speed compared to paper-based checks, there are a number of additional advantages of employing e-checks, including:

Increased Security

Given the authentication and additional consumer protection steps, such as ensuring that the payer verifies and officially consents to the direct debit to their checking account, e-checks are thereby an inherently safer payment approach compared to paper-based checks.

Other than that, e-checks help to eliminate fraudulent payments by requiring a timestamped digital signature. In addition, the technology infrastructure for e-check processing is also designed to detect duplicate e-check transactions and other suspicious activities. Moreover, the encryption technology, certificate authorities, and public key cryptography functions safeguard the movement of sensitive data within the ACH network.

Not to mention, e-checks are intangible items, so it would be impossible for customers or recipients to misplace them. Plus, many computer network solutions specialise in tracking such payments to prevent losses caused by missing e-check data.

The Ability to Automate Payments

One of the most notable perks of e-check payments would be its opportunity to automate the entire process. This is especially helpful if the customer needs to make regular transactions, such as monthly insurance premiums or rent payments. 

An Environmentally-Friendly Payment Option

As our society gets progressively environmentally conscious, particularly as more and more people are becoming aware of the threats of climate change, converting from paper-based checks to e-checks is an excellent strategy to lower greenhouse gas emissions and the amount of fuel associated with the transport of paper checks.

What Do Businesses Need to Do in Order to Start Accepting E-Checks?

Suppose a company intends to start accepting e-check payments. In that case, it will need to collaborate with a payment gateway or a payment processor as well as a banking institution that can facilitate this form of transaction. In terms of the required software and hardware, this will largely depend on how the e-check will be processed and accepted by the firm.

For instance, should a corporation want to accept payments via e-checks at the point of sale, a check scanner will be a piece of the necessary equipment to facilitate the process. In the meantime, if the merchant hopes to accept e-checks submitted online, payment processing software would be required for them to start accepting such e-checks.

How Can Businesses Cancel An E-Check?

In general, an e-check can be cancelled at any point until the transaction settlement stage, which this phase is often marked by the arrival of the money to the checking account. In certain cases, the recipient might obtain the money transferred by an e-check as early as the next business day if the financial institution had fronted the money before the settlement. As a result, the company may cancel an e-check even after the payment has been sent to its bank account. Nonetheless, if the payment has officially been cleared, the business will not be allowed to cancel the e-check payment and will need to submit a refund to the customer.

Concluding Thoughts

At this point, it comes as no surprise that the invention of e-checks has helped companies to streamline the entire payment settlement process for all parties involved, where clients can now make their payments effortlessly, whilst firms would be able to receive their funds sooner as much of the authorisation step has been automated.

On top of its environmentally friendly and time-saving applications, e-check payment processing brings a myriad of benefits to both the paying customer and the merchant. With that, introducing e-checks as an accepted payment option for the company’s offerings will provide a secure and simplified way for payers to complete transactions. Furthermore, this creates an opportunity for the company to demonstrate their sustainable business practices, which helps to minimise wastage and time costs. Thus, moving forward, it is vital for companies to select a reliable payment processor to support one of the world’s most widely adopted payment methods today if they intend to remain in business for the long term.

Suppose you are a business owner looking to modernise your credit control and fuel your growth. In that case, Kolleno will serve as a perfect solution to address your needs, as this smart credit control platform unifies the payment collections, accounting, and communications tools into a single platform to streamline your efforts.

Frequently Asked Questions (FAQs)

What Is An E-Check?

Also known as an electronic check, an e-check can be described as the electronic version of a paper-based check. Essentially, customers paying with an e-check will have their money being electronically debited from their account and transferred through the automated clearing house (ACH) account to be deposited directly into their intended recipient’s bank account.

Is E-Check the Same As ACH?

The key distinction between e-checks and an ACH-based payment would be based on their categorisation. Put simply, an e-check can be considered a type of ACH payment as it is viewed as a direct deposit, whereas ACH payments cover many variants of electronic payment approaches. As a result, one could effectively say that all e-checks are a type of ACH payment, but not all ACH payments are e-check payments.

Is E-Check a Wire Transfer?

Just like an ACH transfer, e-check payments would be considered to be a type of electronic funds transfer (EFT), which is a generic term that encompasses a wide variety of payment methods, including wire transfers and payments made via the PayPal network. Nevertheless, e-checks are not the same as a wire transfer because they both use different types of payment service processors.