Fintech Insights

11 questions answered about eCheck payments

Worldpay Editorial Team

July 08, 2019

For small business owners, the bottom line is always top of mind. And one way to keep money flowing in is to accept the payment types that are convenient for both businesses and their customers. eCheck is one.

1. What is an eCheck?

eCheck is a digital version of a paper check, also known as an electronic check, online check, internet check and direct debit. eChecks use the Automated Clearing House (ACH) to direct debit from a customer’s checking account into a merchant’s business bank account with the help of a payment processor. eChecks are transmitted electronically, making transactions quicker, safer and easier.

2. How do electronic checks differ from paper checks?

While electronic checks are digital, paper checks are, of course, paper – and likely to become obsolete in the future. Fewer consumers are writing checks for everyday purchases or home expenses, preferring the convenience of digital payment types including eChecks.

Additionally, more purchases are made online, inspiring new digital forms of payments that occur invisibly, effortlessly and quickly. Online retail sales in the US were up 15% to $517 billion in 2018 and is expected to continue to gain a larger share of overall commerce.

eChecks also take less time to process than paper checks. There are a few reasons why: 1) the time and manual effort it takes to deposit paper checks at a bank; 2) paper checks require longer processing and hold times than eChecks; 3) eChecks occur digitally, which speeds up the process.

3. What’s the difference between eChecks and credit card payments?

eCheck payment processing works a bit differently than credit card processing. The biggest difference is that eCheck uses ACH to transfer funds instead of the card networks, so processing fees are lower. There are no credit card interchange fees for eCheck acceptance, and fees can be as low as 10 cents per transaction. This can make a big difference to businesses that accept large or recurring payments.

4. What’s the difference between ACH and eChecks?

ACH (Automated Clearing House) and eCheck are very similar methods of payment, transferring funds from one bank account to another. In fact, eChecks process payments using the older, established ACH Network. The key difference between the two is who holds the payment information. Using ACH to manage recurring bills or receive direct deposits from an employer, for example, these transfers require enrollment with a user’s account and routing number. The more recent eCheck technology, however, acts as a one-time transfer from one bank account to another.

5. How do eChecks compare to EFT and wire transfer?

EFT stands for electronic funds transfer. It’s an overarching term that covers several types of electronic payments including eCheck, ACH transfer, wire transfer, PayPal payments, direct deposit, SEPA payments, local bank transfers and eWallets. Basically, transactions like eChecks and ACH are types of EFT, but not all EFT transactions are eChecks and ACH.

Wire transfers move money from one bank account to another. Unlike ACH transfers, which take place in batches, wire transfers happen manually, one transaction at a time. Because of this, wire transfers cost more than ACH. Another distinct difference is that, unlike ACH, wire transfers cannot be reversed once initiated and are thus considered less secure than ACH.

6. How does eCheck processing work?

In order to accept eCheck payments, a business must first obtain the customer’s information including their bank routing and checking account numbers. This information can be obtained online, by phone or in person via a paper form. Most businesses today have websites and can provide a secure form page for this customer information.

Using this information, the merchant’s bank can communicate directly with a customer’s bank. Once the funds are verified, the direct debit happens via ACH.

A lot of money is passed through ACH annually. To illustrate the volume, consider that in Q1 2019, ACH Network volume grew 5.8% over Q1 2018.

Following are the parties involved in ACH electronic check payment processing:

  1. An originator: The merchant cashing the eCheck. The originator initiates the direct deposit process by obtaining the necessary information from the customer (see above).
  2. The business bank: The orginator’s bank, also called the Originating Depository Financial institution (ODFI). The business bank places the ACH entry at the originator’s behest, aggregates payments from a variety of customers and sends the payments in batches to an ACH operator.
  3. An ACH operator: The ACH operator sorts the fund request and settles the funds into the business bank.
  4. The customer’s bank: A Receiving Depository Financial Institution (RDFI) receives the request, verifies that the funds are available, debits the customer’s account and credits the business account.

While ACH funds have taken a few days to post in the past, the National Automated Clearinghouse Association (Nacha), which oversees ACH, has enabled new capability that now makes same-day funding possible.

7. Can electronic check acceptance help a business increase revenue?

Yes. eCheck payments help businesses keep payments coming in because checking account numbers rarely change as often as credit card numbers, so there’s less likelihood for payment breakage.

While eCheck acceptance can be good for any type of business, the payment type is especially well suited to the following:

  • Subscription-based businesses
  • From music to memberships to magazine subscriptions, eChecks make recurring payments, autopay and auto-renewal easy and convenient for businesses and their customers. Any business with a subscription-based model, whether an online tea-of-the-month club or a health club with monthly fees, would do well to consider electronic check payments.

  • Online businesses
  • A business can sell a customer on their product once and continue to collect monthly, sometimes for years. It’s the most efficient sales model out there, and it’s been exploding online over the past few years.

  • Businesses that accept large payments
  • With ACH moving the funds for eChecks, banks talk directly to other banks. By eliminating the middlemen involved in processing credit card payments, businesses save money by avoiding interchange fees. If your business regularly processes payments in the hundreds or thousands of dollars, you can potentially save a significant amount of money by accepting electronic check payments.

8. What kind of security is used with eCheck payments?

Electronic checks are inherently more secure than paper checks. They are also subject to additional consumer protections with Regulation E.

Following are five major security components for eCheck transactions:

  1. Authentication: This is the process whereby the payments provider verifies the individual submitting the account information. Authentication ensures that fraudulent payment information is not submitted to the merchant.
  2. Encryption: This is the process of “masking” sensitive data, rendering it non-sensitive – and thus useless – if it’s stolen. Encryption is required for all ACH transactions including eChecks that occur over unsecured electronic networks.
  3. Public key cryptography: This is part of the encryption process and is used in ciphering the data to protect it in transit.
  4. Digital signature: A digital signature with time stamps is an encryption process used to ensure that eCheck transactions cannot be fraudulently duplicated.
  5. Certificate Authorities: Certificate Authorities issue digital certificates like the SSL Certificate to protect information, encrypt transactions and enable secure communication.
  6. Duplicate detection: This is a fraud detection strategy that monitors for duplicate eCheck transactions and suspicious activity.

9. How do you send an eCheck to someone?

An eCheck service is first needed for a business to send eChecks. A business may want to consider payment processing solutions that will support their business type with desired scalability and speed of processing. Verified security should also be a high priority.

Once the account has been setup and connected to a bank account, sending an eCheck is simple: enter the recipient’s name, email, the payment amount along with a description. Confirmation notifications and online eCheck books can also be helpful tools for managing eCheck payments.

10. How do I accept an electronic check payment?

In order to accept eChecks, a business must work with a payment processor or payments gateway and a financial institution that can facilitate this type of transaction. The type of hardware and software needed depends on the way electronic checks will be accepted.

For example, if a merchant wants to accept eChecks at the point of sale, they will need a check scanner. If they want to accept eChecks online, they will need payments software equipped to accept this payment type.

11. Is it time to integrate eChecks into your business payment options?

The more payment options a customer has, the more likely they are to spend their money and return to the business. By accepting eChecks, a business naturally expands its revenue potential.

To find out more about electronic check payment processing, talk with your bank and your payment processor. They can help you decide if it’s the right time to incorporate eChecks into your mix of payments and how to maximize this payment type.