The Complete eCheck Payment Guide

These days, electronic payments continue to gain prominence. Two of the most oft-mentioned types of electronic payments are ACH and echecks. If you do an internet search and read through some of the articles, you’ll see that there seems to be confusion about the difference between the two, and some even suggest that there’s no difference at all.

This isn’t true.

ACH and echecks are two different things, and we explain the difference in a series of articles. This current article deals with echecks — what they are, how they work, whether they are safe to use, and so forth. We’ll also delve into why you might consider accepting echecks at your business as well as provide some directions on how to get started.

At the end of the day, and while paper checks are slowly becoming obsolete, echecks continue to be a viable and important form of payment for many merchants. eCheck payments offer several distinct advantages over not just traditional paper check payments but also credit/debit card payments. In fact, many businesses can’t really afford not to offer echeck payment acceptance as an option.

Read on to find out all about echecks.

What Is An eCheck?

An echeck is — exactly as the name suggests — the electronic form of an actual paper check. It works as and follows the same process flow as paper checks, a process that has been in place for hundreds of years.

Back when only paper checks were available, whenever someone wrote a check, they were telling their bank to pay the amount of money on the check to the person named on that paper check. That person could go to the check writer’s bank and ask for a payout, or the person could ask their bank to go to the payor’s bank, get the money, and put the money in the recipient’s bank account. Sometime later, banks in the same city decided to meet at the same place at the end of each day and exchanged checks and money all at the same time for efficiency.

More time passed, and the concept of a “central bank” came into being. Instead of meeting at the end of the day to exchange paper and money, the banks merely send their paper checks to the central bank. The central bank sorts the checks and (1) credits/debits the banks’ accounts accordingly, and (2) sends the paper checks to the check writer’s bank for final verification that the check is not fraudulent and that there’s enough money in the account. If the check writer’s bank doesn’t accept the check (e.g., finds insufficient funds, finds fraud, the signature doesn’t match, etc.), the check officially bounces. At that point, the person to whom the check was written (and had for many days/weeks thought the money in their bank account was fine to use) will have to disgorge the money.

This is the process followed by paper checks, and it’s still the process followed by echecks. The only difference is that paper checks no longer have to be physically transported. Instead, the merchant or the bank that takes the deposit can transform the check into electronic form and send it that way. In fact, echecks never have to be in paper format in the first place — the writer of the check could “write” an echeck using special software and send it to a merchant, who then deposits the echeck with the bank, all in electronic format.

ACH, which is often confused with echecks, can actually be a part of the echeck process. ACH is specific to the US and is the most popular way banks transfer money to each other via the US Federal Reserve. So, for convenience, that last part of the echeck process where the banks transfer money to each other to square the funds, an ACH transfer is often used. eChecks, though, are still checks and are governed by a different set of laws. To confuse things even further, echecks can be changed into an ACH payment by the merchant before the check is deposited with the bank as long as proper notice is given to the consumer. This is why the two are often confused with each other. But make no mistake, they’re separate payment instruments under the law.

You’ll also sometimes hear echecks be associated with the term Check 21. Check 21 is the nickname for the Check Clearing for the 21st Century Act, a US law passed in 2004. Before this, some banks already settled checks directly between them (bypassing the Federal Reserve’s check clearing services), and they did this electronically, but this was by private agreement. The Check 21 law made this uniform nationwide in the US, so all paper checks can now be turned into electronic form, in a uniform format. That’s the big takeaway of the Check 21 law. In many ways, echecks and Check 21 describe the same thing, but echecks refer to the item itself while Check 21 refers to the law that allowed paper checks to be turned into echecks. And while the Check 21 Act regulates many aspects of echecks, echecks are governed by all the other laws that regulate paper checks too.

So this is what an echeck is. Note that the credit card networks are absent in this process, so they don’t get a cut if you send/receive an echeck.

How Do eChecks Work?

From a consumer’s standpoint, echecks work like regular checks. Sometimes, a bank’s “bill pay” feature will pay out via an echeck (and other times via an ACH payment), but the consumer typically has no control over that. A consumer can also go on a merchant’s website (or call the merchant) to give bank routing information and authorization, and an echeck can be made out that way.

From a merchant’s standpoint, your customer can sometimes use the bill pay feature at their bank to send an echeck to you, but they’ll need your bank’s routing number and your account number. You can also subscribe to an echeck service (typically through a payment processor, and you must have a gateway) to have a dedicated and secure webpage for a consumer to type in their bank routing number and account number. Some merchants scan a paper check received through the mail to transform it into an echeck before depositing the check, either by special scanners or through smartphone mobile deposit. If you send electronic invoices, you can insert a link from the invoice to your dedicated secure echeck page. Lastly, you can take echecks through the phone or mail order, verbally getting the customer’s banking information and voice authorization and typing this information into your virtual terminal.

eChecks work like any money transfer where you can pay once or pay on a recurring basis.

Are eChecks Safe?

From a data security standpoint, echecks are sent through secure channels with encryption, so they should be safe from hacking. However, just like paper checks, echecks can bounce and be subject to check fraud, and, like regular checks, the risk of loss is entirely on the merchant. In that sense, echecks are as safe/unsafe as paper checks.

eChecks are subject to a shorter “float.” That is to say, when you write a traditional paper check, that check is typically physically mailed to the recipient before being physically deposited at the recipient’s bank. Then the bank has to physically transport these checks to the central bank and/or to each other. All this transportation takes time, so people who write paper checks could write a check without enough money in the account to cover the check but then deposit enough money a few days later and before the amount on the check is withdrawn. This is called “float.” With electronic transmission, that old transportation time now takes just seconds, thereby shortening the float, so people might bounce more checks than before.

What if the check wasn’t accidentally bounced, but was deliberately bad? As a merchant, do you have any recourse? Unfortunately, the answer is “very little, and it can take some time and money.” When there’s a bounced check, banks typically wait a little bit and re-present the check to the payor’s bank. If a short float caused the bounce, the issue is resolved. However, if the check maker deliberately wanted to defraud you, other than calling them and trying to talk them into paying you, your only other recourse is to rely on bad check laws to recover your loss. This means you’d have to go to at least the small claims court and work through the formal legal system, which ultimately will cost you a lot more time and money.

Fortunately, extra check verification and/or check guarantee services exist and can be purchased for a fee. These are particularly important if you’re already high-risk and concerned about bounced checks, and especially if you’re only using a simple remote deposit capture feature for your paper checks. Ask your service provider if these features are already included or if they must be added on for a fee.

Why Use eCheck Payment Processing?

eChecks generally cost less to process, and, certainly, that’s one reason to use echeck processing. We’ll cover that in more detail in the section below. eChecks also take less time than paper checks to clear the bank, so your account can be fully funded much faster, yet another reason to accept echecks over paper checks. But one of the biggest reasons to use echecks is to build a credit profile, especially if you have a high-risk business, so you can eventually take ACH and credit cards from your customers.

If you have a high-risk business, you may not qualify for ACH processing initially, let alone credit card processing. Credit card processors don’t often want to work with high-risk businesses because of high chargeback rates, among other things, but that’s true of ACH too. Setting up an ACH processing account requires its own underwriting process with stringent guidelines, similar to merchant accounts for credit card processing. For example, NACHA rules dictate that you must keep your ACH chargeback ratio below 0.5% and your ACH return rate below 15% or else risk account closure.

So with a high-risk business, if you can’t take credit cards or ACH payments, how do you do business online? The solution lies with using echecks in a very strategic way, a way that a high-risk specialist processor can help you set up. When you receive an echeck, the funds are first deposited into an aggregate account held by the echeck processor. An aggregate account is a method of mitigating risk since the large volumes of transactions that are deposited into the account every month help offset any chargebacks or checks showing non-sufficient funds (NSF). Once your funds have cleared, the echeck processor initiates an ACH transfer into your business account. Your primary business operating account is never put in jeopardy of a shutdown since your bank only ever sees perfectly cleared and settled ACH transactions. Using this clean record will make it easier for your business to get a full ACH or credit card processing account.

eCheck VS Credit Card: Comparing Payment Methods

Because echecks bypass the card networks — and use their own systems and abide by their own set of rules — there are several advantages to accepting echecks over credit cards:

• Lower cost to process (can also be lower than debit cards, depending on your pricing model)
• Convert your recurring customers to a less expensive processing method
• Reduce declined recurring payments due to expired card information
• Harder for customers to file chargebacks
• Shorter period for customers to initiate chargebacks
• Increase reach to consumers who can’t or won’t use credit cards
• Offer an additional payment method your competition may not offer

The cost to process echecks depends on several factors but still should cost less than credit card processing in the majority of cases. If you’re using a simple remote deposit capture setup without any conversion to ACH, you may be able to use a check scanner app on your phone or invest in check scanning hardware for higher volumes. These machines can cost several hundred dollars, but some banks may provide the scanner and charge a monthly fee instead. You could also incur a per-check fee.

If you’re converting echecks directly into ACH payments before forwarding it for processing, you may need to be underwritten for an ACH processing account. This is similar to a merchant account for credit card processing, and the underwriting process will determine your rates and fees. Transparent providers often publish standardized ACH rates and fees that most lower-risk merchants will receive.

For echeck payments, here are some common rates you might see:

• Free up to a certain number/amount (for remote deposit capture)
• Free with a credit card processing account
• Flat fee (average $0.20-$1.50 per transaction)
• Percentage fee (average 0.5%-1.5%)
• Flat fee + percentage fee

Note that any of these average figures may run higher for high-risk merchants. For merchants with larger average transaction sizes, a per-transaction fee (not a percentage) is generally the cheaper option. Nevertheless, they tend to be much less expensive than credit card transaction costs.

A common trap for merchants is to focus only on rates while overlooking other important fees. Watch for one or more of the following additional costs:

• Payment gateway fee
• Setup/application fee
• Monthly fee
• Equipment fee
• Monthly minimum fee
• Batch fee
• ACH return fee
• ACH reversal/chargeback fee
• High ticket surcharge
• Expedited processing fee
• Check verification
• Check guarantee
• Refundable deposit (e.g., for high-risk ACH)

Just as with credit card processing, it pays to shop around for the best overall deal. Also, pay close attention to the terms and conditions — including contract length and cancellation penalties — for echeck processing, which may be quite different from card processing.

As to disputes, credit card processing follows dispute procedures outlined by the card processors, but the Check 21 Act governs echeck disputes. Specifically, a consumer generally has 40 days to dispute an echeck, and the bank generally has 10 days to investigate (see 12 USC Sec. 5006). For credit cards, disputes can be initiated up to 180 days after the charge is made, so echeck payments give you more certainty than credit cards.

Does My Business Need eCheck Payment Processing?

Checks might not sound all that modern, but they’re still an important part of the payments world, especially echecks transmitted electronically. Particularly, if your close competitors are offering echeck payments, this might be the rare justification for keeping up with the Joneses. With the high cost of credit card processing for you and the demand for multiple payment options for your customers, echeck payment acceptance could be a good add-on or alternative for your business.

We recommend that those who accept recurring payments or offer subscription products or services take a close look at adding echecks to their arsenal of payment acceptance methods as well as merchants who are already dealing with a lot of paper checks. If you accept paper checks at all, it’s also time to consider some form of remote deposit capture, whether through a mobile phone for small volumes or a countertop device for larger volumes. ACH payments (as distinguished from other electronic check payments that never go through the ACH Network) usually work best for online merchants.

Does your business need echeck processing? Except for high-risk businesses that can’t accept any other payment form, the answer is probably in the nice-to-have category. If your processor offers echeck processing along with ACH processing and both are rolled into one price, then definitely give that option to your customers. But do you need to search high and low for an echeck processor, or if echeck processing isn’t offered a processor you’re using or considering, does it have to be a deal-breaker? Probably not either.

Share your echeck experiences with us! Leave us a note below.