Business Banking

Are eChecks safe?

eChecks are growing in popularity as a fast and convenient replacement for traditional paper checks. In this post we go over what eChecks are, how they work, and whether they're safe.

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An eCheck, or electronic check, is in theory just as safe as a regular physical check. As technology continues its relentless march, many of the staples of the financial industry are being questioned, upended and even replaced. 

Most of the discussion about this revolves around cryptocurrency, but there's a far more major development that isn't getting nearly enough attention— payment methods for many transactions are changing completely as we move towards all electronic payments.

One of the first payment systems going through a change is check payments, with traditional paper checks being replaced by eChecks. 

To most people, though, eChecks are a mystery, so let's take a serious dive into how they work. We'll start with a definition, then look into how transactions occur and how processing works, and we'll also examine and analyze any risks that come with using eChecks. 

What are eChecks?

Simply put, eChecks are the virtual equivalent of traditional paper checks. They work exactly the same way as their paper equivalents, transferring funds from one bank account to another. The only difference is that the information the check contains is transmitted online or using a phone instead of via a piece of paper that needs to arrive at a physical location to complete the transfer. 

The chief advantage eChecks provide is speed. The transfer occurs close to instantaneously, without all the possible risks of regular mail, not to mention the inconvenience and cost. 

To get an idea of how significant this is, all you need to do is remember that the old expression "the check is in the mail" is actually a snide way of saying that the check isn't coming at all. With eChecks, that simply can't happen. 

How do eChecks work?

As simple as eChecks sound on paper, there is some processing involved. eChecks have to be cleared through the Automated Clearing House (ACH) network, which is run in the US by the National Automated Clearing House Association (NACHA) and provides fast clearing times along with security and convenience. 

Acronym stew aside, these organizations also provide an extra layer of protection when it comes to the possibility of lost or stolen checks. The requirements to process an ACH payment include the bank account number along with the ACH routing number for the receiving accounts on the back end of the transaction, and there's also another layer of acronyms for the financial institutions that help complete this process. 

What about eCheck processing?

As complicated as this process may sound, the processing itself is actually quite simple. There are four steps, so let's review the basics of each one. 

The first step in the processing is authorizing the eCheck transaction. This can be done with a simple signature on an order form, and that signature can be generated online, over the phone or in person. 

The next step is to submit the necessary online information. This, too, is a fairly basic operation, with the information submitted via an online payment gateway. PayPal and Venmo are two of the most common ones, but some merchants provide this service independently, usually to increase the security and convenience of the transaction. 

Step three is where the ACH network gets involved. The provided information is further processed and submitted to the parties involved in the transaction. 

The last step is to release the funds. This is the part where the money travels, electronically speaking, from the payer's checking account into the account designated by the payee. 

This process usually takes 3-5 days, but the actual clearing time is usually somewhere in the neighborhood of 24-48 hours. Sometimes an extra security window is inserted, depending on the nature of the transaction and the amount involved. 

Benefits of eChecks

In addition to the obvious speed factor, eChecks also offer a number of other significant advantages. The processing costs are much less, and they can even be cut to nothing in some instances. 

The lack of paper makes the payment process far more environmentally friendly, and merchants can enhance the customer experience by including more payment options. This can increase sales, too, making it especially attractive as a win-win possibility. 

While it might seem like eChecks pose a greater fraud risk, the opposite is actually true. Security authentication occurs several times at different levels, starting with the payment gateway and then verified by both the ACH and the banks that are involved. 

Because of these security measures, it's actually safe to use eChecks both online and using a phone, which is another huge advantage. The ability to stop payments and institute a reconciliation is also part of the package, so overall it's an impressive array of advantages. 

The issues and risks

Now let's talk about some of the issues involved with eChecks, along with the risks that may be incurred along the way. 

Cancellation is the first potential problem. While cancellation is possible, actually canceling an eCheck payment can get a little thorny in real life. 

The different organizations involved in the payment process may have different rules about how cancellations are implemented, which can mean delays, disputes and disagreements that feel like they go on forever. 

This is an issue for both businesses and individuals. Nothing can mess up a smooth cash flow faster than a check that ends up in financial limbo, whether it's a paper check or its electronic equivalent. 

The difference between an eCheck and a credit card payment is an interesting side issue that surfaces in this area. Credit card payments can be subjected to chargebacks that occur months after the actual transaction has supposedly been completed, but eCheck payments via ACH transactions only allow 60 days to dispute the transaction and Check 21 eChecks only grant 40 days.

Are eChecks safe for overseas purchases?

Using eChecks to pay for overseas transactions comes with some unique problems, the biggest being that eChecks are primarily a US financial vehicle at the moment. 

The ACH does state that it's possible to set up an account to accept transfers from other financial institutions around the world, but it's important to remember that technically there is no such thing as a global or international version of the ACH network. 

Instead, many of these transactions have to be processed through the clearing mechanism of the country that's part of the transaction. In Europe, for instance, the organization that does this is the Single Euro Payments Area (SEPA), while India relies on the National Electronic Fund Transfer (NEFT) system. 

So what's the bottom line here? You have to do your homework. Know what each individual country or continent uses as the equivalent of the ACH, and know what the rules are when it comes to clearing. 

You don't necessarily have to become an expert in international finance to do this, but you do need to know the basics. If the transaction is large enough to justify focusing on some of the specifics, look closely at the typical timeline for clearing and what some of the common issues are there. 

Are eChecks right for me? 

Now that you're familiar with the basics of checks, how they work and what some of the advantages, issues and risks are, you probably want to know if eChecks are right for you. 

There's no simple answer to this question, but there are some basic guidelines that can be applied. For starters, let's separate this question into consumers vs. merchants and consider each one separately. 

If you're a merchant, you should definitely consider using or accepting eChecks, especially if most of your transactions occur in the US and don't involve a lot of overseas check traffic. 

The advantages are great, and there's a competitive aspect to offering eCheck use in addition to whatever other payment options you may already implement. eChecks may also offer considerable cost savings for business owners and merchants, so that's yet another reason to start utilizing them for your business. 

For consumers, the question may be trickier. For some the question may come down to simplicity. If you're still writing paper checks or doing a lot of financial transactions, you should definitely add eChecks to your list of possible options. 

If your financial life is more basic, though, then you should be able to weigh the advantages fairly easily and make an appropriate choice. 

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