12/26/2021

Business Banking

What is an eCheck and how does it work?

eChecks are emerging as a safe and convenient alternative to paper checks. Here's what you need to know about eChecks and how they work.

Tim Wu
Tim Wu

Head of Growth

Table of Contents

Electronic checks allow you to pay electronically using the funds from your checking account. With the introduction of eChecks, online payments bring a whole new level of ease. By using electronic payments, small businesses give their customers another payment option other than the use of direct deposits, debit or credit cards. Here we'll discuss everything you need to know about eChecks: what is an eCheck, how it works, and why you might want to use them.

What is an eCheck?

The eCheck program was launched by the Financial Services Technology Consortium in 1995. FSTC is an organization that researches new technologies that can help improve consumers' banking experiences. With the support of the US government, this program aims to eliminate paperwork and reduce the overall cost of check writing.

Sending an eCheck is another kind of digital payment. An eCheck is a payment sent electronically from your checking account. With just the information on your bank's routing number, your checking account number, and your name as reflected on your checking account, you can easily write an eCheck as a payment. However, for the merchant to receive the payment, it should first have electronic check processing and enable eCheck as one of its payment methods. Just like any other electronic payment, the Automated Clearing House (ACH) network will process this transaction and send the funds to the payee.

How do eChecks work?

Both merchants and customers can greatly benefit from using eChecks as a payment method. It reduces paperwork and saves time because only a few clicks are needed to process it. Accepting eChecks and paying by eCheck is similar to how you accept and pay using traditional paper checks. However, because you don't have to wait for checks in the mail from your customers and go to the bank to clear them, eChecks are far more convenient than paper checks. Here is a step-by-step process to understand how eChecks work, whether you're the customer or the merchant.

How to accept eChecks?

Here are four steps for small businesses on how to accept eChecks sent by customers as payments.

1. Obtain customer's authorization

To withdraw funds from your customer's checking account, you must first obtain permission from him or her. You cannot just withdraw and proceed to a check processing software because the authorization from your customer contains the information you have to input into the software. There are many ways to obtain a customer's authorization. One is by sending an online payment form that will ask for your customer's bank account information. Another one is asking for bank information via a phone call.

2. Select your payment processing software

An online payment processing software acts as a mediator between you and your customer's financial institution. With the use of eChecks, you don't have to go to physical banks to clear the check, because your chosen payment processor will be the one to do this. It will process your eCheck and have it deposited into your checking account. You just have to fill in the needed payment information in order for it to proceed.

3. Start the ACH transaction process

When you are finished with inputting all the payment information needed into the payment processor software, you can now click the "submit" button. This will start the ACH transaction process. Within 24-48 hours after you click submit, the funds will be verified.

4. Receive the fund

After verifying the funds and that the payor has the available funds in his or her checking account, the transaction will be cleared. The funds will automatically appear in your bank account.

How to pay by eChecks?

For individuals, here are simple steps to send eChecks as payment to your merchants.

1. Confirm the ACH merchant account

The first step in sending any electronic payment is to verify if the merchant has an ACH merchant account. This information will tell you that the merchant can accept ACH payments via electronic funds transfer made possible by the ACH network. If the merchant has an ACH merchant account, you can proceed with authorizing the merchant to withdraw funds from your checking account.

2. Configure eCheck Payments

Via Online Payment Form

The merchant will send you an online payment form to ask for payment information. This payment information indicates that you are giving them access to your banking information and allowing them to withdraw funds from your checking account as payment for your purchased item. The information that will be asked for is your name, your bank account number, your bank's routing number, the payment amount, and the name of your bank.

Via phone call

If you don't want to provide your banking information online, you can choose to talk to your merchant via phone call. The payee will ask for your bank information via a recorded phone call and then input it into the payment processing software.

Via a Signed Order Form

A signed order form is a purchase order to request products from your merchant. It includes your bank information to authorize the merchant to withdraw funds from your checking account as payment.

3. Obtain the Receipt

After the withdrawal has been made from your checking account, you should receive a receipt confirming your payment to the merchant. Every payment processor generates a receipt and automatically sends it to payors after every completed transaction.

What types of payments can you make with eChecks?

If you have a payment to make every month, either for your subscription plans or membership plans, you can set your payment to be automatically made every month via eCheck. For merchants that have a subscription-based business, the payment processor software lets them collect payments every month by entering recurring payment information from their clients into the system. Electronic checks work best for recurring payments, online shopping payments, and high-cost items. Here are some payments where you can take advantage of eCheck payment.

  • Auto loan payments
  • mortgage payments
  • Rent payments
  • Credit card payments
  • fitness memberships
  • Memberships to health clubs

How long does it take an eCheck to clear?

Many individuals and small businesses prefer eChecks as a payment method because it only takes 3-5 business days to successfully transfer funds. eCheck processing with complete information and available funds from the checking account can only take 3 days.

Factors affecting the check clearing process

There are several institutions that are involved in processing eChecks. This is also why eChecks have to pass through several stages before they appear in the payee's bank account. Here are some factors that will determine how long it takes an eCheck to clear and what could get in the way before seeing the funds in your bank account.

  • payment processor software
  • issuing bank
  • availability of funds from the payer's checking account
  • holidays and weekends
  • time, day, and date of transaction

After completing the transaction in the software, the funds will be verified and it will take 24-48 hours to complete this stage. After verification and if there are available funds from the payer's checking account, the payment will appear in the payee's account within 3-5 business days. Financial institutions are closed on weekends and holidays. Avoid making transactions on these days to get the funds within 3 days.

What happens if there are no available or sufficient funds from the payer's checking account? Just like a traditional paper check, the eCheck will bounce. Contact your customer regarding this issue. By receiving authorization from your client, he or she promises to pay you within 3-5 business days. If the eChecks bounce, your customer may be liable for fees for bounced checks and penalties for late payments, if applicable. If this is the first time this has happened between you and your customer, your payor must have forgotten about the eCheck. You can just set a different payment method to collect payment.

Is it safe to pay by eCheck?

Electronic checks are actually safer than traditional paper checks. One, because there is no physical document that can get lost in the mail or stolen, making it prone to identity theft or fraud.

The use of eChecks comes with a risk of data and security breaches, but the right electronic check processing software eliminates this risk. The electronic encryption standards in payment processors protect customers' information and prevent fraud. The software protects the entered banking information on the web using data encryption, so you can be sure that your personal information remains confidential.

The use of eCheck is a very convenient payment method for both merchants and customers. It not only saves time but also money through easy and less costly transactions. With technological advancements come innovations in online payments and banking experiences. It's time for small businesses to integrate eCheck into their payment methods to increase revenue by encouraging buyers with another online payment option. With the knowledge of eChecks and how they work, you are now set to enter the world of eChecks and greatly benefit from them.

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