eChecks: A Simple Guide To How They Work
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What is an eCheck?
eChecks (aka electronic checks) are to conventional paper checks what streaming services are to cassette tapes. With eChecks, customers/payers avoid the hassle of paper checks with the ability to deposit money from their checking accounts directly into businesses/payee’s checking accounts via ACH (Automated clearing House) networks. Payment is completed after the customer gives their authorization either by signed contract, acceptance of Terms and Conditions or a recorded voice conversation.
How do eChecks work?
Echeck processing happens similarly to paper check processing, but at a faster pace because of the fewer steps involved. The process of filling out paper checks and sending them to payees/businesses is replaced with a streamlined, resource-saving, automated process.
Broken down, the following steps are involved:
- Authorization request: The customer must give express authorization to the business before the transaction proceeds. This is done either using an online payment form, a (recorded) phone conversation, or a signed order form.
- Payment setup: Following authorization, the business enters the payment details into the online payment processing software. For recurring payments, payment schedules should also be included at this point.
- Review and submit: Once the entered details are confirmed to be correctly entered, clicking on “Save” or “Submit” should trigger the ACH transaction process.
- Deposit funds: Payment is automatically transferred from the customer’s checking account and to the business’ bank account, with a payment receipt sent to the customer. Funds tend to reach the business’ bank account around 3 – 5 business days after initiation of the process.
How secure are eChecks?
eChecks are an extremely secure payment method when processed by the right payment processor. A good payment processor puts electronic encryption standards in place to protect customers’ sensitive data and prevent fraud. For online shoppers, eChecks are a more convenient and safer payment method than paper checks as eChecks are far less likely to fall into the wrong hands. With online criminals and hackers becoming more sophisticated, there are no physical documents to intercept. In addition to this, encryptions, authentications, and digital signatures make security breaches more difficult.
On a business front, eChecks help to additionally mitigate some of the risks associated with being in high-risk industries (such as dating and drop shipping) as eChecks are much harder to cancel or charge back when compared to paper checks or credit card payments. Consumers also benefit from additional protection by Regulation E of the American Federal Laws.
Can businesses increase revenue by accepting eChecks?
eCheck payments reduce the likelihood of payment interruption for businesses as checking account numbers tend to not change as often as credit card numbers. While eCheck acceptance is compatible with most business types, they are best suited for:
- Subscription-based businesses: Any business with a subscription-based model will benefit from considering eChecks as a payment option from magazine subscriptions to dating site memberships. eChecks make auto-renewals, recurring payments, and autopay seamless and convenient for businesses and their customers alike.
- Repeat purchases for online businesses: One extremely effective sales model for online businesses with a strong customer base, is offering existing customers new opportunities to make additional purchases further down the line. By being creative about regular customer offers, online businesses can guarantee payment streams sometimes for years.
- Regular large payments: With eChecks, banks can leverage ACH’s for direct communication with other banks, eliminating intermediaries involved in credit card payment processing and saving money in interchange fees. For businesses processing sizable volumes of payments regularly, accepting eCheck payments present a more seamless and cost-effective option.
eChecks vs. other Electronic Funds Transfer (EFT) instruments
eChecks are part of a larger electronic banking field, a sub-set of transactions generally referred to as electronic fund transfers (EFTs). The EFT umbrella includes a variety of computerized banking functions such as eChecks, wire transfers, direct debits, ACH transfers, SEPA payments, local bank transfers, eWallets, ATM withdrawals and deposits, debit card transactions and remote check depositing features. All of these require the use of various computer and networking technologies to gain access to relevant account data to perform requested functions.
Under this umbrella, eChecks fall under a subcategory of EFTs that leverage the ACH (Automated Clearing House) network for payment processing.
When compared to wire transfers (another type of EFT) for example, wire transfers are performed manually, one transaction at a time – making them more expensive and subject to error. ACH system-based transfers such as eChecks on the other hand are automated and carried out in batches – making them cheaper and less error-prone.
What type of transactions eChecks be used for?
eChecks can be accepted across a wide range of businesses that sell products and services. Because of the low processing costs associated with eChecks when compared with credit cards, for example, eChecks are especially popular for high-cost items and high-cost recurring payments such as mortgage payments, insurance payments, donations, car loan repayments, etc.
eChecks for recurring payments
eChecks, like direct debits, are a very popular option for accepting recurring payments as they come in very handy for seamlessly collecting regular payments such as subscription fees or membership plans. Businesses only have to present recurring eCheck payment forms which customers can fill out from the comfort of their own spaces. This facilitates an automatic deduction from the customers checking account on the stipulated day each month, saving all parties the hassle of submitting and processing paper checks regularly.
How do eChecks benefit businesses?
- eChecks enjoy a faster processing time through the ACH system, as opposed to the time involved in processing manual paper checks.
- With eChecks, there is no requirement for a physical paper which costs money to produce and money/time to physically send by post.
- eChecks are secure and offer high traceability as they come with instant electronic payment confirmation by email or an easy-to-save PDF file.
- eCheck processing fees are far lower than credit card fees. This is particularly important for merchants expecting to process high volumes, who would like to save money on payment processing costs.
- Fewer errors are encountered through the automated process.
How long do eChecks take to clear?
The clearing time for eChecks varies between providers but generally, funds verification is completed within 24 to 48 hours of the transaction being initiated. If the customer/payer has available funds, the entire transaction would be typically completed within 3 – 5 business days.
How to send an eCheck
As a customer looking to send an eCheck, you must verify that the recipient has an ACH merchant account that allows them to accept payments using the ACH network.
Following confirmation, here’s how you can send an eCheck:
- The business/payee sends you an online payment form where you enter your name as it appears on your checking account, checking account number, routing number, and the payment amount.
- Submit the form to authorize the payee to withdraw the amount from your account.
- Alternatively, you can set up eCheck payments over the phone by offering your checking account details on a recorded call. You will need to enter your account details into an online payment terminal and click on “Process” or an equivalent action to authorize and trigger the transaction.
How to cancel an eCheck
In certain situations, there might be compelling reasons for business owners to cancel eChecks on behalf of customers. In such situations, the process will depend on the payment system used and the stage of the transaction.
If the eCheck has already been cleared into the business’ account and cancellation is no longer possible, then a refund will need to be set up. If on the other hand, the payment is yet to clear, the payment processor will offer further advice on what to do.
What happens if an eCheck bounces?
Just like conventional checks, eChecks can bounce in the absence of sufficient funds in the payers’ account. Customers/payers tend to be aware of the 3 – 5 day window when payment is expected to leave their accounts. Funds are usually verified around 24 to 48 hours after payment authorization with a deduction made within 3 – 5 days.
The authorization given on the online payment form acts as a promise to pay the stipulated amount. If there are insufficient funds to honor this ‘promise’, the customer/payer will need to contact the business/payee to ascertain what fees and penalties have been incurred (if any) and to arrange an alternative way to pay.
What does it cost to process eChecks?
eCheck processing rates vary across merchant account providers, depending on whether the processing companies structure their fees per transaction as well as their monthly fees. However, average eCheck processing fees range between $0.30 and $1.50 per transaction.
How to get an eCheck merchant account for your business
Getting an eCheck merchant account follows the same process as getting a credit card merchant account. You will need to select a trusted merchant account provider who will request key information such as:
- Anticipated processing volume
- Federal Tax Identification Number (EIN)
- Number of years in business
- Additional details to confirm business standing
With this information, the merchant account provider will be able to assess your eligibility for acceptance and notify you of the outcome within 1-3 business days.
TailoredPay is a secure and trusted eCheck merchant account provider that specializes in supporting businesses that are considered “high-risk” by mainstream providers. Our merchant account services are specially designed for businesses who have been rejected elsewhere due to bad credit, industries that are deemed risky, high-ticket sales, etc. We believe that every hardworking business deserves a chance to succeed, and we aim to offer businesses this chance with zero account setup fees, daily settlements and fast account approvals.
If you want to set up an eCheck merchant account with a provider that is rooting for your success, sign up today and we’ll help you get started!