How eCheck processing works

An eCheck is processed in four stages.

The first stage is to request authorization. For traditional paper checks, this is the stage during which the customer searches for their checkbook and pen before filling in the fields, signing the page and handing it over or putting it in an envelope. For an eCheck, the process is more flexible. The eCheck can be “written” using an online payment form, a signed order form or even with a phone conversation. There doesn’t have to be a sheet of paper in sight, and usually there isn’t.

Once the seller has received authorization — the payer’s payment details –the second stage of the eCheck is to enter those details into special software. For paper transactions, that might mean a cashier scanning or copying the amount and the names on the check into the bank’s computer system. For eChecks too, it might mean that the seller has to enter the detail themselves but generally, the authorization form itself enters the information automatically. Because it’s digital, the information doesn’t need to be digitized again before it enters the network leaving less chance for error. At Due, for example, the process is initiated using the online form. eChecks can skip a whole stage of the payment process resulting in a diminished chance of error.

The third stage for an eCheck is to look up the payment details and amount, and hit Submit. The payment then makes its way through the automated clearing house system. This is a clearing and settlement system set up to process enormous volumes of transactions. In 2015, the system handled nearly 24 billion transactions worth around $41.6 trillion using rules and regulations established by the National Automated Clearing House Association and the Federal Reserve. Using ACH to process eChecks makes clearing the check similar to a transfer: fast and efficient and usually significantly cheaper.

The last stage of the process is to confirm the payment and deposit the funds. Using the details provided on the eCheck’s submission form the funds are withdrawn from the buyer’s bank account and placed in the seller’s account. The entire process typically takes between three and five days but can be faster.

One difference between a paper check and an eCheck is that a single eCheck can be used to make multiple payments. This feature is particularly useful for renters who also have a regular rent payment plus a huge number of utility payments, and for people paying off an item in installments. Instead of leaving the landlord with a pile of dated checks, renters can enter the details once and state how often and when to make the payments.

The process of using an eCheck isn’t free, but it’s fairly inexpensive. Fees usually range from between 30 cents and $1.50. This is significantly less than the price of a wire transfer and lower too than the real cost of using a paper check once the price of mistakes, the long float time and the extra processing time is taken into consideration.

The launch of eChecks two decades ago was met with some criticism. Some institutions saw the attempt to digitize a paper channel as misguided. It would have been better, they argued, to create an entirely new system specifically set aside for the digital world that was then developing. Instead of looking for a way to turn paper checks into bits and bytes, banks and online payment systems should have been creating unique formats to to use in their own business’s to send and receive payments digitally.

Others countered that checks were familiar and trusted. Building on a framework that already existed would, they argued, make the take-up faster and it would give customers a greater range of options to choose from. Payers and payees could opt to use an eCheck but they could also make use of any of the native systems that would also become available.

In practice, the two systems have collided. When eChecks were first tried, they differed significantly from Automated Clearing Houses — at least behind the scenes. eCheck funds would come from the paying or issuing bank; ACH debits would be made from the Receiving Depository Financial Institution. The depository bank would receive the funds described in an eCheck; the Originator Depository Financial Institution receives the money sent through an ACH. For businesses and customers, the differences were just about invisible and now — the differences are far less relevant.

Although eChecks and ACH payments remain technically different, ACH has developed into a system that can support a number of different transactions — including eChecks. Automated Clearing Houses send the eCheck transactions between the payer’s bank account and the payee, often using software that includes third party payment platforms like Due.

The result is a system that mirrors the simplicity and familiarity of writing paper checks but which has the speed and the efficiency of automated clearing houses. Customers are free from the complexities of that process while enjoying a low-cost and reliable way of sending and receiving funds.

In this guide, we’re going to look closely at eChecks. We’ll explore their benefits and advantages, and we’ll also assess their risks and how to reduce them. We’ll explain how and when to use eChecks, and finally we’ll take a look at where eChecks are heading. Although the inspiration might be old, eChecks have evolved greatly since their introduction two decades ago. We’ll also take a look at where they’re heading.

Let’s start by looking at the benefits of using eChecks.